MONEY MAKEOVER
Digging out of debt
By David Butts
Advertiser Staff Writer
A two-hour meeting with the financial planner had just ended, and Deborah Lief, a single mom trying to provide for her 10-year-old son and work her way out from under $20,000 of credit card debt, was feeling a bit overwhelmed.
Eugene Tanner • The Honolulu Advertiser
"I'm going for a walk in Kapi'olani Park, and, who knows," Lief joked, "maybe I'll find something around the corner. I always think something will come along."
Deborah Lief, a single mom who lives with her 10-year-old-son, Aaron, in Palolo Valley, is attempting to pay off credit card debt.
A long session with a financial planner can leave most people hoping for a bag of money to fall off a truck. And that is probably why many people just keep putting it off.
"There are millions of people that are so underwater they don't want to look at the problem," said Judith Slawsky, a financial planner, who prepared a strategy for Leif to get out of debt. Lief is way ahead of the game, Slawsky said, because she has sought out help.
"If they pick up the phone and call me, they are willing to make a change," Slawsky said.
Procrastination is a strong trend, added Wendy Burkholder, interim managing director of the Consumer Credit Counseling Service of Hawai'i, which provides free credit counseling. "We tend to kind of live in tomorrow. We all want to believe that tomorrow will be better. If you are worrying about it, get some advice. Don't wait until you have maxed your credit limits."
As with many people in her situation, Lief didn't get deep into debt by extravagant spending.
When she got married in 1990, she had about $5,000 on her credit card balance. Aaron was born in 1992, and Lief took two years off from work to stay home with him.
"We were living in Hawai'i on one salary," Lief says. And that meant some expenses went on the credit card.
She later got a job that involved travel and other expenses, which she put on her personal credit card. The company would reimburse her, but she didn't always use the reimbursement checks to fully pay off the debt.
By the time she got divorced three years ago, Lief and her husband had built up about $40,000 of credit card debt. They split it evenly, and Lief hasn't been able to pay down her half. On the positive side, she has kept the total debt at about $20,000 for those three years.
That's the history. The result is Lief owes money to five credit card companies and has to make a minimum monthly payment of $541.
The debt didn't grow overnight, and it will take years to pay it off. But she can do it faster if she can:
• Reduce the interest rate.
• Stop adding to the debt.
• Pay more than the minimum.
Slawsky calculated that lowering Lief's interest rates, including one card that is charging 24 percent, could save Lief about $100 a month. Slawsky suggested Lief transfer balances to the card with the lowest rate, call the credit card companies and ask for a lower rate and check with her credit union about getting a low-interest loan to pay off the cards.
Burkholder agreed with that approach. "She should shop for better interest rates," Burkholder said. "Contact the credit card company directly and ask them to reduce the interest. If she has a good payment record with them, sometimes it is just a question of asking. The worst that can happen is they can say no. If they do, join a credit union and see if they are doing a loan at a lower rate. Credit unions are wonderful for that. If both of those fail, talk to consumer credit counseling."
Next is not adding to the debt. Slawsky keeps a large pair of pink-handled scissors in her desk to help clients break the credit card habit. Lief turned over two credit cards, and Slawsky cut them into small pieces. Two more at home will need to be cut up, and one, with the lowest interest rate, can be put in a drawer for use only in emergencies.
Then Slawsky began to chip away at Lief's spending. A tally of her income and monthly expenses showed that Lief is spending $168 a month more than she is taking in.
Lief earns $48,000 to $52,000 a year at Kaiser Permanente, where she teaches documentation and coding to physicians and staff. That salary would be plenty for Lief and her son, Aaron, if she didn't have to pay $541 a month to credit card companies.
"I keep thinking where would I be if I didn't have this over my head," Lief said. "I want that to be a goal of mine. To me, being debt free is so liberating; you are a free person then."
In addition to the credit card payments, she spends $875 a month on rent, $352 on her car lease and $320 on groceries. Dining out uses up another $192 and movies and movie rentals another $45.
Slawsky pressed Lief to account for every dollar spent, and then asked Lief to decide how she wanted to trim the $168.
Picking the right expenses to forgo is a key to making the whole makeover work.
"I don't want you to cut out something and get depressed and start spending with your credit card," Slawsky told Lief.
"I could give up haircuts," said Lief, knowing that would save $40 a month. But she reconsidered that tack. "I'm a 42-year-old woman. The first thing I let go can't be my looks."
She spends about $80 a month on getting pizza delivered once a week. She could cut that to once a month. She spends about $30 a month on books and could go to the library instead. She was invited to golf with a co-worker once a month, but wouldn't mind letting that go and saving another $25.
After taking all those items off her budget, Lief said, "I can't whittle anything else."
In July, Lief's three-year lease on her 2000 Ford Escort will be up. Slawsky suggested she negotiate to buy the car from the dealer instead of getting another new car. That could save about $125 a month and allow Lief to add back some of the fun things she cut out or pay off her debt faster.
With these changes, Slawsky expects it will take Lief five years to pay off her debt.
To reach her other goals, Lief may have to take on a part-time job, perhaps on Saturday mornings when her son is with his father.
Lief wants to buy a townhouse to avoid paying rent. She has been looking at townhouses in Kapolei and 'Ewa Beach in the $120,000 range.
Slawsky suggests she hold off on that until the credit card problem is under control. She also suggested Lief consider buying a larger place and renting out a room. A tenant could pay $500 a month, and that would help with the mortgage while building up Lief's assets.
Lief is paying $875 in rent. Slawsky said that would translate into a $1,300 mortgage payment once the tax benefit of a mortgage is taken into account. Over the life of the loan, about half of the mortgage payments are tax-deductible interest. For the first few years, all or most of the payments are deductible interest.
Another goal is to put Aaron in private school in two years. She is considering St. Patrick's, which she expects would cost about $3,500 a year.
That is something Slawsky wants Lief to consider carefully in light of her need to build savings for retirement. "You will be sacrificing your retirement," Slawsky said.
Family reducing credit overload
• The family: Deborah Lief, 42, and son, Aaron, 10
• Work: Coordinator of coding operations for Kaiser Permanente
• Salary: $48,000 to $52,000
• Savings: Minimal
• Credit card debt: $20,450
• Goals: Reduce credit card debt. Save so Aaron can attend a private school in two years. Buy a condominium. Save for retirement.
• Challenge: How can she reduce her credit card debt when the minimum payments are $541 a month and her budget is already tight?
• The Makeover: Stop using credit cards now to avoid adding to debt. Pay off the card with the highest interest rate first, using a credit union loan or cards with lower rates. Buy a used car instead of leasing a new one. Track monthly spending and cut back in areas of least importance, such as extra telephone and pizza delivery once a week. Apply savings to reducing debt.
Planner finds best strategy for client
• The planner: Judith Slawsky
• Address: 1019 Waimanu St., Suite 204
• Phone: 593-1040
• Qualifications: Certified Financial Planner, IRS Enrolled Agent
• Years as financial planner: 23
• Years in Hawai'i: 28
• Style of planning: "I take a complete snapshot of where they are and where they want to be in five, 10 or 20 years. I try to find the appropriate investment for the client's time horizon and risk tolerance."
• Fees: Hourly or commission, depending on client preference.
Financial counseling services in Hawai'i
• Volunteer Legal Services Hawai'i, Consumer Credit Clinic: 528-7046, (800) 839-5200
• Consumer Credit Counseling Service of Hawai'i: 532-3225, (800) 801-5999, www.cccshawaii.org. CCCS is an advisory service for free advice and counsel about the use of credit and about handling debt problems.
• University of Hawai'i College of Tropical Agriculture and Human Resources, Cooperative Extension Service, Family Financial Counseling Program. Call 956-6519 for an appointment with a counselor. For a free copy of a self-help publication titled Overcoming Financial Difficulties, call 956-7046 or see www.ctahr.hawaii.edu.
Participate in a Money Makeover
The Advertiser's Money Makeover feature takes a look at a variety of Hawai'i residents' financial situations and goals in a changing and challenging economy.
We ask financial professionals to suggest ways in which people can better manage their money to achieve their dreams and desires.
If you're interested in participating in a Money Makeover, reach assistant business editor David Butts at 535-2453, or dbutts@honoluluadvertiser.com.
