Profile: Elizabeth Bryant

The problem:

Savings are scattered; investments are over-diversified.

The plan:

Pay off high-interest debt first; then build up emergency fund.

The plan in 5 steps:

Reallocate investments in 401K.

  • Account balance is spread among too many funds.
  • 70 percent of new contributions purchase international stocks.
  • Solution: Move money and divert new contributions to one target retirement fund.

Tip: How much will you need to retire?

Pay off all credit card debt

  • Use money in current emergency fund to pay off credit card debt.
  • Put credit cards on ice — literally.
  • Slowly close paid-in-full accounts.

Tip: Calculate the true cost of debt

Build emergency savings cushion

  • Put $400 a month into an emergency fund to accumulate three months’ of expenses within two years.

  Tip: Find a high-yield savings account

Open a Roth IRA

  • Contribute the maximum $4,000 to a Roth IRA by April 15, 2008.
  • Use bonus and pay raise to fund IRA.
  • Sell existing growth stock fund and use proceeds to fund IRA.

Tip: How to reach your retirement goal

Establish college savings accounts for the children

  • Divert freed-up funds into college savings accounts.
  • After car is paid off, make payments to your retirement fund and children’s college funds.
  • Also channel tax refunds, bonuses toward these goals.

Tip: How much do you need to save for college?

The Plan

Elizabeth needs an adequate emergency savings cushion and needs to boost her retirement savings. But one thing she can take care of right now is to reallocate her 401(k).

Put 401(k) money into one diversified fund

She currently has her account balance spread among nearly every option available in her plan. Diversification is a key ingredient to investment success, but this is overkill. Her current contributions also need an adjustment, as 70 percent is presently going to international investments. Instead, she should allocate her current balance and ongoing contributions to the 2035 target retirement fund, the year in which she will turn 66.

Get rid of high-interest debt

At present, Elizabeth has $2,800 in savings accounts and roughly $1,700 in credit card debt. It doesn’t make sense to be putting money into savings yielding 5 percent when she is carrying credit card balances at rates well into the double digits. Because of her saving discipline, she should tap the savings account to pay off her credit card debt, pronto! This will still leave her with over $1,100 available for emergency expenses.

Then put the credit cards on ice — literally. Freeze all but one credit card in glasses of water. This will enforce the hands-off policy. Tread carefully however, with regard to closing out a few of the higher rate accounts. Go very slowly in this area so as not to inadvertently ding the credit score. Three months from now, if she has successfully refrained from tapping credit cards while continuing to pad the emergency savings account, then she should close out one card. In another six months, assuming she has zero credit card balances and has stuck to the savings regimen, she can close another account. She doesn’t need more than two credit cards, and having two open credit lines will be best for her credit score and financial stability.

Now let’s turn our attention to her need for emergency savings and increased retirement contributions.

Build an emergency fund

Even after contributing 10 percent of salary to her 401(k), Elizabeth consistently saves over $400 per month. Now she must channel that saving discipline to the most productive uses. The top priorities are her emergency savings account, and opening and funding a Roth IRA.

She must diligently funnel money into the savings account on a monthly basis. Depositing $400 per month into emergency savings will give her a cushion of three months’ expenses within two years and six months’ expenses in a little over four years. And she can be working toward other financial goals all the while.

Open a Roth IRA

Her recent pay increase and the annual bonus she gets this summer can be used to establish a Roth IRA. She has between now and next April to make her 2007 IRA contribution and can contribute a maximum of $4,000. Her goal should be to contribute the maximum.

In order to reach that goal, one casualty is the growth stock mutual fund that she holds in a taxable account. The fund isn’t consistent with her short-term cash needs, and lacks the tax efficiency to be suitable for her longer term goals such as retirement and college savings. Even though she will likely trigger a capital gain by selling it, the existing balance is better deployed in the IRA.

Establish college savings accounts

The monthly contribution she currently makes to the growth stock fund can instead be used to increase her 401(k) contribution or establish 529 college savings accounts for the kids.

For 2008 and beyond, her tax refund, annual bonus and the money currently going toward her car payment will be enough to fully fund her IRA each year and make occasional 529 contributions for the kids’ educations.

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