Bridget, 44, is a divorced teacher who has a special-needs child. She wants to begin to save money again. Her debt is mostly from hiring lawyers for her divorce proceedings, trying to collect child-support payments and defending herself against a lawsuit that was filed by her former in-laws over the sale of her home, the equity of which they claim is theirs. Contesting the claim will cost an estimated $25,000. Her ex-husband liquidated their child’s prepay college account. Bridget has 1 month to pay more than $7,500 back into that account to continue to qualify for the prepay option.
In addition to obvious moves, such as finding a cheaper place to rent, financial planners whom we contacted advise Bridget to pay off all of her debt. Despite Bridget’s insistence that she doesn’t tap into her investment portfolio, the planners believe that it’s in her best interest to do so: Her credit-card debt is increasing with interest at the same time that her investments are losing money.
(Bridget has enlisted the aid of a financial planner who is also her friend. We’re leery, because friendship might hamper your ability to assert yourself if you need to change investments. You also should keep in mind that even if you are losing money in your investments, that doesn’t mean that your financial planner isn’t making money from handling your account. He/she might have little incentive to move your money.)
Peter Fisher of Human Investing, which is a wealth-planning company, believes that Bridget should take $100,000 from her investments and place it in short-term Treasuries. Then she should take out a margin loan at 7 percent interest and borrow $50,000 (the highest amount that you may borrow on a margin loan) to pay off her debt and refund her child’s college account. “Borrowing against the portfolio also will prevent any tax liability that could be triggered by a sale of stocks or funds,” points out Jeffrey M. Siegel at United Wealth Management Group.