Leah Cardona has been a registered nurse for a dozen years. She lives in Santa Rosa, California, with her three children: an 11-year old son and daughters who are 8 and 3. Trying to get by as a single mom in the pricey San Francisco suburbs, she works two jobs but says she’s “living paycheck-to-paycheck and not saving anything.”

Bankrate wants to help get her on the right financial path. We’ve chosen her as the winner of our first-quarter 2017 Money Makeover and $10,000 prize.

Goals

Leah lists two primary financial goals:

  1. Paying off debt.
  2. Building emergency savings.

“After that, I will start to contribute again to my children’s college funds,” which are on hold, she says. She also is trying to save for retirement; that will need to become a more consistent focus for her.

Money Makeover winner Leah

Single mom Leah Cardona already knows how to budget, but she needs a healthy cushion of emergency savings.

The challenge

Leah tracks her spending and manages her household budget, which is tight. Since her income can vary, she limits spending each month to the money she brought home the previous month.

She owns her home (she bought out her ex-husband) and has lived there since 2012. Her first mortgage is a 30-year fixed-rate home loan at 3.5 percent, plus she has a home equity line of credit (HELOC) at a variable rate — currently 5 percent — and is paying only interest. The rate will rise as the Federal Reserve boosts interest rates.

Leah has a monthly car payment of $430 on her Nissan Pathfinder, financed at 2.9 percent. The loan balance of $23,000 leaves her a few years away from paying it off. She is interested in paying down the car loan more quickly, but would need to dial back her retirement contributions to do that. She also has $2,000 in credit card debt at up to 14 percent interest, against which she is paying $100 per month, and a medical debt that’s one month away from payoff.

With a mortgage, HELOC and a car payment that aren’t going away anytime soon, Leah’s challenge is to find ways to carve out savings opportunities and create some breathing room in her monthly budget.

Leah's current net worth

Leah’s self-assessment that she’s “not saving anything” is a bit harsh, because she is contributing 9 percent of her pay to 401(k)s at both her full-time and part-time jobs — more than enough to maximize the employer match each provides. The combined balance of these two plans and one from a previous job is nearly $60,000, though a $20,000 chunk remains unvested.

Her full-time employer offers a pension that could provide some additional retirement income when that time comes. She does not have an IRA.

Leah has a total of $7,000 in 529 college savings accounts for her kids.

Her emergency savings fund of $2,500 is lean — a point Leah freely admits by saying simply, “I know …”

Stop retirement contributions to pay off car?

Leah asked me, “Is lowering or stopping my 401(k) contributions a wise move temporarily?” She wanted to use the money for her car loan.

I recommend that she keep her 401(k) contributions intact and not devote additional cash toward paying down the car loan. What she needs right now is liquidity and more savings — not paying down a low-rate loan and tying up precious spare cash in an illiquid asset, like an automobile. Given the car loan’s $23,000 balance, she won’t eliminate that monthly payment quickly.

See if a low-rate auto loan makes sense for your financial situation.

A healthy dose of savings opportunities

Soon Leah can eliminate a couple of monthly payments to give her budget some breathing room.

The last payment on the medical bill is scheduled for April, which will then free up $335 per month. From our $10,000 in prize winnings, Leah should use $2,000 to pay off her credit card debt, which would free up an additional $100 a month. She also should immediately set aside $2,500 for the taxes on the prize that will come due next spring.

She then needs to add the remaining $5,500 of prize money and the modest proceeds she’s expecting from her tax refund to her emergency savings.

Setting up direct deposit into a savings account is a smart way to build wealth. Check out high yielding money market accounts at Bankrate.

How Leah should divide the prize

Averting future financial problems

Looking down the road, there are some potential trouble spots for Leah.

The variable interest rate on her home equity line is poised to increase further, which will lead to higher payments that could eat into her budget. The low rate on Leah’s first mortgage prevents refinancing both together right now.

Her options:

  • Keep an eye out for potential refinancing opportunities: If mortgage rates were to plunge back to record low levels, Leah could combine her first mortgage and HELOC into one loan, locking in a fixed rate and shaving approximately $200 per month off the combined payments.
  • Look for lower-rate HELOC offers: If Leah can refinance into a HELOC with an introductory rate that is below the prime rate, she’d have a lower starting point for future interest rate increases.

Find out how much you could save on interest by checking home equity rates at Bankrate.

Final bits of advice

Leah’s investments in the 401(k) from her part-time job should be reallocated, simply by putting everything into a 2050 target-date retirement fund; 2050 will be the year she turns 67.

The small balance in the 401(k) from the previous employer should be rolled over into an IRA, which could then be converted to a Roth IRA. There would be a modest tax hit — approximately $600 — but getting some assets into a tax-free Roth would be beneficial in the future.

As Leah’s emergency savings grow and become a less urgent priority, she will be able to divert some of her regular monthly savings into that Roth IRA in future years.

As for college savings, Leah must address her higher financial priorities first before she can consider siphoning off cash for the kids’ 529 accounts. The issue can be revisited at a future date, but she should keep in mind the wise adage: Kids can borrow to go to college, but parents can’t borrow to retire.