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Californians Learning How to Succeed in Personal Finances

Lightening the Debt Load

Single Parent Weighs Strategies for Making Ends Meet


Juliet Arroyo tried to downshift but instead got herself caught in the economic gears.

After reading Juliet Schor's influential "The Overworked American"--the recent study positing that modern-day folk are devoting too much time to their jobs to the detriment of personal and family life--Arroyo, an urban planner, decided to forgo upward mobility. In 1995, she arranged to work a 32-hour week in a new job at a slightly lesser salary.

The thirtysomething single mother wanted to be more available for her two boys, now 16 and 14, as well as have more time to pursue her favorite hobby: belly dancing.

"It was very stressful, working 40-plus hours a week and raising two kids alone," she explained.

Yet Arroyo, already facing financial difficulties, didn't cut back enough to make up for the lost income. After she pays the minimum due on her various obligations each month, she has barely $1,000 left over for everything from food to medical expenses. She is, however, saving $192 a month in her 401(k), of which her company matches 25%.

Arroyo grosses $46,500 annually and collects $5,400 a year in Social Security survivor's benefits for her younger son, but she is currently $33,000 in debt. And that's on top of the mortgage on her Glendale home and a housing-rehabilitation loan (for a new roof) with a balloon payment of $39,500 due in 2008.

"You have to get a budget that balances. Nothing will improve until you do that," Kathleen Stepp, a fee-only certified financial planner in Overland Park, Kan., told Arroyo. "Right now, you need to get your fiscal ship turned around."

There are months in which Arroyo barely makes it from the 1st to the 30th, even as she pays only the minimum due on her five credit cards and her student and personal loans. What's more, she receives no child support for her elder son.

Unfortunately, her expenses are increasing. She strongly believes her younger son will benefit from a private education, and the boy has received a scholarship for his school, but Arroyo will still have to pay around $6,000 a year. And her car, with 170,000 miles on it, isn't getting any younger.

"I don't feel my money goes far enough," Arroyo said. "I can't even save money, never mind invest it. I barely get by day to day. I'm trying to live a middle-class lifestyle when I'm a single parent with one income.

"There's car repair, house repair, school photos," she said, expressing her frustration. "I try to anticipate these expenses, but I never realize what things will come up and what they will really cost." So when Arroyo comes up short, she taps her credit cards to pay for necessities such as groceries.

And let's face it, denying yourself and your children the occasional treat isn't easy. Then again, neither is paying for a treat you can ill afford.

Arroyo took her boys on a summer trip to Seattle. "My older son is moving out next year, and we'd never gone on a family vacation before," she explained. But to pay for the trip, she took out a $1,000 loan from a finance company at 24% interest.

Arroyo's plight is stark evidence of the troubles many middle-income single parents face.

Stepp's first recommendation: Arroyo should not continue to battle her red ink alone--and Arroyo readily agreed. Nonprofit consumer credit agencies such as the Consumer Credit Counseling Service or Debt Counselors of America can often negotiate with creditors to get reduced interest rates and lower monthly payments on obligations, and they can be more persuasive than debtors usually can be on their own. Moreover, either service would offer Arroyo classes in budgeting basics, something Stepp believes Arroyo needs.

Stepp dismissed any notion that Arroyo might want to tap the approximately $40,000 equity in her home to pay off her bills, either by selling or borrowing against it. It would be too easy for Arroyo to get herself into an even worse financial mess down the road. That's because she'd be either liquidating or risking the loss of her one significant financial asset without, presumably, making a serious commitment to changing her lackadaisical approach to money.

Besides, Arroyo's monthly mortgage payment, before tax deductions, is $1,117. If she sold the home, it's unlikely she'd be able to rent a two-bedroom apartment for less than that.

What should Arroyo do, then?

Stepp and DCA debt counselors urge that Arroyo boost her income, either by returning to work five days a week or accepting the paid nighttime belly-dancing gigs she's been offered.

She also should reduce or stop her 401(k) contributions, currently set at 4% of her salary, to increase the money available for debt payment and living expenses, Stepp and DCA representatives said.

It should be noted, though, that giving up her 401(k) for, say, five years would be a big sacrifice. It would save Arroyo about $6,000, after taxes, but it would cost her about $86,000, if one factors in what those contributions would have earned by age 67 at an annualized return of 8%.

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