Elizabeth and Daniel Dillon opened their hearts, their home and their wallets to a New Orleans mom and her kids left homeless by Hurricane Katrina--without realizing their own finances were in shambles too
(MONEY Magazine) – On Aug. 18, Elizabeth and Daniel Dillon closed the deal on their newly constructed $225,000 house in Shreveport, La. Part of a pristine new development on the outskirts of town, the house had four bedrooms, a big garage and a small backyard for their baby Johanna, eight months, to play in. For Daniel, 26, a doctor in his second year of residency at LSU Hospital, and Elizabeth, just 22, it was a dream come true.
Earlier that very same day, in the Other America, a single mother named Alicia Hensley, 23, was in a hospital in the impoverished Ninth Ward of New Orleans giving birth, two months prematurely, to her third child. As Elizabeth and Daniel were moving into their new home, Alicia was watching little Janiya fight for her life with an I.V. sprouting from her hand and feeding tubes in her mouth and stomach.
Few forces on earth are powerful enough to bring these two Americas together to live under one roof, but Hurricane Katrina did it. Two days before the storm roared through New Orleans, Alicia's father called and said, "Category 4? Get ready, I'm gonna come get you." Janiya was just nine days old, still too fragile to leave the hospital. By the time Alicia reluctantly climbed into her father's truck with her grandmother and two older daughters (Jaricka, almost 4, and Jakia, about to turn 2), she'd convinced herself that she'd be back for Janiya in a couple of days, as soon as the storm blew over.
During the next few days, as the city's levees crumbled and her rented one-story wooden house was being swallowed up by the raging waters of Lake Pontchartrain, Alicia holed up at a Red Roof Inn in Baton Rouge, trying to locate her baby. Then, miraculously, she spotted Janiya on a TV news report about an emergency airlift of hospitalized babies from New Orleans. Alicia recalls, "The camera zoomed in on her face and I said, 'That's my baby!' " A few hysterical calls later, Alicia learned that her child had been safely transported out of the city, ultimately landing in a hospital in Lake Charles, La.
Safe in Shreveport, Elizabeth and Daniel emerged from a Sunday church service determined to help Katrina's victims. Elizabeth learned of Alicia's plight when she contacted a nonprofit group called Operation: Share Your Home, and immediately decided to take her in, one mom reaching out to help another. Within a day, Elizabeth was making the four-hour drive to Baton Rouge to bring Alicia and her two older girls home. Two weeks later, Janiya was healthy enough to join them.
Clearly, Elizabeth and Daniel have big hearts. What they did not have at this dramatic moment of altruistic inspiration was a monthly budget or any clue of how deeply in debt they were--$225,000 from school loans and credit cards, it turns out, some at sky-high interest rates--or how they could afford to accommodate a family of four that had just lost everything it owned. Elizabeth's main financial strategy was to pray: "God, if you're gonna work this out for Alicia and her kids to come up here, then I just know you'll work out the financial part of all this."
When Elizabeth Dillon decides to do something, there's no stopping her. Consider how she first met her future husband. It was 2002, and she was a sophomore at St. John's College in Annapolis; Daniel was a medical student at Northeastern Ohio Universities whom she'd gotten to know online while seeking advice about graduate schools in Ohio. After a couple of months of flirting via instant messages and phone calls, she found out where Daniel lived, which turned out to be near her parents' house around Akron. On a visit home, she called Daniel from her cell phone and suggested he open the door. When he did, she was standing there with tickets for his school's formal the following night.
The Dillons were married in April 2004 and bought their first house in Shreveport for $76,000. Meanwhile, 350 miles away in New Orleans, Alicia and the girls were struggling to get by on $363 a month in food stamps and $34 a week from the children's dad, putting them squarely among the 36% of Ninth Ward residents living below the poverty line. They shared a rented house with her mother, who cared for the kids while Alicia worked--that is, until her mom's death from a heart attack in February.
Because she was unable to afford day care after her mother died, Alicia quit her job at a hamburger joint called Bud's Boiler, one of a series of fast-food jobs that she has held since dropping out of school in the 11th grade. Medicaid covered her medicine and doctor visits, and her $500 monthly rent was paid for by a family that had employed Alicia's mother as a housekeeper for many years. But when Janiya arrived in August, there was yet another mouth to feed, without much financial support from the children's father. The couple had already broken up after six years together, with Janiya the result of a brief reconciliation.
Then Hurricane Katrina hit. Alicia's family arrived at the Dillon house exhausted, disoriented and carrying nothing but three days' worth of clothing. Elizabeth had a torrent of questions for Alicia: "How are you feeling?" "What do you need?" "What are your plans?" Elizabeth hoped the Hensleys would stay two months or so--long enough for the baby to get healthy and to help Alicia land a job, arrange child care and find a new home. But Alicia would answer simply, "I don't know. I'm very confused." What she was sure about was her deep gratitude to the Dillons for letting her girls live in a real house again, however temporary their stay might be. "They made us feel very welcome," she says.
The first few days of life together were consumed with activity, rearranging the household and buying the Hensleys the basics they'd left behind in the flight from New Orleans. Elizabeth and Daniel took Alicia and the kids shopping for new clothes, and bought a TV and futon to turn the upstairs guest room into a play area. The Hensleys wanted to stick together, sleeping in the downstairs guest room--one small stab, perhaps, at retaining a measure of privacy and independence. When baby Janiya came home, however, there was no room for her in Alicia's downstairs enclave. So they set up a nursery upstairs, with Alicia keeping tabs on Janiya with a baby monitor.
The adults were all exceedingly polite. But living in a stranger's house--or having strangers in your house--can be, well, strange. Alicia tried to stay out of sight, quietly pecking away on a computer tucked in a nook under the stairs or staying with the kids on the second floor, emerging sporadically to cook some ramen noodles. "We invited her to come and hang out with us, but she said, 'Oh no, we're fine upstairs,' " says Daniel. "Getting the two families to gel was hard."
Jaricka and Jakia had a seemingly easier adjustment. They immediately took to "Miss Elizabeth" and "Mister Daniel," as they called the Dillons. The host family won major points when they indulged the girls' obsession with Dora the Explorer, including throwing a Dora-themed party for Jakia when she turned two.
But even these youngest members of the household soon ran into problems, as the Dillons' style, with lots of rules, turned out to be very different from their mom's. "We run a pretty tight ship here," says Elizabeth, "and it's very difficult to discipline someone else's children." After a couple of weeks, Daniel and Elizabeth held a house meeting to set some ground rules: Clean up your own dishes, don't eat outside the kitchen, keep the house quiet after 8 p.m. Alicia and the kids agreed.
An even bigger source of tension came when Alicia's father and grandmother tried to persuade her to leave the Dillon household. The family should stay together, they argued, and not accept handouts--even if it meant returning to the Red Roof Inn. "I'm used to being on my own, and I don't want to stay too long," Alicia said. When she told the Dillons she was thinking about leaving, Elizabeth broke down in tears, saying she feared for the newborn Janiya's fragile health. Finally, Alicia agreed to stay for at least a month more, until the baby was stronger.
Behind the friction with the Hensleys, another problem was festering for the Dillons: money, an issue they were forced to confront when they met with an adviser to talk about their finances a couple of weeks after the Hensleys moved in. Running the numbers with Shreveport financial planner Diana DeCharles, Elizabeth and Daniel were surprised to discover that they'd already spent $1,800 to take care of the Hensleys since their arrival--money they could ill afford. The couple were deep in debt and had been struggling to make ends meet on Daniel's $71,000 salary, even without extra mouths to feed. And the extent of their problems was greater than the Dillons realized, since they'd never sat down together to figure out how much money they owed or how much interest they were paying on that debt.
Quite a lot, on both counts, is what they found out. Without the cash for a down payment on their new house, the couple had financed the full price, paying 8% on 80% of their $225,000 mortgage and a painful 12% on the rest--far higher than the 5%-to-6% going rate in their area. And while the Dillons thought their other debts, mostly student loans, totaled $150,000, the real figure was a staggering $225,000, with nearly $34,000 of that amount owed on 10 credit cards, some at loan-shark interest rates of up to 30%.
That debt, which they say they racked up having too much fun in college, didn't worry the Dillons unduly because their outlook for future earnings seemed so bright. Daniel recently signed a contract with a local hospital that will pay him $140,000 annually, and Elizabeth estimates she'll earn $80,000 next year when she begins selling skin-care products part time from home. But Daniel's new job doesn't begin for almost two years, and Elizabeth's projections seem overly optimistic given the actual success rate of multilevel marketing programs like the one she has signed up for.
The big question: How could the Dillons afford to help another family get back on its feet when they could barely stand on their own? "Their finances are out of control," said DeCharles. "New Orleans had a natural disaster, but the Dillons have a financial disaster."
Until that point, the Dillons had been saved from a cash-flow meltdown by a quirk of timing: Because their monthly payments of $1,700 on the new house were not scheduled to begin until Oct. 1, they had some money to spare in September. Going forward, DeCharles advised the couple to ease up on their purchases for the Hensleys and get help where they could. They might, for example, ask Alicia to use her food stamps to help pay for food. And DeCharles urged the Dillons to reconsider their plan to buy a second car and give Alicia their old '95 Nissan minivan. "I really wanted to do it, but I guess we can't," Elizabeth said glumly.
Just a week or so later, though, the immediate pressure on the Dillons' finances eased. Less than a month after Alicia Hensley arrived, she left, moving back to Baton Rouge with her kids to rejoin her father and grandmother at the Red Roof Inn. She didn't explain her reasons or tell the Dillons much about her plans, except to say she might eventually move to Little Rock, where she'd heard she might qualify for a federal housing program for hurricane victims.
Elizabeth was distraught at first, worrying that baby Janiya was still too young and fragile to be traveling into such an uncertain future. Daniel was upset too, saying, "Bringing Alicia back to the same hotel where we picked her up made it hard to think we did much for them."
But a few days after the Hensleys had gone, Elizabeth was already looking on the bright side. Alicia was carrying only six shopping bags of possessions when they first met. When the Dillons dropped her off, the sidewalk was covered with a dozen bags, suitcases full of clothing and three car seats. "We ask ourselves so many questions: Were we too harsh on the kids? Did we expect too much?" says Elizabeth. "The only thing I'm sure of is that we did the best we could."
Now that the Hensleys have moved on, DeCharles urges Elizabeth and Daniel to address their own money problems. The planner suggests these specific steps.
• Do What You Can Afford The Dillons' generous spending on the Hensleys underscores the problem that they have living within their means. Going forward, they must follow one cardinal rule: If you can't buy it with cash, you can't buy it at all. And they should look for additional ways to cut their expenses, if possible. "The truth is, they really don't have any wiggle room in their budget," says DeCharles.
• Create a Long-Term Plan As a first step in getting their longer-term affairs in order, DeCharles suggests the Dillons better organize their financial life to get a firmer grasp of where they are and where they should be going. They should start by creating a filing system for their financial paperwork and taking an inventory of how much they owe and how much they're paying in property and income taxes. Most important, they should sit down and talk with each other about their financial goals, coming to an agreement on what they want to accomplish, short term and long term, and then monitor their progress on a monthly basis.
• Attack That Debt The Dillons should immediately call their credit-card companies to negotiate better terms--or at least transfer the highest-rate balances onto lower-interest cards. Then they need to follow an aggressive repayment schedule. Fortunately, Daniel expects to earn an extra $45,000 or so a year by moonlighting two weekends a month once he gets his certification to practice in Louisiana in January. Even assuming a tax bill of about $20,000 on his freelance income, there should be enough left over to wipe out most of their credit-card debt by the end of next year. The student loans, with a rate of just 3%, can be paid off gradually.
• Get Financial Protection If nothing else, hurricanes Katrina and Rita underscored how quickly an unforeseen disaster can wreak havoc on a family's financial well-being. To ensure that doesn't happen to the Dillons, the couple should increase Daniel's term life insurance from $300,000 to $1.8 million (cost: just $40 a month) and take out a small policy for Elizabeth too (a $340,000 policy, at just $10 a month, would cover child-care costs). They should also supplement Daniel's disability coverage from LSU with a small private policy, which will likely cost only pocket change but would prevent financial catastrophe if he became incapacitated. Other important long-term goals, like saving more for retirement and for Johanna's college tuition, should probably wait until the Dillons have paid off their credit cards and Daniel has started his higher-paying job.
"It was very sobering," Elizabeth says of the advice DeCharles gave. Adds Daniel: "Most of all, I've realized that we can't take care of someone else unless we take care of ourselves first."
Whenever they need a jolt of inspiration to help keep them on the financial straight and narrow, however, all the Dillons have to do is remember the Hensleys. Says Elizabeth: "When I think about Alicia and the other hurricane victims who lost so much and have so little they can use to rebuild their lives, it's hard not to feel grateful for what we've got."
The Bottom Line
The Dillons' top financial priority must be to wrestle down their runaway debt. Then they can begin saving for future goals.
Advice for Alicia These strategies can turn tragedy into a fresh start
To help Hurricane Katrina evacuee Alicia Hensley get her life on the right financial track, Shreveport financial planner Diana DeCharles offers the following advice.
> PUT RELIEF MONEY TO GOOD USE Hensley received $3,300 from the Red Cross and the Federal Emergency Management Agency, but her plans for the cash sound shortsighted. "I can use the money to pay rent for a few months and then get a job," she says. DeCharles suggests doing the reverse. She urges Hensley to put her energy into finding a job as soon as possible so she can save most of the relief money for emergencies and necessities for her children.
> GET JOB TRAINING Hensley should look into nonprofit programs that provide job counseling. The Louisiana Department of Education sponsors such programs. To find one in her area, she can call the toll-free number, 877-453-2721.
> FIND AFFORDABLE CHILD CARE One reason that Hensley has not been able to work since her mother's death in February is that she hasn't been able to afford day care for her kids. The solution may be to sign them up for a local Head Start program (866-763-6481; nhsa.org), which would provide care for the children from 7:30 a.m. to 2:30 p.m. There is no charge for very low income families.
> TAKE ADVANTAGE OF OTHER AID Many charitable groups, from the March of Dimes to local churches, are providing cash, food, baby supplies and other goods to hurricane-stricken families. Getting whatever help she can is critical over the next few months, notes DeCharles. "Otherwise, if Alicia isn't careful," says the planner, "she could be right back to where she was."
HELP FOR THE HELPERS New tax breaks can make the finances of caring easier
To help people who have pitched in to aid families victimized by hurricanes Katrina and Rita, Congress recently enacted a number of tax breaks. They include:
> HOUSING DEDUCTIONS If you open your home to evacuees, you may be able to claim a deduction of $500 for each person you take in, up to a maximum of $2,000. For you to qualify, they must stay with you for at least 60 days and not pay any rent.
> DRIVE TIME BREAKS If you use your own car to help a recognized charity with relief efforts related to the storms, you can now claim a higher mileage-reimbursement rate: 34¢ a mile, up from the standard 14¢ a mile, for volunteer work through Dec. 31, 2006.
> BUSINESS WRITE-OFFS If you own a business and hire someone who lived in the affected areas, you can claim a Work Opportunity Tax Credit, which generally equals about 40% of the first $6,000 you pay in wages.