With their youngest child starting college, a pile of debt and retirement getting closer, Cheryl and Mark Thome are feeling their tightest financial squeeze yet.
They've reared three children and cared for an elderly parent for several years, obligations they took on willingly but that contributed to the family's now-staggering $59,000 in credit-card debt.
The Thomes said they closed their eyes to the flood of cash that was flowing out of their house as they cared for Cheryl's ailing father and their children. In addition, Cheryl took five years off work when the children were young, while the bills kept coming.
They sold their Maryland home about nine years ago to pay some bills, take vacations, care for relatives and start their older children, daughters Lani and Remy (now 26 and 24), in college.
To keep their 18-year-old son, Miles, in their desirable school district in Ellicott City, they've been renting a home for $1,450 a month. Recently, Cheryl wrote a $1,600 check to cover Miles' fall semester at a nearby community college.
And retirement is looming large. Cheryl, 53, has a small, undiversified 401(k) plan at the swimming-pool construction company where she works as a scheduler. Mark, 55, manages a steakhouse, a job that has no retirement benefits.
All that makes the couple's combined $69,000 annual income look pretty small, so they reached out to Money Makeover for some guidance on how to put their financial lives back on track.
"We no longer need to live in the school district, and I hope that we can once again invest in a home instead of paying rent," Cheryl said in her letter requesting a makeover. The couple hasn't charged anything on a credit card in more than two years, even for Christmas presents, she said.
Financial planner David M. Kover of Chicago agreed that getting off the rent treadmill is a high priority for a couple only a decade or so from retirement age. But an even higher priority is the debt load, he said.
The good news is that the couple has drastically cut spending and has been aggressively paying down the debt, at roughly $1,400 per month.
"One of your toughest choices will be balancing a mortgage payment with paying off your credit-card balances," said Kover, a certified financial planner and president of the Chicago Loop Council chapter of the Illinois Financial Planning Association. "An option to consider would be to buy a small, affordable house, with payments close to your current rent, and buy up in three or four years when the credit-card debt is more manageable or completely paid off."
Kover's first suggestion for the Thomes was to pull their credit report.
Cheryl believes their report will show a good credit history. They've never been late on a payment, even though the total debt amount is a large percentage of their annual household income.
If the credit report is positive, Kover suggested the couple contact creditors to try to negotiate better payment terms, especially on their highest-rate cards. Their rates range from 4.2 percent to 26.9 percent.
"I would focus on paying more on the higher-interest cards first and make the minimum payment on the cards with the lower interest rates," Kover said.
If they can't negotiate their rates down, he said, the Thomes should investigate balance-transfer offers from other companies. But avoid teaser rates for the first year that rise sharply after that, Kover said, as it will take four years for them to pay off their debt at their current payment rates.
Meanwhile, Kover suggested the couple look for ways to get back into home ownership without siphoning away the debt-reduction money. The couple's landlord is a builder with whom they have started discussing rent-to-own plans, an idea Kover likes. Failing that, the couple should investigate other deals that require little or no down payment.
But getting a mortgage could be difficult, he said. Financial institutions generally require that home buyers' total payment for principal, interest, taxes and insurance not exceed 30 percent of their income, and total household debt payments, including mortgage and credit cards, can't exceed 45 percent of income.
Next, Kover recommended balancing out Cheryl's 401(k) elections, which are now invested in a single international stock fund.
Although foreign funds have performed well in the last few years, she is exposing herself to a lot of unnecessary market volatility, he said, suggesting she diversify the account to a still-aggressive portfolio containing 85 percent pure stock funds and 15 percent in a fund balanced between stocks and bonds.
As for day-to-day living expenses, Kover recommended the couple comb through the bills.
"You should sit down together and create a family budget to understand what your complete monthly expenses are," Kover said.