Maintaining a no-debt lifestyle: Linda Clayton may have to suppress her fears about debt to increase her fortunes. (Family Finances).

LINDA CLAYTON HATES BEING IN DEBT. HER FEAR OF debt is such that she recently used a settlement from a car accident and her savings to pay $40,000 in cash for a BMW X5 SUV, just to avoid taking on a car note. Clayton's biggest fear, however, is that she "might wind up being homeless" if she assumes too much debt. "I feel I have to pay off every bill that I have every month because I don't want a finance charge [that] will only keep growing," says Clayton, 45, who lives in Centreville, Virginia, and makes $73,000 as a business analyst with Fannie Mae.

Clayton's aversion to debt stems from her college days and early work-life when she ran up about $38,000 in credit card debt paying for school expenses, a fully furnished one-bedroom apartment, and leisure travel.

While debt can be the thief that robs many people of substantial wealth, there's a downside to Clayton's approach--cash flow problems, She owns a one-bedroom, riverview co-op in the Bronx, New York, but she's been unable to rent it, in part because prospective tenants desire units with two or more rooms. With no tenant since July 2002, she's been paying the mortgage and maintenance fees herself--a total of $1,000 a month. She refinanced the mortgage in 1991 and took cash out to consolidate the debt, leaving an amount of $12,946 to pay off the 15-year mortgage on the New York co-op. Maintaining the $1,000 monthly payments on the co-op for the past year has drained her savings. On top of that, she has a mortgage on the three-level, three-bedroom townhouse that she occupies--another $1,658 a month.

Because Clayton is determined to pay off every bill when it comes in, her tendency to rack up $800-$1,000 in monthly credit card charges creates her cash crunch. "I really don't have any idea what I'm buying, but I charge a lot of things like cable TV, my cell phone, and long distance bills to earn frequent-flyer miles," says Clayton, who is enrolled in graduate school at George Mason University in Fairfax, Virginia, completing a degree in adult education. She sheepishly adds that she often buys expensive items for the house or car, citing, for example, $1,050 (including installation) for a bike hitch and rack for her car so she can take it with her when she travels.

The carefree divorcee loves to exercise and travel outside the U.S. She takes off on Caribbean spa vacations and African excursions to study dance. Clayton doesn't want her "good life" to change when she retires, which she hopes to do in the next 15 years (or less if possible). "I'm afraid of not being able to maintain the lifestyle I'm living now when I retire. I want to be able to travel, eat organic vegetables, and do whatever I want to do," says Clayton, who dreads becoming poor.

THE ADVICE

If Clayton's dream of an early retirement is to become a reality, she needs to do three things: improve her cash flow, face her fear of debt, and control her spending. BLACK ENTERPRISE had Tony Epps, a certified financial planner with A.G. Epps Financial Group in Rye, New York, spend time with Clayton and analyze her situation. The following are Epps' recommendations:

* CONTROL SPENDING

Epps was most impressed with Clayton, stating that, "There are very few people who carry so little debt." In fact, the only liabilities she has are her mortgages.

However, Epps says if Clayton can rein in her spending and invest the money saved properly, she'll easily solve her problems. But she spends impulsively. "She runs up a lot of [charges] on her credit card. I understand wily she spent so much on the BMW--she's been in several accidents and wants to feel safe. But the vehicle burns a lot of gas, and in Virginia, there are property taxes for vehicles. Although that car is paid for, it's an expensive [luxury]," Epps says. He adds that the bike hitch and rack could have been purchased for a lot less.

* SELL THE CO-OP

To address her immediate cash-flow problem, Epps suggests Clayton sell the co-op. Since she bought it at a great price in the early 1990s, now is the time to take her profits from this property. The current market value is $68,000. Epps surmises that she could net $50,000 from the sale. She would no longer have the $1,000 monthly cost to maintain the co-op, nor would she have the expenses associated with traveling from Virginia to New York to rent the co-op.

* BOLSTER CASH RESERVES

Epps would like Clayton to have a total of $15,000 saved for emergencies. He advises that she put $8,000 of the profits from the co-op sale into three CDs laddered to mature in three, six, and 12 months, so she can renew them, hopefully at higher interest rates. He also suggests that she contribute $3,000 (the maximum annual allowance) to a Roth IRA. The remaining $39,000 could go into a variable annuity, which he favors since the money grows tax-deferred. Another advantage of variable annuities, Epps says, is the death benefit. Epps also suggests that Clayton put the $2,000 contest winnings toward her retirement.

* CHANGE TAX EXEMPTION

Clayton typically gets a tax refund of $3,000 every year. Epps says by changing her exemptions from three to two, she could get more of her money now instead of later. "Even if doing so means she only gets $200 back, or that she owes $200 at the end of the year, she should stop loaning money to Uncle Sam and instead earn interest on that money by investing it."

* REFINANCE TO IMPROVE CASH FLOW

Epps says Clayton should refinance her 15-year mortgage on the Virginia home to a 30-year mortgage. With interest rates low, she could probably reduce her mortgage from $1,658 a month to just over $1,000. That's more than $600 in her pocket. If she still wants to pay off the mortgage quicker, she could prepay an extra $200 toward her principal with a separate check. She would still have an additional $400 in hand and save money in interest.

* REALLOCATE PORTFOLIO ASSETS

Epps also suggests that Clayton reconfigure her existing portfolio, which comprises nearly all equities, to include 60% equities (large-cap, mid-cap, small-cap, and international stocks), 38% bonds (corporate bonds, high-yield corporate bond funds, and government funds), and 2% in short-term CDs and cash. Moreover, Clayton is heavily invested in Citigroup stock in her brokerage account and 401(k); the former Citigroup employee worked there for more than 20 years. "You don't want more than 10% in one company stock," Epps cautions. "Remember Enron."

Financial Snapshot:
Linda Clayton

            HOUSEHOLD INCOME

Gross Income                       $73,000

                 ASSETS

Virginia Home (appraised value)   $275,000
401(k) Plan                         70,976
Bronx Co-op (appraised value)       68,000
Fannie Mae Retirement Plan          49,460
Car                                 28,000
Brokerage Account                   14,500
ESOP                                 7,096
Money Market                         7,000
Savings                              1,100
Checking                               400
Total                             $521,532

                LIABILITIES

Home Mortgage                      177,887
Co-op Mortgage                     $12,946
Total                             $190,833

Net Worth                         $330,699