Naturally, I assumed you would want to know more of their story, so I asked if they would agree to an interview. Good sports that they are, they agreed. Thank you John and Lisa! Here is their story:

When did you get serious about getting your finances under control?

Our finances have never really been out of control, but after listening to the Financial Peace seminar it became obvious we needed to get out of debt.   We found paying interest for “stuff” to financial institutions was making us have to work harder and enjoy our family less.

How did the car purchase itself go?

Quickly. haha The oddest part was writing a check out of our personal account and driving away with only a receipt.

Did you struggle with the decision to pay cash?

Not at all.

How do you feel about it now?

Great and in control.

How have your lives changed since you decided to get rid of your debt?

We feel more secure and stable. We know that no matter what happens, we will have our basic necessities protected. It makes not following the Jones’ much easier. We are no longer enslaved by the atmosphere of consumerism.

How much debt have you paid off in the past few years?

We have paid off $130K (including the home) since starting. We also have paid cash for all needs since deciding to not take on debt. It has been 3 or 4 years.

What has been the most difficult part of this journey?

Weekly budgeting and controlling daily spending. We still haven’t mastered this yet.

Have the two of you been on the same page throughout the process?

Yes, both of our families discouraged borrowing. So we were raised with the same similar mindset toward family finances.

How have you differed?

Not much. We have had to redirect each other at times, but it wasn’t a struggle.

What has been the key in working together?

Having the same goal and desired outcome. We want to play with our kids more. We work so we can live, not live so we can work.

I know you have one daughter who has graduated from college and two preteen daughters at home. How has this focus on your finances affected them?

We are fortunate to have healthy incomes, so the burden has not been too great for them. But they are getting an education along the way. They are also not kids that place a lot of value on “stuff”.

Do you think your journey has been a good influence on them?

Absolutely and for Kathe too. She had to struggle through college and manage her finances well. She did not take on school loans or credit card debt for her bachelors degree. She worked throughout college and finished in 4 years. She drove the same car she had in high school. She lived on campus and worked campus jobs. She aggressively pursued opportunities for stipends, grants or other positive financial assistance programs.

What is your biggest financial challenge going forward?

Staying comfortable in the stock market with investment strategies. Lost $7200 over the last 3 months in my 401k. Wisest investment for us to date has been property.

Do you believe you will stay debt free for the rest of your lives?

ABSOLUTELY!! We are even looking to downsize our housing to a more modest and realistic size.

Anything else you would like to add?

We think the work you are doing is very helpful for people and we are thankful for our experience with you.

Concluding thoughts

You have just read a real life story of a family who is debt free (having paid off $130,000 in debt) and committed to staying that way. John and Lisa are passing this legacy on to their children; their daughter worked and sacrificed to make it through college with no credit card or student loan debt. My hunch is that their two younger daughters will do the same.  My congratulations to John and Lisa: you are doing it right!

How about you?  Do you pay cash for your cars? Are you debt free?  Are you working toward becoming debt free?  How are you progressing?

photo credit: quaziefoto

Our normal anxieties in dealing with insurance companies are based on the concern that we won’t be sufficiently compensated.

However, not everyone fits this mold.  This post is based on an email from one of my clients (I will call her Carol) who, because she had been injured in an auto accident, is in the process of hiring an attorney to represent her in dealing with the insurance company. Although she was hospitalized, missed work and could have ongoing medical issues, Carol is struggling with the morality of “going after” the insurance company. Because of the trauma of the accident, she doesn’t clearly remember it, which creates some guilt issues. Carol is also concerned about the possible “greed” mentality many lawyers seem to have.

Here is a clip of her email:

“You helped with this when we talked, but I think I’m blanking on it and churning. Will you give me perspective on the accident claim again according to biblical teaching? I’m still struggling with what God really wants of us in this financial circumstance.”

This is my reply to Carol:

I wish I had great biblical passages to share with you about insurance. The best I can come up with is Exodus 21: 12-36, a section of the bible which tells us that those who are harmed should be compensated. The gist of this passage is just that: God expects people to be compensated for harm done to them. This is why you have insurance and why the other person in the accident has insurance. If the other person was harmed, I am sure you would be glad that you had insurance so she could be compensated. Just because the shoe is on the other foot (being you are the one harmed) does not make it any less right that you should be compensated. You are concerned about how this will affect the other person. This is something you have no control over, but she SHOULD be glad that her insurance is going to take good care of you. If she isn’t, that is her problem, not yours.

The issue of how much the claim should be…again, ask yourself, “What if the other person had to go through what I have been through?” Wouldn’t you want her to receive payment for her medical care AND for lost income AND for possible future medical care? Of course you would. It is only right. I agree with your attorney. This is not about greed. It is about an injured person being compensated for the harm done.

Another thought is this: we are commanded in Romans 13:1 to be subject to the governing authorities. I am not sure about Missouri, but I know Illinois requires auto insurance (liability as a minimum). In keeping with the laws of the land and Romans 13:1, you have auto insurance. The very legal system that requires you to have insurance will also have a judge who makes a determination as to the award of the case. As long as you aren’t doing anything un-Godly to tweak the system (which you aren’t), then I would say that God is using that judge to make a proper and fair determination. In reality, the attorneys for the insurance companies might settle out of court, but the point is that God requires insurance, so trust Him to see to the details.

One more thought. You have debt and you have been harmed financially by this accident, meaning you have not been able to work as much physically or emotionally. This is not your fault and you should not feel guilty about what you can’t control. But if you were to somehow sabotage this settlement, you might be turning away money that could go toward those you owe. I know this is a stretch, but allowing the process to play itself out could help some creditors get the money owed to them. I can’t see that is a bad thing. Without the accident, you might have been able to gain enough traction to start making some major payments through your income stream. But the accident DID occur, so you don’t really know what might have happened in your career if it hadn’t. All of this is part of compensating a harmed party (back to Exodus 21).

In the end, I think you should trust the process, trust your attorney (or find one you can trust) and trust God. That is the best way I know to put it in God’s hands. When you do so, you can feel good about the outcome whether it goes very well or very poorly.

I hope this helps.

Joe

Carol’s response:

“I won’t be able to tell you how much it means to have your counsel and how thankful I am….I’m breathing easier today because you took the time to think on this for me. I’m so thankful”

Readers: have you ever struggled with guilt or the feeling of greed when negotiating an insurance settlement? How did you handle it? What would you add or change in my response to Carol?

photo credit: Chasqui

I wish that I could say that every story has a happy ending, but life is real and story book endings don’t always happen. You may remember reading The Sad Tale of Clarence and Evita, an encounter which left me some morose.

However, some do turn out well. I received a phone call the other day from a very happy young man (we will call Carl).

Carl, “Joe, I called to thank you for helping us.” His voice was tingling with excitement.

“Hey Carl. What’s going on?”

“I just want you to know that, other than our house, we are debt free! The feeling is just indescribable!”

“Awesome!” I countered. “Did you just now pay off your last debt?”

“We sure did. We followed the plan that you helped us with and it worked. We are building up our emergency fund and getting positioned to invest for retirement. But the best part is this: now that we don’t have debt, Penny (not real name) is able to cut back her work schedule to two days a week. She has always wanted to stay home with the kids and that is becoming a reality. Joe, we both want to thank you for your help.”

“Carl, you are welcome. But all I did was help point you in the right direction. You and Penny did all of the hard work. Congratulations. I am thrilled for you!”

This 30 year old couple, with three young children, had discovered the freedom that getting out of debt brings. When they first met with me a little over a year ago, they had over $35,000 in car debt, credit card debt and student loan debt.  Admittedly, a big chunk of paying off the debt came by selling some stuff, but the point is this: they did it.  Why did Carl and Penny succeed when so many don’t? I believe these four factors were huge:

They were highly motivated.

They didn’t like their lives like they were and were extremely focused on change. In fact, their first words to me were, “We don’t like where we are and are ready to do whatever it takes to change.”

They worked as a team.

Carl and Penny were absolutely on the same page. Their communication was open and clear. Neither hesitated to speak up when they disagreed, and they talked things out until they did agree. Their respect for each other was always obvious.

They had a clear goal.

They had had enough of debt. Their goal was to get it out of their lives. Both understood Proverbs 22:7 “The rich rule over the poor and the borrower is a slave to the lender.”

They were ready to sacrifice.

For Carl and Penny, eating out was a big money drain. Carl would eat lunch out nearly every day and, because of Penny’s work schedule, eating out as a family was convenient (and costly). But Carl started bringing his lunch to work and they planned eating out as a family for special occasions. They also agreed to forgo their vacation in order to pay off their debt.

I wish I could say that I had a huge part in helping them, but all I did was point them in the right direction and encourage them along the way. They are a very happy family right now, and I am happy for them.

photo credit: lioliz

Readers:  Have you worked through debt in your lives?  What would you say was the greatest factor in your success?

photo credit: Let Ideas Compete

Clarence and Evita (not real names) came to see me recently for financial counseling. As they entered my office, I noticed that Evita walked slowly, with a noticeable limp. Clarence, white hair with matching full beard, offered friendly banter. After introductions, I asked them what their short term financial goals were.

Short Term Goals

They looked at each other, then Clarence offered, “Get our bills paid.”

“What kinds of bills?” I asked.

“Well, you know…house payments … car payments.”

“Is that all?”

“Well”, Evita spoke up, “credit card bills too.”

“OK” I said, “we will come back to that in a minute. How about your long term goals?”

Long Term Goals

Clarence said he would like to retire from his maintenance position in two years. Evita added that she would like to get their house and credit cards all paid for in five years. I learned that Clarence is 60 years old and Evita is 59.

“Sounds like good goals” I commented, mentally noting that I would like for them to have the house and other debt paid off BEFORE retirement. “Let’s dig in.”

Crunching numbers

So we dug. Evita produced a spreadsheet printout intended to show their situation. I commended her for her initiative. Although I normally use my own software to help gain understanding of clients’ situations, I decided to honor Evita’s efforts by examining her numbers. Unfortunately, they were unorganized, sketchy and incomplete. I learned that they had $23,000 in credit card debt and were current on their payments. After asking lots of questions and adding the numbers, I determined that they had more money going out than coming in…and groceries were not even listed.

I stopped, took a breath and stated, “You are using credit cards to buy your groceries with, aren’t you?”

They looked at each other then Evita said, “Yes…but how did you know?”

“You are spending more than you are making and we haven’t even factored in your groceries.  In order to stay current, you have to be paying your bills with your income and then using credit cards to buy essentials with. This means you are going deeper in the hole every month. Am a right?”

Clarence seemed surprised by my assertion, so he looked at Evita, who simply said, “Yes.”

I will not go through the rest of the interview, but here are some things I learned:

• They are digging a deeper hole every month.

• They are sometimes making their 30 year old daughter’s $350 car payment.

• Clarence co-signed for the daughter’s car loan.

• They also make their daughter’s cell phone payment for her.

• Evita is on Social Security disability.

• They are upside down on two older cars.

• They have very little equity in their house because of a Home Equity loan.

My advice

When a couple is spending more than they make, they either need to spend less or make more. First, I told them to stop using credit cards, reasoning that if some don’t get paid, the late fees and interest would not be as bad as continuing to create more debt each month. I suggested cutting out their satellite TV ($89/month) and selling one of the cars, but Evita, being homebound most of the time, balked at both ideas. I challenged them to have a heart to heart with their daughter, explaining that they simply can’t help her any more. I looked Clarence in the eye and asked him, “Are you going to have this discussion?” He nodded and said, “Yes I’ll do that.”

We then discussed the possibility of generating more income. Evita thinks she can take on some baby sitting. Clarence is pretty sure he can get some part time work at Wal-Mart. We ran the numbers…if they could balance their budget and bring in an extra $1000 each month, they could get the credit card debt paid down in a couple of years. I told them to get back with me once they start bringing in more income. Clarence said, “OK. We will be back in touch.”

We stood, shook hands, and Evita and Clarence walked out of my office. I don’t think I will ever see them again. I hope I am wrong, but I have this feeling that our discussion was all niceties. Unless they change and change quickly, they are headed for financial disaster. It makes me sad.

Summary

My purpose here is not to pick on Clarence and Evita, but to point out some mistakes that I hope you can avoid.

• Lack of communication.

It seemed to me that Clarence was pretty oblivious to the depth of their problems. Evita was carrying the stress alone.

• They didn’t have a plan.

They wanted to retire in two years, but had made no realistic plans to make it happen. Yes, they came to me for help in formulating a plan, but they waited too many years before seeking help.

• Home equity loan.

They put their home up as security for a loan they can’t afford. Not a good idea.

• They enabled their grown daughter.

Co-signing a loan, making her car payments and making her cell phone payments not only taught the daughter irresponsibility, but also made Clarence’s and Evita’s hole deeper.

• Misuse of credit cards.

This has already been discussed, but I don’t think they realized their misuse until I challenged them about it.

This story could still turn out all right, but right now Clarence and Evita’s future seems pretty bleak to me.

I hope you can learn from it.

From what you learned  about Clarence and Evita in this post, what would you recommend that I didn’t think of.  Any suggestions are appreciated.

Erin and Jeremy

Erin, “Debt free for me means that we have more choices, more freedom and less that will hold us down keeping us from what and where we want to be.”

Jeremy, “It means tremendous peace…now we can pay ourselves every month.”

My son Jeremy and his wife Erin accomplished a milestone in their lives yesterday: they made their final debt payments and now, other than their house debt, owe no one anything. With their permission, I interviewed them so I could write their story. This is for Jeremy and Erin: a very happy young couple with a very bright future.

Assessing the Situation

When they got married in January, Jeremy and Erin had a very average household income, $3,000 in a savings account and $21,500 in debt. The debt consisted of:

• $12,400 Student Loan
• $4,700 current credit card
• $4,000 in two old credit card debts
• $400 personal debt

Jeremy and Erin set a goal…a lofty goal…to become debt free before the end of the year.

Getting Radical

With this goal before them, these two knew that they needed to get organized and radical. They started with a personal budget that would allow them to use a little of Jeremy’s income and all of Erin’s toward debt reduction. They immediately applied all but $1,000 of their savings to debt reduction, a decision which, because both of their cars are old and high mileage, created some anxiety. At the same time, Jeremy temporarily stopped investing for his retirement in order to free up more funds for debt reduction.

Bumps in the Road

As is the case in most journeys, all was not smooth. Erin sprained her ankle, necessitating a $650 emergency room visit not covered by insurance. She then encountered a battle with bursitis in her shoulder, requiring another $850 for an MRI and costing her a month’s work. Jeremy, however, was able to work enough overtime to keep the momentum moving. Next came $350 in dental work and $600 in car repairs. At times it seemed that they were getting knocked backward every step they took. But they kept getting back up and, each time, furthered their resolve to stay the course.

A New House

Although Jeremy and Erin dreamed of owning their own home, their plan was to put that dream on hold until they were out of debt. But Uncle Sam made an offer they couldn’t refuse: an $8,000 tax credit for first time home owners. They were hoping to buy in 2010 anyway, but, because they didn’t want to miss out on the $8,000, they began house shopping. After a couple of months, they found the perfect house: within their price range, solid but needing some work. They slowed down on their debt payments long enough to save up $3,600 for a down payment and moved into their own home in September.

Other Twists

Two of the credit card debts, both $2,000, had been turned over to collection agencies. Jeremy and Erin decided to attempt to work out settlements with the collectors for these two debts. One was quite willing to settle for $1,200 while the other was combative; making multiple phone calls a day with threats of law suits. As the phone calls escalated, Jeremy and Erin responded with settlement requests through the mail (certified mail, return receipt requested). These mailings magically ceased the phone haranguing and, just last week, the collector agreed in writing to accept their settlement offer of $1,200 as payment in full for the debt.

Everything Falling Into Place

After closing on their house, Jeremy and Erin, with the help of their CPA cousin Beth, amended their 2008 income tax returns, allowing them to receive the tax credit this year. They each received $4,000; the second arriving just as the collector agreed to the settlement. This allowed our happy couple to not only get the nasty collector out of their lives but also wipe out their only remaining debt: $3,000 on student loans. The ecstatic couple called and we celebrated together over the phone.

When asked the most difficult part of the process, Erin said, “Not getting to spend money on things we wanted and never actually seeing the money I was making.”

Jeremy’s response: “The hardest thing for me was not getting to put the $8,000 toward fixing up our house, but to an almost unseen debt.”

A Year To Remember

2009 will be a year to remember for Jeremy and Erin. They not only got married, but they reached their goal of paying off $21,500 in debt. The unexpected expenses and the down payment for the house brings that total to $28,000. $10,000 of this ($2,000 from existing savings and $8,000 for their tax credit) was not squeezed out of their budget, but the rest ($18,000) was! That comes to over $1,600 a month for the eleven months from their marriage to now.

Think about it: in their first year of marriage, Jeremy and Erin set goals, worked together, sacrificed, encouraged one another, kept getting back up when knocked down, and relentlessly stayed the course to accomplish those goals. And, although I didn’t mention it, they tithed steadfastly throughout it all. Does this couple have a bright future? Clearly!

Do I sound like a proud dad? You’d better believe it!

photo credit: processwhite

Darren and Cynthia (fictional names) had $80,000 in credit card debt, two old paid for vehicles and a house with zero equity that they were trying to sell. Because Darren’s job required him to work sporadic hours, it was difficult for him to find extra work. Cynthia worked a sales job that brought in irregular income. They secured my services to help them with their finances.

These two believed strongly that they should continue to tithe while working on their debt. They also believed vehemently that they should always make all of their payments. The problem was that they did not have enough income to make minimum payments to all creditors, so they would pay all of their creditors and bills with their income then charge their groceries and gasoline to credit cards, thus increasing their debt every month.

I recommended that, instead of continuing to dig a deeper hole each month, they prioritize their finances, meaning they would always make house payments, utility payments, and grocery purchases. They would then make minimum payments to creditors as they were able. Depending on cash flow, some would occasionally go unpaid. We wrote letters and tried to work with creditors who were not getting paid. Some were receptive but others were not. Eventually, when threatened with a law suit, Darren and Cynthia filed bankruptcy.

Bankruptcy, for these Christians, was a traumatic event.  Could it have been avoided it Darren and Cynthia had cut back on their tithes? Maybe. Early on, I very tentatively suggested that cutting back on the tithe could be something to consider, but, for them, this was a non-negotiable.

I have since struggled with the issue of tithing while paying off debt, and still have more questions than answers. Following are some of my thoughts.

I do believe that Christians should tithe

Tithing, or giving a tenth of your income to the Lord’s work, has been a basic tenet of Christianity for centuries. The practice, though not emphasized in the New Testament, was clearly taught in the Old Testament. I realize that we are under grace and not law, but it seems to me that Christians, who have been given so much, should give much. I don’t look at the tithe legalistically, but I think it should be a goal of all Christians to give at least 10%.

I also believe that Christians should pay their debts

Scriptures and common sense tell us that when we borrow money we should repay it.

What if these value systems collide?

If Christians can continue to tithe and still pay their debts, I think they should. However, when there isn’t enough money to do both, the issue becomes dicey. Pleasing God in one area (tithing) may necessitate not pleasing him in another area (paying our debts). In effect, doing so means giving God money we robbed from someone else (by not paying them what we owe them). So how does one handle this dilemma? Here are some thoughts:

• Examine your budget for fluff. I once had a client who did not have enough cash flow to tithe and also make minimum debt payments. Although he was paying $1300 a month on two car payments, he chose to cut back on his giving rather than divest himself of one or both cars. The point is that some people CAN continue to tithe while paying debt if they are willing to sacrifice (extra job, no eating out, no vacation, etc.)
• What if there is no fluff? Tough decisions need to be made based on the answer to this question: “In the financial situation I am currently in, how can I best please God?” Of course the answer is dependent on one’s particular theology and life commandments, but I think that the best way to honor God is to do our best at paying our debts while also giving to his kingdom. Realistically, the tithe might need to be temporarily cut back in order to do so. Yes, doing to may create huge guilt, but I question if this person was giving with right motives in the first place…see 2 Co 9:7 “Each one must give as he has decided in his heart, not reluctantly or under compulsion, for God loves a cheerful giver.”
• Consider giving more of your time. For some, giving more of their time may be a way to tithe while paying off debt. Volunteer to serve in your local church or other charitable organization.
• If the decision has been made to temporarily decrease your giving, formulate a plan to gradually increase it again. As the debt goes away, have a plan to systematically give more. Each increment may be very small (1% of your income at a time), but each increase should also be a celebration…God does indeed love a cheerful giver.

In summary, I think that Christians should willingly and cheerfully give 10% or more of their income to advance the Kingdom of heaven. I also think they should do their best to pay the debts they owe. If these two values clash, I think the Christian should seek the Lord and ask himself how he can best honor God. There may be times, after thoroughly scrutinizing the budget, when temporarily cutting back on tithing is a solution.

photo credit: snappybex

Meetings 4 and 5

Introduction: This is the fourth post in a case study series of financial counseling meetings with Alline Davenport (real person with fictional name). Previous entries are found under the “Case Studies” tab. Alline is a widow in her mid 60’s who works full time as a receptionist and is striving to take care of her debt and prepare for retirement.

As of meeting 3, we had a plan in place that would allow Alline to retire in four years with no debt, a paid for house, $10,000 Emergency Fund and $20,000 nest egg.

Meeting 4: July 14, 2009

Our agenda is to review our plan, fine tune the budget, track progress and answer any questions.

Alline reported that she expects the closing on the house within 30 days. (Explanation: she is buying a house from her daughter for what is owed on the house, thus giving her instant equity of $15,000 in lieu of $35,000 loan to her daughter that will never be paid. Alline will then borrow enough on the house to pay off her IRS debt and jump start her debt snowball.)

1. She has cancelled her land line telephone, thus helping her cash flow.
2. Her $1,000 Baby Step One Emergency Fund is in place.
3. She is making minimum payments on all debt and poised to start her debt snowball next month.
4. Homework before our next meeting is to set up an escrow savings account for
   Christmas savings, health insurance deductible, home owner insurance and taxes.
5. We concluded the meeting, agreeing that Alline is on track and making progress.

Meeting 5: August 18, 2009

Our agenda is to check homework and track progress.

Alline appeared distraught as she entered my office. With clenched jaw, she uttered, “Joe, I feel like I am starting all over again.”

“What is going on, Alline?” I asked.

She plopped a paper on my desk which tabulated, in her handwriting, a list of events and corresponding costs. “These” she moaned, “are the unplanned expenses I have encountered in the past two months.” She picked the paper up, studied it and put it back down. “Over $1,300! My air conditioner broke, I had to get my car worked on, the deck boards rotted out and that is not all!”

Knowing she didn’t have that kind of buffer in her budget, I asked, “Alline, were you able to pay for all of this?”

“Yes,” she hesitated, then went on, “but now my emergency fund is down to $600!”

“Alline. Listen to me.” I said. “You aren’t starting all over. The fact is that your emergency fund is down and you will need to build it back up again, but when life happened, you were able to pay for it. What if you hadn’t set that money aside into the emergency fund?”

She sat back, looked upward for a few seconds, then back at me. Her eyes had brightened. “Joe. You are right. I am glad I had that emergency fund in place. Yes, I need to repay it but this is something I can do.”

“Actually,” I responded, “I don’t see how you were able to pay everything without totally wiping out your emergency fund. That, to me, is amazing.”

“Well, I am one hard headed woman who simply watched every single penny these past two months.”

“That is the trait, Alline, that will make you win with this plan. You are going to be all right.”

She took a deep breath, exhaled, and leaned back, smiling. “Yes, Joe, I am.”

Alline told me that the closing on the house is still being held up. She aced her homework by having the escrow account in place. We fine tuned her budget and concluded our meeting by scheduling our next meeting.

My observation/summary is that what happened to Alline is what happens to us all. We can budget and we can plan, but we never know what life will bring. For her, it is good that she had the small emergency fund in place. For all of us, her story is a gentle reminder that building and maintaining a fully funded emergency fund is an absolute necessity.

photo credit: Jen_Maloney_Photo

Meeting Three: 6/15/09

Review of Meeting One: Alline’s short term financial goal is to become debt free. Her long term goal is to rebuild some of her lost retirement and put herself in a position not to be a burden to her children. We established a preliminary budget with plans to review it in one month.

Review of Meeting Two: With minor adjustments, Alline’s budget is doing well. We agreed on the following plan to jump start her short term goal of getting out of debt: Because her daughter owes her $35,000 (from a loan) that Alline has no hopes of ever getting, Alline is going to buy her daughter’s house for the amount owed on it, thus gaining the equity of about $15,000. She will then take out a loan of 80% of the appraised value which will allow her to get a check at closing for about $8,000 to $11,000. She will then use this to pay off debt, wiping out all of the IRS debt and part of the car debt. Her credit card debt (only 2% APR) will be last on the debt snowball.

Based on the above information, I prepared the following plan for Alline and presented it to her at this meeting:

The following plan is contingent upon using loan at time of house purchase to pay off IRS.

Step One: $1,000 in an “Emergency Fund”

DONE!

Step Two: Pay off all debt utilizing the “Debt Snowball” (except the house)

Remaining debt = $3,000 on car and $7000 on credit card. Total amount to be paid on debt = $1200 cash flow plus $300 car payment. Car should be paid off in three months. Credit card debt should be paid off in an additional four months.

Debt free except for house in 7 months!

Step Three: 3-6 months of expenses in savings

Continue to build emergency fund by saving $1500/month. Should have $10,000 in 6 more months.

Done with Baby Step Three in 13 months total.

Step Four: Invest 15% of household income into Roth IRAs and pre-tax retirement

Invest $500/month and pay extra $1000/month on house (see Baby Step Six)

Nest egg should be about $21,000 in three years. At this point, house is paid for and you can invest $1500/mo. Nest egg will be about $60,000 in two more years.

Step Five: College Funding (Not applicable)

Step Six: Pay off home early

Should have home paid for in four years total (three years after completing Baby Step 2)

Step Seven: Build Wealth!

Summary:

• Baby Step One: Done now.
• Baby Step Two: 7 months
• Baby Step Three: 6 more months
• Baby Steps Four and Six: 3 more years

Conclusion: In four years, Alline should have all debt gone, house paid for, $10,000 in Emergency Fund and another $20,000 nest egg. With no other debt, you could have another $40,000 in nest egg in only two more years (six years from now).

With no debt, Alline has choices. She could easily retire in four years. But, because she would be done with Baby Step Three in only 13 months, she could make it if she had to retire then.

Alline was very upbeat about this plan. For the first time in a long time she feels like she has real hope that she can get out of debt and be self sufficient. We are not sure when the closing on the house can be scheduled because of some contingencies concerning her daughter’s finances, but, because Alline will continue on her debt snowball until that time, her total schedule should not change too drastically because when she closes on the house she will have less debt to pay off.

We scheduled a meeting for one month from now. Our agenda at this meeting will be to review the budget, debt snowball and progress of the house purchase.

photo credit: AanikaP

Entry Two: May 13, 2009

The purpose of this meeting is to follow up on homework from our last meeting, discuss how the budget is working and discuss plans to help her meet her short term goal of being debt free.

Homework:

Alline is working on her goal of a $1,000 “Baby” emergency fund.
She should have $500 toward her emergency fund by the end of this month.

She has lowered her land line phone bill and her Direct TV plan.

She checked and was not able to lower the cost on auto insurance premiums.

Her whole life insurance policy has a cash value of only $1,600. Because of health issues, she will need to keep it instead of pursuing term life.

Reviewing the Budget

The budget we established at our last meeting went very well. With confidence in the budget, we feel that we can begin to formulate our plan. She will need to complete her $1000 Baby Step One Emergency Fund before attacking her debt (Baby Step Two) but she should be able to do so within a month.

We discussed a concept to help expedite this process. Because Alline is living in her daughter’s house, and because her daughter owes her $35,000 and because the prospects of ever getting any of this money from her daughter seem extremely slim, our plan is for Alline to buy the house from her daughter, paying only what is owed on the house. All equity (approximately $15,000), therefore, would be a form of payment from her daughter. Furthermore, when applying for the loan for the house, Alline could ask to borrow 80% of the market value and would walk away from the closing with about $8,000 to $10,000 which she could use to completely pay the IRS debt and greatly speed up her debt snowball. This was Alline’s idea and I endorsed it. Alline has already spoken with her daughter about this and her daughter is in agreement.

Therefore, Alline’s homework will be to talk to her banker and get the purchase process started.

We scheduled our next meeting for a month away. Based on the assumption that her budget is on track and the purchase of the house go forward, I will develop a detailed plan for Alline before our next meeting.

photo credit: timtom.ch

As a financial counselor, I help real people with real issues. This series on case studies will walk our readers through the process of discovering the short term and long term goals of my clients, formulating a plan to achieve those ends and then holding the client accountable to actually carry out the plan and thus accomplish the goals.

I will use real life studies with fictitious names, always with the approval of the client. Some turn out very well, some fairly well and some not so well. I will not “cherry pick” just the successes, but plan to write of some that do not accomplish their goals, assuming I can get permission.

Entry One: April 6, 2009

As this was our first meeting, I asked Alline to fill out the Client Information Form. Her short term financial goal is to become debt free. Her long term goal is to rebuild some of her lost retirement and put herself in a position not to be a burden to her children.

Alline is a widow in her mid-60s. I learned that her husband had a stroke in 2002 and was an invalid until he passed away in 2004. Their health insurance covered 80% of expenses, but nearly all of his 401(k) savings was used to pay the other 20%. He had a $50,000 life insurance policy, but all of it was used for the funeral and medical debt.

At about this time, Alline sold her $175,000 house to her daughter and son-in-law for $120,000. She also loaned the daughter $35,000. She then moved into the small house her daughter still owned and made the house payments, insurance and taxes on it.

About two years later, the IRS notified Alline that she owed $15,000 in back income taxes. It so happened that during the time of her late husband’s stroke and ensuing illness, she had neglected to file their taxes. Her Dad had collapsed the same day that her husband had his stroke and her grandmother had died four months later.

We worked on Alline’s budget. Alline still owes $8,000 to the IRS. She draws $652 a month Social Security and $1617 survivor’s retirement benefit. She also works and earns $1076 a month take home pay for a total monthly income of $3,345. Her budget expenditures are $2457 which includes saving $555 a month toward her Baby Step 1 Emergency Fund. Her minimum payments on her unsecured debt is $888 a month for a total expenditures of $3,345 and thus a zero based budget.

Alline has $13,000 in CDs which are surety for a $13,000 loan. She owes $3,600 on her vehicle. She has no other cash or retirement funds. Her total unsecured debt is $29,000.

At this time we had been meeting about three hours and we concluded the meeting with some “homework” and scheduling our next meeting. The homework (with her agreement) was:

• Get rid of her land phone.
• Get rid of her Direct TV.
• Open a new account as an escrow to automatically transfer money into for non-monthly expenditures.
• Get some quotes on her car insurance to make sure she isn’t overpaying.
• Check on how much cash value her whole life policy is good for.

Our immediate goal is to save $1,000 for Alline’s Baby Step 1 Emergency Fund. We scheduled our next meeting for a month away to allow Alline to try her budget to see how it works.