Case Study: Alline Davenport. Some Financial Homework

by Joe Plemon on August 3, 2009

dollars no cents
Creative Commons License photo credit: AanikaP

Entry Two: May 13, 2009

The purpose of this meeting is to follow up on homework from our last meeting, discuss how the budget is working and discuss plans to help her meet her short term goal of being debt free.

Homework:

Alline is working on her goal of a $1,000 “Baby" emergency fund.
She should have $500 toward her emergency fund by the end of this month.

She has lowered her land line phone bill and her Direct TV plan.

She checked and was not able to lower the cost on auto insurance premiums.

Her whole life insurance policy has a cash value of only $1,600. Because of health issues, she will need to keep it instead of pursuing term life.

Reviewing the Budget

The budget we established at our last meeting went very well. With confidence in the budget, we feel that we can begin to formulate our plan. She will need to complete her $1000 Baby Step One Emergency Fund before attacking her debt (Baby Step Two) but she should be able to do so within a month.

We discussed a concept to help expedite this process. Because Alline is living in her daughter’s house, and because her daughter owes her $35,000 and because the prospects of ever getting any of this money from her daughter seem extremely slim, our plan is for Alline to buy the house from her daughter, paying only what is owed on the house. All equity (approximately $15,000), therefore, would be a form of payment from her daughter. Furthermore, when applying for the loan for the house, Alline could ask to borrow 80% of the market value and would walk away from the closing with about $8,000 to $10,000 which she could use to completely pay the IRS debt and greatly speed up her debt snowball. This was Alline’s idea and I endorsed it. Alline has already spoken with her daughter about this and her daughter is in agreement.

Therefore, Alline’s homework will be to talk to her banker and get the purchase process started.

We scheduled our next meeting for a month away. Based on the assumption that her budget is on track and the purchase of the house go forward, I will develop a detailed plan for Alline before our next meeting.

{ 3 comments… read them below or add one }

Chad August 4, 2009 at 7:35 am

Could you provide additional detail as to why you are recommending keeping the whole life policy? Does Alline have someone who is dependent upon her income? If not, why not use the premium of the whole life policy and the cash out value to pay down debt?

Reply

Joe Plemon August 4, 2009 at 12:21 pm

Chad,

Great question. No. She does not have anyone dependent upon her income, but (probably because of the hardships her husband’s death and funeral placed on her) she places a very high value on having enough life insurance to cover her funeral expenses. Because of health issues, she does not qualify for term life, so the choice seemed to be either cancel her policy in order to use the premium and cash value for debt reduction (as you suggested) 0r keep the existing policy so she can have the peace of mind to know that her death will not be a burden to her children. We discussed this and she chose to keep the existing policy.

Reply

Chad August 4, 2009 at 12:37 pm

Joe,
Thank you for the clarification.
Important lesson is that not every person or situation is the same and the security gland needs to be satisfied for peace to occur.

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