Financial Challenge: Debt Reduction & Retirement Savings

Financial Challenge

Sophonia Hardaway saves for her daughter’s ­college education as a way to honor her own father. “He paid for my college education with cash. I never had any student loan debt,” she says. Hardaway earned a bachelor’s degree in computer science from North Carolina A&T State University and a master’s in computer engineering from Loyola University Maryland. “I want to do the same for my daughter.”

With that goal in mind, Hardaway has contributed $400 each month for the past five years to a 529 college savings plan; moreover she has recently begun contributing $350 per month to an ING Direct savings account. This comes to $9,000 a year, or nearly 8% of her annual income. So far, she has set aside about $27,425 for 14-year-old Zoë’s college expenses.

But Hardaway is saving for more than just college. Two other important long-term financial goals compete for her attention: debt reduction and retirement savings. At a glance, the 41-year-old has positive cash flow, but her situation could turn negative quickly if a financial crisis were to strike.

Hardaway has $113,497 in an IRA. Additionally, she has $45,000 in a 401(k), $3,620 in mutual funds, and $2,270 in savings and money market accounts. Hardaway contributes 13% of her paycheck to her 401(k) each pay period. Her unsecured debts total $45,000, of which $29,000 is an interest-only note and $16,000 is in credit card balances; however, her cash reserve–$2,270–is dangerously low.

Fortunately, Hardaway has a steady job as an information systems security engineer in Fort Meade, Maryland. She currently earns an annual gross income of $116,000 working 32 hours a week. Putting in part-time hours gives her more time with Zoë. Her schedule also allows her to focus on her side business, Tweens n Things L.L.C., which teaches life skills to kids 8 and up and teaches computer literacy at daycare centers through Imagine Tomorrow Computer Classes for Kids (a franchised computer software). Altogether her enterprise grosses $6,000 a year. She pays an annual $1,500 franchise licensing fee for the computer software, and until earlier this year she leased laptops for around $3,000 a year, but she has since purchased her own.

Hardaway, who is divorced, receives $450 in child support each month. She owns her home and also a townhouse that she rents out for $1,350 per month.

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