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Finances by Ellen Le September 2013
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A Financial Horror Story with a Happy Middle
Five years ago a client asked me if I would help her son and daughter-in-law deal with their financial mess – a mountain of debt coupled with horrible spending habits. I said I would be willing to try. The client said her daughter-in-law would be calling me. I didn’t hold my breath for her call because I have observed over the years that the degree to which someone is in financial trouble directly correlates to how deeply their heads are dug into the sand.
But, to my happy surprise, “Jamie” did call! She got right to it and laid out the ugly scene. She and “Mark” were both 51 years old and had zero investments. No 401K’s, no IRA’s, no personal mutual funds, no CDs, no nothing! They had a $275,000 home mortgage, $200,000 home equity line of credit and $50,000 of credit card debt. Their one significant asset was their home, an illiquid asset, which was worth $450,000. Their assets minus their liabilities gave them a total net worth of negative $75,000.
What they did have was an incredibly resolute attitude to take charge and change their life. They were determined to build something for their retirement and put an end to the pervasive stress in their lives due to debt and worry.
Our next step was to review their monthly income and expenses in detail.
Fortunately they both had decent jobs that brought in a combined total of about $8,000 a month after taxes. That’s not a huge amount of money and because they both were consultants and not employees, neither of them had a company 401K plan they could contribute to or receive company contributions from. Before we tackled their expenses in detail, Jamie confided in me that they were living so lean to the bone and she couldn’t envision how or what they could cut back on. Hmmm. I had heard that lament before. Turns out, their expenses provided a veritable gold mine of opportunity.
The monthly fixed expenses that couldn’t be altered included their mortgage payment (recently refinanced to a market rate), line of credit payment, credit card payment, property taxes, home insurance, income taxes, health and car insurance premiums, basic utilities, gasoline, car and home maintenance, and groceries which totaled to about $5,500. Their daughter’s activities consumed another $500, landscaping $200, housekeeper $200, hair and nails $150, dining out $400, clothing $200, travel & entertainment $500, and miscellaneous $350. All told, their monthly expenses added up to around $8,000. And every penny seemed to be accounted for.
Our plan required discipline. My support and periodic investment projections kept them encouraged and on track. We opened Roth IRA accounts and they pledged to invest $200 a month to each of their accounts. They also committed to pay an extra $300 a month to pay down credit card debt and $400 to pay down their line of credit. Where did they find the $1,100 a month to do this?
First, they stopped casually frittering away the miscellaneous $350 they had for extras every month. They saved $200 when Mark started cutting and maintaining the landscaping himself. They saved another $200 by cutting their dining out in half. They cut their clothing budget in half down to $100, travel and entertainment budget down to $300 a month, and shopped around for less expensive car insurance and saved $50 a month. They were so excited by their progress each year that when Jamie started getting $10,000 bonuses each year, she immediately paid down more debt.
Fast forward five years to today. Jamie and Mark have tax-free retirement accounts worth about $40,000 and credit card debt is down close to $20,000.
When Jamie and Mark retire in 14 years at age 70, they will have a retirement nest egg of over $200,000, no credit card debt, a mortgage with less than six years to go, and much lower monthly expenses. Their Roth accounts will supplement their social security income until their mortgage and line of credit is fully paid off in a just a few more years.
Jamie and Mark are thrilled with their new found frugality. They don’t feel as though they are depriving themselves of anything and are invigorated by the notion of having a positive net worth in retirement. The future is uncertain. Perhaps they will get part-time jobs in retirement or inherit money. The point is that they are being smart and responsible now and that’s what counts. The fact is that the only way to build wealth is to either make a lot of money or cut your expenses. Sometimes cutting expenses leads to a healthier attitude which leads to better work output which leads to making more money!
I relay this story to give those of you or your children or grandchildren who suffer from the American illness of living beyond your means a real sense of hope. You can thrive, feel secure, and alleviate stress with a bit of effort. The end result is well worth the interim so-called hardship.
When Jamie and Mark retire, we should live and be well, I will change the title of this storyto“A Financial Horror Story with a Happy Ending.”
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