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."
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.
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.
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.