Case Studies: Alline Davenport

by Joe Plemon on August 18, 2009

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Creative Commons License photo credit: Jen_Maloney_Photo

Meeting Three: 6/15/09

Review of Meeting One: Alline’s short term financial goal is to become debt free. Her long term goal is to rebuild some of her lost retirement and put herself in a position not to be a burden to her children. We established a preliminary budget with plans to review it in one month.

Review of Meeting Two: With minor adjustments, Alline’s budget is doing well. We agreed on the following plan to jump start her short term goal of getting out of debt: Because her daughter owes her $35,000 (from a loan) that Alline has no hopes of ever getting, Alline is going to buy her daughter’s house for the amount owed on it, thus gaining the equity of about $15,000. She will then take out a loan of 80% of the appraised value which will allow her to get a check at closing for about $8,000 to $11,000. She will then use this to pay off debt, wiping out all of the IRS debt and part of the car debt. Her credit card debt (only 2% APR) will be last on the debt snowball.

Based on the above information, I prepared the following plan for Alline and presented it to her at this meeting:

The following plan is contingent upon using loan at time of house purchase to pay off IRS.

Step One: $1,000 in an “Emergency Fund"

DONE!

Step Two: Pay off all debt utilizing the “Debt Snowball" (except the house)

Remaining debt = $3,000 on car and $7000 on credit card. Total amount to be paid on debt = $1200 cash flow plus $300 car payment. Car should be paid off in three months. Credit card debt should be paid off in an additional four months.

Debt free except for house in 7 months!

Step Three: 3-6 months of expenses in savings

Continue to build emergency fund by saving $1500/month. Should have $10,000 in 6 more months.

Done with Baby Step Three in 13 months total.

Step Four: Invest 15% of household income into Roth IRAs and pre-tax retirement

Invest $500/month and pay extra $1000/month on house (see Baby Step Six)

Nest egg should be about $21,000 in three years. At this point, house is paid for and you can invest $1500/mo. Nest egg will be about $60,000 in two more years.

Step Five: College Funding (Not applicable)

Step Six: Pay off home early

Should have home paid for in four years total (three years after completing Baby Step 2)

Step Seven: Build Wealth!

Summary:

  • Baby Step One: Done now.
  • Baby Step Two: 7 months
  • Baby Step Three: 6 more months
  • Baby Steps Four and Six: 3 more years

Conclusion: In four years, Alline should have all debt gone, house paid for, $10,000 in Emergency Fund and another $20,000 nest egg. With no other debt, you could have another $40,000 in nest egg in only two more years (six years from now).

With no debt, Alline has choices. She could easily retire in four years. But, because she would be done with Baby Step Three in only 13 months, she could make it if she had to retire then.

Alline was very upbeat about this plan. For the first time in a long time she feels like she has real hope that she can get out of debt and be self sufficient. We are not sure when the closing on the house can be scheduled because of some contingencies concerning her daughter’s finances, but, because Alline will continue on her debt snowball until that time, her total schedule should not change too drastically because when she closes on the house she will have less debt to pay off.

We scheduled a meeting for one month from now. Our agenda at this meeting will be to review the budget, debt snowball and progress of the house purchase.

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