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Striving to be debt free: Henri Hammond is working overtime to get his family out of debt and on track to a self-sufficient future. (Family Finances).

"WE WENT HAYWIRE." THAT'S HOW HENRI HAMMOND describes a credit card spending binge. Six years ago, he and his wife. Felozia (pictured above), paid for their wedding with plastic and followed up with a similar spree to furnish their home. By the time the bills arrived, the couple had a whopping $53,000 in debt from credit cards and student loans.

The Hammonds, both 31, were paying thousands of dollars a year in interest alone, which is not tax deductible. "For the past few years," says Henri, "we've been working on paying down our debt. Each month we make the minimum payments on each of our cards to avoid paying penalties. Then we use whatever money is left over to pay down the balance on the cards with the highest interest rates."

Meanwhile, Henri has been putting in long hours to raise money for debt collectors. A tooling engineer with a major corporation in Arlington, Texas, he has logged enough overtime to boost a $72,000 base salary to $96,000, in addition to taking courses for his master's degree in mechanical engineering. Felozia is a stay-at-home mom, looking after the couple's two sons, ages 3 and 5.

The Hammonds' hard work is starting to pay off. They've already reduced their outstanding debt to approximately $25,000, not including home mortgage and auto loan payments. And they've already paid off several credit card balances.

Their past extravagances, however, still haunt them. They have outstanding balances on 10 cards, totaling nearly $16,000. Because so much of their income goes to paying down their old credit card debt, the Hammonds have not been able to bank any money, aside from the little they put into Henri's 401(k) account. (The couple also own undeveloped land they're holding as an investment.) They've also been forced to get by with just one car. "It can be inconvenient sometimes." says Henri. "depending on which shift I'm working, but that's all we can afford."

One approach to become debt free is to use a home equity loan to pay off some or all of those credit cards, Such a move would lower the couple's interest payments. "We did that when we lived in Michigan," says Henri, "and managed to pay off $11,000 worth of debt when we sold our house there a few years ago."

In Texas, though, the situation is different. "Home equity debt is limited to 80% of home equity, so it doesn't seem to be worthwhile," Henri says. Their house is valued at $150,000, and the mortgage balance of $116,000 is 77% of that value, so there's not much room for a home equity loan.

"While we pay off the debt," says Henri, "we'd like to be able to afford a second vehicle and start to save some money." In particular, the Hammonds would like to build a college fund for their sons. The boys now attend private school, costing a total of $2,500 per year, and school bills are likely to mount as they grow older.

Fortunately, Henri only has to pay $1,300 per year for his postgraduate education, thanks to his employer's tuition assistance program. "Once I have my master's," he says, "I'll have better career opportunities. I'll be eligible for promotions, and I might be able to more into management."

In the long run, obtaining a master's degree will be a step toward a professional engineering license for Henri. "With that license," he says, "I'll be on track toward my ultimate goals, I'd like to become a consultant of start a manufacturing company."

THE ADVICE

Such long-term goals are commendable, but the Hammonds need to build a firm foundation in the short-term, says Cheryl Creuzot, president and CEO of Wealth Development Strategies L.P. in Houston. "Counting the payments they're making on their credit cards, the Hammonds are spending more than their after-tax income," says Creuzot. "They need a realistic budget, and they need to take certain steps to get their finances on a firm footing."

* PAY DOWN THE DEBT

Of the $2,000 cash prize from BE, Creuzot suggest the Hammonds use $1,000 to reduce the balance of the credit card with the highest interest rate. "If they can sell their investment property, that money can be used to pay down those balances, too," Creuzot says.

"Some of their credit cards have interest rates [of] over 20% Therefore, paying off those debts is the same as earning 20% plus, after-tax, risk-free. I don't think they can count on that kind of a return from their real estate, so they might as well sell it."

* TRIM THE BUDGET

The Hammonds currently spend more than $90,000 per year, which is more than $7,500 per month. "They're not really living extravagantly," says Creuzot. "Most of their expenses are in housing, transportation, education, and church contributions. Still, by spending a little less here and there, I think they could save $175 per month. For example, they might cut down on long-distance phone calls."

* PUT HENRI'S 401(K) ON HOLD

Ordinarily, contributing to a 401(k) plan makes sense. "For now, though, they just can't afford it," says Creuzot. She estimates that Henri's take-home pay would increase by about $250 per month if he stopped his 401(k)contributions.

"By taking that $250 per month, along with another $175 per month in savings, they could have ah additional $425 per month to pay down their credit card balances," Creuzot says. "I project those debts could be retired by the end of 2003."

* PUT THE PLASTIC AWAY

In the meantime, the Hammonds should live on a "cash basis." Creuzot says. They should not put new charges on their cards while paying down the current balances and they should call up to cancel the cards once they ate paid off (cutting them up is not enough), They only need one major credit card (Mastercard or Visa) or charge card (e.g. American Express) for emergencies.

* PREPARE FOR A RAINY DAY

If $1,000 of the $2,000 cash prize from BE goes toward paying down debt, the other $1,000 can go into a reserve fund. "You need something in case of an emergency," Creuzot says, "especially if you have young children."

After the credit cards have been paid off, the Hammonds should continue to build up their cash reserves fund to at least $12,000, advises Creuzot. "This can be done quickly," she says, "once they're no longer paying off credit cards every month."

Eventually, the Hammonds can restart their retirement plan and begin to save for their children's education. This should wait, however, until they've established a solid financial foundation. First things first.
Financial Snapshot:
Henri Hammond

 HOUSEHOLD INCOME

Henri's Base Salary $72,000
Anticipated Overtime 24,000

Total $96,000

 ASSETS

Market Value of Home $150,000
Investment Property 14,000
401(k) 9,000

Total $173,000

 LIABILITIES

Mortgage Balance $116,000
Student Loans 8,100
Credit Card Debt 16,000

Total $140,100

Net Worth $32,900
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Article Details
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Author:Korn, Donald Jay
Publication:Black Enterprise
Date:Jul 1, 2002
Words:1175
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