Learning to live through a layoff: the Williams family must make major adjustments to keep their financial dreams within reach.

Six years after Whitney Williams was laid off from his IT job at a pharmaceutical company, he and his wife, Diane, are still struggling to get the family back on firm financial footing. Uninterested in working full time for a company again, Whitney figured that his project management and business processing skills would enable him to charge $60 an hour and gross $120,000 a year working as a consultant.

Reality bites. Securing consultant opportunities has been unpredictable, which led to dry spells of up to six months and far less than the six-figure income Whitney was hoping for.

It's all been rather disconcerting for Diane and Whitney, who have children ages 11, 8, 6, and 2. Between her salary as an engineer and what he earns as a consultant, they have a household income of about $150,000. While that seems like a healthy number, the Marietta, Georgia, family was accustomed to living on closer to $200,000 in household income. Financial strain has begun to show. They pay $13,000 in private school tuition for the children. They have $160,000 left on their mortgage, $26,000 in student loan debt, $28,000 on two car loans, and more than $10,000 in credit card debt. Unplanned expenses over the last few years for a new roof, replacement gutters, and new carpeting have stretched them to the limit.

"Given the instability, it's been difficult to keep to any plan or budget," says Diane. Unfortunately, the couple has used their credit cards to make up for cash shortfalls, as they have no emergency fund. They do have $55,000 in investments, $1,500 in a savings account, and $2,000 in a checking account.

To make the financial adjustment Whitney initially took consulting jobs all around the country to keep money coming in. But the frequent travel and long stays away proved too high a price to pay for the overall good of the family. Now, the couple has become more conscious of spending, like not going crazy on the children's birthday parties. They have also trimmed expenses on swimming and baseball lessons, acting classes, and lawn maintenance.

Another big move the Williamses made this year was to establish a business. This will allow Whitney to deduct business expenses and pay taxes quarterly. He also has plans to expand beyond computer consulting to include engineer-training programs. "As we put more time and resources into the business, it could grow to something down the road that I would join him in, even if only part time," says Diane.

So far, the children haven't noticed the change in their financial situation, but Diane and Whitney know that they need a plan to get back to the good old days. Says Diane, "We want to continue building for retirement; send our children to college; be ready for emergencies: and, most importantly, be debt free in five years."

THE ADVICE

To help Diane and Whitney Williams find answers to their financial situation, BLACK ENTERPRISE asked Kathy Williams, president of Williams Financial Services Group in Oklahoma City, Oklahoma, [e-mail], to consult with them. Williams' early assessment is, "Because Mr. Williams is pursuing self-employment, the couple's current income level does not fit their prior lifestyle, to order for them to live more comfortably at this time, they need to make major economic adjustments.

"Their expenses leave them with little room to breathe. They also aren't prepared for emergencies." To give them more cash to work with, she recommends that Diane, whose contribution of 16% of her salary to her 401(k) is laudable, reduce her contributions to 10% until all debts, excluding the mortgage, are paid off.

Make tough cuts and reduce debt. Unfortunately, Diane and Whitney will have to make a major sacrifice: "Temporarily stop private school [for the kids] until debt is eliminated, an emergency fund is established, and Whitney's business improves with time," says the financial adviser. The couple should then concentrate on refinancing at least $10,000 of their revolving debt through a new 15-year mortgage. Unfortunately, most of their revolving debt is from department store credit cards, which generally do not negotiate lower interest rates. They should look for a company that will refinance at no more than 5.13%, which is their current interest rate. "This will save them a tremendous amount of interest. Their current mortgage is a 30-year mortgage. The interest on the credit cards range from 19.9% to 27%. However, they should not refinance this debt if they are unable to stop using the credit cards," adds Williams.

They should also tackle debt by using the $2,000 contest winnings to pay off two debts totaling $1,671. The remainder should be used to establish a money market account that will serve as an emergency fund.

Reallocate savings from old debt. Making these moves will produce monthly savings of roughly $1,300 from discontinued private school; $476 from the lowered 401(k) contribution; $45 from the refinanced mortgage payment; and $226 from paying off debts with contest winnings. The resulting $2,047 a month in savings should then be applied as follows: $1,000 toward the emergency fund, $560 toward high-interest debt, $125 toward a 529 college savings plan, $200 toward an IRA for Whitney, and $162 toward life and disability insurance for Whitney.

Williams says that the couple should build an emergency fund that contains at least four to six months of expenses. As they eliminate debt, they can increase their contributions to the children's 529 plan.

Improve insurance coverage. Since Diane and Whitney want their family to live well if either of them were to die, they must purchase additional term life insurance to provide 80% of their joint income, repay all debt, pay college expenses, and provide immediate emergency funds. Right now, each has life insurance worth more than $400,000, but they will need additional coverage until their 2-year-old finishes college. Diane should purchase an additional $412,000 and Whitney should purchase an additional $44,000, says Williams.

"Diane should have more because she earns more income at this time. The family relies on her income the most. However, if they want their lifestyle to remain the same, then each should purchase at least $412,000 worth. It makes economic sense to purchase the recommended amount only."

While Diane has long- and short-term disability coverage at 66% of compensation, Whitney has no disability insurance and should make getting a policy a priority, says Williams.

Financial Snapshot: The Williamses

HOUSEHOLD INCOME

Gross Income              $150,000

ASSETS

Market value of home      $260,000
Diane's 401(k)              49,000
Whitney's stocks             1,000
Market value of two cars    34,000
Checking account             2,000
Savings account              1,500
529 plan for children          600
Series EE savings bonds      5,000
Household furnishings       10,000
Total                     $363,100

LIABILITIES

Mortgage                  $160,000
Car loans                   28,000
Student loans               26,000
Credit cards                11,000
Private school tuition      13,000
Total                     $238,000

NET WORTH                 $125,100