Mellody's Math: Getting Out of Debt

The extra savings opportunities do exist for the Jim and Kathy. For example, if the entire family starts making their lunch at home, instead of buying it, and cancels their premium cable service, it would add up to a savings of more than $250 a month.

Should They Buy a Home?

Before the family moved to Texas, they were homeowners. According to Kathy, they really want to buy another home. But first, the true cost of home ownership:

According to Kathy, it would cost her family around $350,000 to purchase a suitable home in their suburb of Dallas. If the couple were to put 5 percent down, $17,500, they would face monthly mortgage payments of more than $2,800 (assuming a 30-year fixed rate of 6.5 percent), which includes the cost of insurance and property taxes. After deducting their monthly interest payments and property taxes, the couple would face an actual cost of $1,900 a month.

While Jim and Kathy would benefit from the tax savings of home ownership, before even considering such a purchase, they must reduce their credit-card debt and save enough money for a down payment.

That said, in three years, the couple will be empty-nesters. Suddenly, their home purchase for a family of five is now more house than the couple possibly needs.

Yes, after the credit cards are paid off and Jim and Kathy are able to put enough money away to cover the down payment, they could buy a home.

College?

Kathy says saving for college is a bigger priority than saving for her and her husband's retirement. However, retirement should definitely come first.

With their current debt situation, saving for college is not an option. Instead, Jim needs to consider contributing more to his 401(k) — the catch-up provision now allows him to make a contribution of up to $11,500 a year.

The children should hit the books and make an exhaustive scholarship search, because there are many wonderful financial opportunities for college students and no scholarships for retirees. In addition, Kathy and Jim's children will be able to pay off their debt much faster than they could.