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.