Money Make-Overs : Did you...
Lynn Johnston was in a state of panic until she froze her credit cards.
The icicles gathering on the American Express card in her freezer keep her from using it while she browses at shopping malls, where she might be tempted to buy something frivolous.
But putting her plastic on ice was not enough, she said.
So Johnston, 38, and her roommate, James Jax Jr., 35, sat down with a financial planner to try to figure out how to pay off $20,000 in credit card debt and get their financial lives in order.
The couple are salespeople at the South County Volkswagen and Isuzu dealership in Huntington Beach. Because they work on commission, their incomes are not steady. But together they earned more than $70,000 last year.
What should Johnston and Jax do?
Malcolm I. Campbell, a certified financial planner at Grant Nelson Group in Newport Beach, advised them to stop buying on credit. He also recommended that they keep a detailed account for 30 days of where every penny goes, then figure out what they can do without and where they can spend less.
“If you see where you actually spend your money, you can control your spending and identify ways that money could be spent more efficiently,” Campbell said.
With state-of-the-art workout equipment, leather couches, a mini-playground for the cat and other expensive extras adorning Johnston’s Fountain Valley condominium, the couple acknowledged spending on impulse.
And Johnston admitted that she is mostly to blame for the buying. “If you’re nice to me, I’ll buy from you,” she said. “That’s why we’re in debt.”
Campbell advised her to cancel all credit cards except the one with the lowest interest rate, which he recommended keeping in case of emergencies.
He also counseled the couple to stop buying unnecessary items. “No more extra entertainment, no more gym machines and no more fancy stuff for the cat,” he said.
After dealing with their No. 1 concern--getting rid of their credit card debt--Johnston and Jax want to move back to Michigan, where they grew up. They are not sure that would be wise, though, considering that the resale market for condos is bleak.
“I wonder if I’m kind of silly to sell now,” Johnston said, noting that a recent appraisal of the property valued it at $10,000 less than what she paid three years ago.
Pat Neal, a real estate broker and president-elect of the California Assn. of Realtors, suggested that the couple hold on to the condo unless they can sell it without losing money.
“They should try to sell in January,” said Neal, who owns Pat Neal & Associates in Garden Grove. “We always find that January is a good month to sell no matter how the economy or the real estate market is doing. . . . I say they have a good chance of selling. If not, then I recommend keeping the property and renting. Even if they live out of state, they could inexpensively hire a management company.”
Campbell, however, suggested putting off the move until the credit card debts have been paid off.
If the couple dedicate $520 a month to paying off the debt, they will be free of it in three years and two months. If they earn $70,000 again this year, Campbell suggested paying twice that amount monthly--or more, whenever possible.
The sooner the debt is reduced the better, all agree.
Indeed, Campbell drew up a budget for the couple that would set aside $1,600 a month to pay off the credit card bills. At that pace, they could be free of the burden in 16 months.
Other top priorities, he said, are to buy health insurance--which neither has--and to start a savings program. Those two things are a must, Campbell told them.
He also suggested that Johnston and Jax have wills drawn up and start retirement plans. Each, he said, should contribute $166 a month to an individual retirement account. Under that plan, by retirement age they could be drawing as much as $1,500 a month each from such an investment.
Johnston said she and Jax will follow Campbell’s plan to the letter.
“Now,” she said, “we don’t feel as overwhelmed as we did before.”
The Johnston-Jax Family
Profile: Double income over $70,000, debt-ridden, living beyond their means
Names: Lynn Johnston, 38, and James Jax Jr., 35
Occupations: Car salespeople
Assets: Condominium valued at $145,900; 1992 Toyota Camry valued at $14,440; 1991 Dodge Colt valued at $5,125. Total: $165,465
Liabilities: About $116,000 owed on a home loan; $23,853 owed on car loans; $20,000 owed on credit-card accounts; $132 owed on personal loans from relatives. Total: $159,985
Financial goals: Pay off credit-card debt, sell the condo, move to Michigan and buy a house.
