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Can She Bear It?
By Ric Edelman, March-April 2004
She still supports her grown kids. How can she get them off her back-and herself out of debt?
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Dixie Groberg, 63, lives in a rural community of Tennessee and
has been a widow for nine years. She has worked on a factory
assembly line for more than 20 years and now earns $28,000
annually. (For someone with her experience, she's at the top
of her pay scale.) She has four children, and her two youngest,
ages 25 and 28, still live at home. Both are employed full-time,
but neither pays room and board. Dixie comes up a few hundred
dollars short every month because her kids continually ask for
financial help, and, well, she never was much good at saying no.
Strengths
Dixie's home is worth about $180,000, and she owns 90 acres
of farmland, worth roughly $75,000. In addition, she has some
$40,000 saved in her 401(k) plan. Luckily, she's in good
health and enjoys her job. She plans to work until she's 70.
Weaknesses
Dixie relies on credit cards to make ends meet. In 1999, she had
a balance of $15,000 and refinanced her home (taking out a larger
mortgage) to pay it off. In 2002, her debt was back up to
$11,000, so she took out a loan to pay off the cards again. Now,
two years later, her balance is back up to $10,000. She still
owes about $130,000 on her home mortgage (at an interest rate of
8 percent, which was the best rate Dixie could get in 1999). The
monthly payment of $1,200 eats up most of her take-home pay.
The Plan
Her first task is to tell all of her kids that the Bank of Dixie
is closed. She must stop giving them handouts, and start
collecting rent from her live-in sons. If they won't agree to
start paying her at least $300 each a month—which is fair
for room and board in that area—Dixie should evict them,
just as she would any other freeloaders. Dixie spends about $400
a month total on food and utilities for them, and she must start
applying that money to her own needs. First on the list is paying
off her credit card debt—one last time!
Simultaneously, Dixie needs to boost her retirement savings. The
best and easiest strategy is to increase her contributions to her
401(k) plan, as the money is deducted from her paycheck before
she can spend it. It'll save her a bit more on taxes, too.
She contributes only $100 a month now, but she could raise that
to $200 or more if she stops being the family piggy bank.
Dixie will be eligible for full Social Security benefits in 2006,
when she'll begin receiving about $800 a month. If she's
still working, she should save that money by contributing an
additional $800 each month to her 401(k).
Finally, she should consider refinancing the house once more, to
lower that high interest rate on her mortgage. She'll likely
get a rate just under 6 percent, in which case her monthly
payment could drop by as much as $200.
With these moves, Dixie's savings could grow to as much as
$150,000 by the time she's 70. That, combined with her Social
Security income and the value of her properties, should allow her
to maintain her lifestyle. And to spoil her grandkids—at
least once in a while.
Ric Edelman is the founder of Edelman Financial Services and
author of The Truth About Money.
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