Paving the way to future security

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.

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