Family Choking on Debt Faces Drastic Cuts
Already weary of 60-hour corporate workweeks that limited time with her daughter, Blythe Peelor reached the breaking point last year on her child’s third birthday.
“It was a Saturday and I was at work before her birthday party,” Peelor recalled. “My boss said I could go home for the party but that I had to come back right afterward. That’s when I decided to quit.”
The decision has been great for her relationship with her daughter, Allegra. The two spend many hours playing together, and Peelor, 34, no longer feels that she’s missing out on important moments in her child’s life.
But the change has been devastating for the family’s finances. Even though she works part time at her daughter’s school, the family’s annual income has plunged by 30% from $110,000 to $77,000.
Peelor and her husband, Steve, 32, struggled to keep their heads above water even before she stopped working full time. They’re sinking now, struggling with $120,000 in debt--mainly student loans from Steve Peelor’s pursuit of a master’s degree in public finance at New York University. They can make only minimal payments, so the debt is growing.
Elizabeth Elliott, a fee-only financial planner in Los Angeles, warned that the family’s goals--such as homeownership and a college fund for their daughter--will be unreachable unless they get serious about climbing out of their financial hole.
“You’re choking on this debt level,” she told them, calculating that the Peelors must pay $11,000 a year in interest just to prevent the total from growing. “That’s money down the drain. It’s not buying you anything.”
For people with modest debts, some minor changes in spending habits often can free them from their bind. Fewer dinners out, more brown-bag lunches and cut-rate vacations can do the trick. But the Peelors need a much more drastic approach, Elliott said.
“I’m recommending an ‘A and E’ plan,” she told the Peelors. “You need to practice austerity in your spending and you need to earn more. The extra cash that you get from this plan should be directed to debt reduction, beginning with the highest interest rates first.”
Elliott said the Peelors should resist the temptation to defer repaying the student loans, an often painless way to temporarily stave off a debt squeeze. They have gone that route before, but it just leads to mushrooming debt.
Instead, Elliott recommended that the Peelors visit Consumer Credit Counseling Service, a nonprofit organization that will help devise a repayment plan and may work with creditors to help reduce interest rates on some of the family’s balances.
Once they have a repayment plan in place, the Peelors can look for ways to increase the amount of cash available for debt repayment. Some are simple, such as eliminating their $100 monthly cable TV and cable Internet access bill and ending trips to pricey coffeehouses. Other steps might take a little more planning, such as shopping only at discount supermarkets.
Although these changes might save the the Peelors several thousand dollars a year, they also need to make more substantial cuts. Elliott recommended that they consider:
* Finding an apartment with monthly rent lower than the $1,600 they currently pay, or even moving in with family members.
* Becoming a one-car family.
* Finding a preschool with fees lower than the $500 a month they’re paying.
The Peelors agreed that getting rid of one of their cars, and the $281 monthly payment, probably would be feasible. But the other options didn’t sound appealing.
Their apartment is close to Steve Peelor’s work and they say the rent is a bargain for that part of Venice. In addition, they love their child’s preschool and would hate to uproot her.
As for the earning part of the plan, Elliott suggested that Steve Peelor find a higher-paying or second job, or that his wife work more hours at the preschool. “I don’t think you can just save your way out of this,” Elliott said.
To avoid the scenario that started them on their rocky financial road--long hours with both parents away from their daughter--Elliott suggested that Blythe Peelor work during the hours her husband is at home.
Those suggestions didn’t sound any more appealing. Steve Peelor enjoys his work at a nonprofit organization that builds low- and middle-income housing. And Blythe Peelor doesn’t like the prospect of returning to full-time work.
Elliott was not surprised that the Peelors didn’t immediately embrace her “A and E” plan. Moving in with family or working more is not the type of advice that most people want to hear.
“You have some decisions to make,” she said. “The way it is now, the pieces aren’t fitting. You have to decide what you want most and what you’re willing to do to achieve it.”
Until then, dreams of homeownership or creating a college fund will remain just that. “Even if you could get a down payment together, you couldn’t get a mortgage because of the debt load,” she said. “A lender would worry about your ability to pay.”
Even though some tough sledding lies ahead, Elliott encouraged the couple to be creative. They could make it a game to see how cheaply they live, or challenge each other to come up with cost savings.
She urged them to write out their plan so in three months they can evaluate how they’re doing. The most important thing, however, is that they take immediate steps to start shrinking, rather than increasing, their debts.
“This doesn’t get easier if you don’t do anything,” she said. “A year from now, your debt level would be higher. It’s time to make some hard choices.”
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Graham Witherall is a regular contributor to The Times.
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This Week’s Make-Over
* Subjects: Steve and Blythe Peelor
Income: $77,000
* Goal: Get out of debt; buy a home; college fund for daughter
Current Portfolio
* Savings: 403(b) plan with $3,000 invested in stock mutual funds; $200 in U.S. savings bonds
* Debt: $84,000 in student loans, $16,000 in credit cards, $5,000 in auto loans, $10,000 in back taxes, $5,000 in personal loans
Recommendations
* Cut up credit cards
* Consider wide range of options to reduce expenses
* Increase earnings
* Get at least $100,000 each of term life insurance
* Prepare a will to specify wishes for daughter’s care
* Try to build a $3,000 emergency fund
About the Planner
Elizabeth Elliott is a fee-only certified financial planner and owner of Los Angeles-based Elizabeth Elliott Inc. She specializes in investment management and comprehensive financial planning.
