Get With The Plan: November 23, 2008

Sami, 44, is tired of being weighted down by debt. She knows her financial situation isn’t pretty, and she wants to fix her past money mistakes and look to the future.

‘‘My goals are to reduce my debt, save for retirement, start investing, buy a house and go back to school to change jobs to make more money,’’ she says.

Sami, whose name has been changed, has $50,000 in her 401(k) plan, $400 in savings and $300 in checking. Her eight credit cards have a total balance of $12,930 and she also has $16,200 in personal bank loans. In total, she’s pay- ing a painful 30 percent interest rate on most of these accounts.

The Star-Ledger asked James Ciprich, a certified financial planner with RegentAtlantic Capital in Morristown, to help Sami come up with a debt reduction plan.

‘‘The current credit card and personal loan balances are excessive and will hurt her ability to achieve financial goals such as retirement and homeownership,’’ Ciprich says.

It all comes down to spending. Ciprich says based on Sami’s budget, not every dollar is accounted for. That means she’s underestimating some of her expenses. Seeing where her money is going, Ciprich says it’s clear discretionary spending — buying items that are not essential — far outweighs necessary expense items.

To better keep track of every dollar — and every dollar matters — Ciprich recommends she use software that can track monthly spending, such as Quicken or MS Money. Another option is to carry around a small notebook in which Sami could mark down every purchase, no matter how small.

‘‘By knowing where her money is going, she can find more areas to save,’’ he says.

Ciprich recommends Sami institute a five-year plan to aggressively pay down her high-interest debt. It took time to build the debt, which amounts to more than half a year’s salary for Sami, and it’s not going to vanish over- night. The faster she pays down the debt, the better, he says, because then she’ll be paying less in interest and helping her credit score, which she’ll need to improve before applying for a mortgage.

‘‘Purchasing a home in the near term is not realistic,’’ he says. ‘‘After eliminating credit card debt, she may be able to achieve that goal within the next six years.’’

Buying a home would also mean she would have to delay retirement, he says. If she does decide to buy, Sami should accumulate a 10 percent down payment and plan on a traditional, 30-year fixed-rate mortgage. She should consider a home in the $225,000 to $275,000 price range, and make sure she understands all the new expenses homeownership will present, including property taxes, insurance and maintenance costs.

One area in which Sami is doing the right thing is re- tirement savings. She’s setting aside 10 percent of her salary and receiving a 3 percent employer match in her 401(k) plan. Ciprich says she should maintain her current savings level and she’ll have adequate retirement income at age 65.

Sami should make changes to her asset allocation, though. She’s currently invested in a 2030 target date fund, which Ciprich says is too rich in large-cap stocks. She should add small-caps and international investments to her portfolio.