Young Family Should Pay Debt, Invest in Retirement Before Saving for College
Q: My husband and I are both professionals in our 30s, although I am currently a full-time homemaker caring for our three boys, ages 6, 4 and 2. We save the maximum allowed in my husband’s 401(k) and have IRAs worth about $55,000 total. We also have about $15,000 in credit card debt (with interest rates ranging from 4% to 11%, mainly from paying for private speech therapy for our 4-year-old). Our income will increase greatly in about three years when I return to work and the speech therapy ends. I think we should contribute to a Roth IRA and Education IRA now while we can, because the debt will be easily paid off in the future. What do you think?
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A I think it’s amazing that with three young boys you had time enough to dash off your question. Obviously, you know how to organize and prioritize your time. Those same skills will help you with your finances.
In general, your priorities should be to save for retirement, pay off debt and then worry about saving for college. Specifically, that means blowing off the Education IRA, doing everything you can to pay off the credit cards and figuring out some way to fund the Roth IRAs.
Education IRAs aren’t a great way to save for college, anyway. The $500-per-child limit is too low, and future withdrawals could prevent you from using valuable education tax credits, including the Hope Credit and the Lifetime Learning Credit.
Meanwhile, you’ve got a large amount of debt sitting in variable-rate credit cards, which means your interest rates--and minimum payments--could go up at any time. You might think you’ll just transfer the balances to other, lower-rate cards, but card issuers are cutting back on those great teaser rates that got you to pile on the debt in the first place. There’s no guarantee you’ll be able to find a better rate when you need one.
You’re also assuming that all will go as you planned--that your husband will keep his job, that you’ll find employment and that the 4-year-old, or another child, won’t develop some other expensive condition that needs to be addressed. Since you didn’t mention an emergency fund, I’m assuming you don’t have one. That means every future financial setback is likely to drive you deeper into debt, and closer to the edge.
If you need some help learning how to save money and live on one income, check out the Dollar Stretcher at https://www.stretcher.com. You can also read there about the importance of having an emergency fund once you’ve paid off your debts.
I wouldn’t go so far as to neglect funding your Roth IRAs in your zeal to pay down debt, however. Because the money you save will be tax-free in retirement, Roth IRAs are an incredibly powerful savings tool.
There’s no catch-up provision, however, so each year you fail to make the $2,000 contributions for you and your husband, means you could have $80,000 less in retirement (assuming your contribution grows at a 10% annual rate for 30 years). Scraping together the money to contribute to a Roth can make sense, even if it means reducing your husband’s 401(k) contribution from the maximum allowed to the maximum that his employer will match.
On Point Bankruptcy Advice
Q: I just wanted to applaud your advice to the single mom about filing for bankruptcy, and your recent follow-up comments, which were right on the money (so to speak!).
I am a bankruptcy attorney in Ohio, and I very often suggest people meet with Consumer Credit Counseling Service before making a bankruptcy decision. That meeting at least gives people an honest, unbiased opinion as to whether they can reasonably structure a repayment program.
Although the program may not work for many people, it at least gives debtors the peace of mind of knowing that, if they do have to file bankruptcy, they have explored all options and did not jump into bankruptcy prematurely.
I’ve talked to many people who should never have filed because they owed relatively small amounts and could have handled a repayment program if they simply knew such programs existed.
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A Thanks for writing and sharing those thoughts. Your clients are lucky to have an attorney who understands that it’s important to weigh the options before choosing bankruptcy.
I might add that Consumer Credit Counseling Services are nonprofit agencies under the umbrella of the National Foundation for Credit Counseling. You can visit its Web site at https://www.nfcc.org or call (800) 388-2227 to find an agency in your area. Some for-profit companies have tried to ride the foundation’s coattails by using sound-alike names.
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Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries. For past Money Talk questions and answers, visit The Times’ Web site at https://www.latimes.com/moneytalk.
