Torrie Maas, a high school English teacher from suburban Detroit, is the winner of the fourth quarterly Bankrate Money Makeover contest and its $10,000 grand prize. She and her husband Jason have been married for five years. Like many thirtysomething couples, they’ve accumulated debt — $30,000 worth, with much of it at double-digit interest rates. Yet they have little in emergency savings and are behind in retirement savings.
Although she and Jason, a self-employed photographer, have a six-figure combined income that places them in the top 20 percent of all income-earning U.S. households, their financial situation doesn’t correspond. They are currently renters, but Torrie lists her financial goals as paying off debt and buying a house. In her 12th year of teaching, Torrie admits she also doesn’t want to teach full-time forever.
Like many young couples, Torrie and Jason have to learn a valuable financial lesson: how to live within your means. Unlike many others, they do have ample resources.
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Torrie cites getting married, having an expensive wedding, starting out their new life and taking a pay cut — all at the same time — as the culprits for their $30,000 in accumulated consumer debt. However, this was five years ago, and they’re still hemmed in by high expenses, with nearly half of their monthly outlay consumed by rent, car payments, auto insurance and renters insurance.
Both Torrie and her husband leased new cars this year, with the combined payments knocking a $785 hole in the monthly budget. Prior to leasing her new car, Torrie sold her used car to pay down credit card debt.
Current lifestyle funded by credit cards
Torrie tries to keep a budget, but finds they always go over. She acknowledges that restaurants and entertainment are the big budget busters, as she likes to dine out and often attends concerts and the theater.
The credit card situation isn’t pretty, with $17,000 spread over five credit cards, one-third of which is currently on a zero-percent promotional offer. The window on zero-percent offers are finite however, with rates on these debts reverting to double digits throughout 2017 and 2018. In addition, Torrie has a $13,000 personal loan at 11 percent and a small balance owed to PayPal.
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Any unplanned expenses are sure to end up adding to their credit card debt as they have a scant $200 set aside for emergencies.
As for retirement savings, Torrie has a 403(b) plan with a balance of $17,500, to which she currently contributes $40 per pay period. But she has repeatedly cut contributions to “keep up with the cost of living.” The existing balance and ongoing contributions are invested extremely conservatively, with 40 percent in a moderate allocation fund and 60 percent in the guaranteed interest option. As a teacher, she is also accruing a pension.
Jason, on the other hand, has no retirement savings.
Read on to learn how Torrie and Jason can improve their personal finances.
- Add to their emergency savings.
- Get a handle on their monthly expenses (rein in the spending).
- Focus on debt repayment.
- Increase their retirement savings.
- Reallocate 403(b).
- Boost income with additional work.
Amp up savings; ramp down spending
First, Torrie and Jason must prioritize savings. They have to save first, rather than make savings the sacrificial lamb to support their lifestyle. Their starting point should be to set up a direct deposit from Torrie’s paycheck into a dedicated savings account — even if it is just $25 per pay period. Jason should also immediately siphon off the same amount on a similar schedule so that they’re both invested — literally and figuratively — in this endeavor.
Since they’re currently living beyond their means, they need to rein in spending and get a handle on their monthly expenses. With their incomes, they shouldn’t have their current debt, but should instead have a pile of savings. Their budget presents some great opportunities to cut spending. For instance, they’re now paying $295 per month for phone, cable and internet services, and Torrie is spending $20 monthly for a car wash club. They also need to get a better handle on their dining and entertainment expenses.
The debt-payoff plan
Getting a solid savings plan going will allow Torrie and Jason to turn their focus toward debt repayment.
But before anything else, Torrie and Jason should set aside $2,500 of the contest winnings for the eventual tax bill that they’ll owe.
After they set that aside for taxes, Torrie should use contest winnings to pay off her Citibank card, plus the two Citizens cards and PayPal balance. Paying off this $4,300 in debt will free up $500 in their monthly budget. That $500 monthly savings should be added to the $175 that is currently going toward Jason’s Citibank card. Those stepped up payments, coupled with $1,000 of the contest winnings being applied to this card, will get the balance paid off before the zero percent offer expires next August.
Come August, they’ll be down to just the personal loan and the balance on Jason’s credit union credit card. Taking the $675 then available each month and adding it to the $393 personal loan payment will get that paid off by mid-2018. Rolling up that $1,068 per month on top of the $225 currently being paid on Jason’s credit card will erase that debt in another three months.
If they follow this plan, and refrain from putting any additional spending on the cards or racking up any other debt, they can be out of debt within two years. At that point, they’ll have $1,300 or more available every month that can be used to build an adequate emergency savings cushion and increase retirement savings.
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Planning for a secure retirement
In the meantime, the remaining $2,200 of her contest winnings is an opportunity to boost retirement savings. And because the investment options in Torrie’s 403(b) plan charge surprisingly high fees, she should open a Roth IRA. A target-date retirement fund would be an appropriate investment option.
As for her 403(b) plan, Torrie should reallocate it. Currently, she has only 20 percent in stocks, 20 percent in bonds, and a whopping 60 percent in cash. She needs to take greater risk to get growth from this account, so moving her entire balance into the All Asset Growth or All Asset Aggressive option is appropriate, considering her 30-plus-year time horizon until retirement.
Additional IRA contributions can come from her side jobs as a tutor each spring, a makeup artist for weddings and other special events, as well as her occasional voiceover work. She can even look into adjunct teaching opportunities at local community colleges, as some of her colleagues do, as a way to bring in some additional income.
Why not put all the extra income toward paying down the debt, too? Because successful saving and increasing the amount you’re saving over time is all about the habit, and they must form the habit now.
Jason desperately needs to get started on retirement savings. Being self-employed, Jason has the ability to save for retirement through plans such as a SEP-IRA or Solo 401(k), both of which allow for much higher annual contribution limits. Opening up and funding a plan should be a priority for him.
Lesson on living within your means
Torrie and Jason need to change their mindset from consumption to savings. This will require making some tough choices — picking up additional work to generate more income and scaling back their discretionary spending in order to 1) pay down debt, 2) put money in savings and 3) live within their means. With a six-figure combined income, they have the means.
This is their chance to change the direction their ship is headed and chart a new course toward future financial security.
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