Matt and Suzie-
Matt is a software engineer and Suzie works mostly at home raising their three daughters: Julianne, 12, Rachel, 11, and Caroline, 9. They live in an upscale California neighborhood in a 4,000-square-foot home with a pool, a huge walk-in wine cellar and even its own movie theater. They drive nice cars and own a second home and two vacation time shares. How do they do it? They're in debt up to their eyeballs.
"I know that we don't make ends meet each month, and to make ends meet, we use credit cards, and then the credit card payments start increasing, and you just can't make ends meet even doing that," Suzie said. Their monthly household income of $8,750 isn't enough to cover all of their expenses, which total $15,000 a month. For over a year, they have relied on credit cards to keep afloat financially. Using one card to pay off the other, their credit card balances eventually ballooned to $60,000. Their Bank of America Visa alone has a balance of $19,000, at an interest rate of nearly 33 percent. The burden of their debt is something that keeps Suzie up at night. "I woke up at 2:30 a.m. this morning because yesterday we went to the diner and tried to use the debit card and it didn't work."
Nothing helps the credit card companies' bottom line more than the fees and high interest rates they earn from consumers who are struggling with their payments. For example, one of their credit cards charges a $39 fee for going over the spending limit or being late on a payment. And even if they always pay their bill on time, the bank can still increase their interest rate to 32 percent if they are late with a car or mortgage payment, or any other payment to a creditor. That's because a "universal default" clause is buried in the fine print of their credit card agreement, the terms of which can be changed by the credit card company "at any time for any reason."
In their case, a series of bad choices contributed to their massive debt. Six years ago, Matt lost his job and spent more than a year out of work. During that time, Suzie decided to open two scrapbooking stores. When her business folded last year, they ended up losing about $200,000 — most of it borrowed money. There were also some bad real estate and stock investments. Even as their financial situation worsened, however, they continued to spend. Last year alone, they took three vacations — a cruise through the Carribean, a trip to Whistler, Canada and another to Hawaii. Matt concedes the vacations may have been unwise, given their dire finances. "OK, we need to be punished, I guess," he said. Suzie, however, has no regrets. She saw the vacations as a way to bond with her daughters. "The cruise was my gift to my family."
Finally, help was offered by a financial planner. After reviewing their financial records, the financial planner calculated that they were about five months away from bankruptcy. All of their debts translated to a loss of $200 each day. the financial planner devised a six-month action plan to rescue the Matt & Suzie from economic ruin. First, he advised them to dump their expensive time shares, even though this will mean they will lose $46,000 on their investment. The financial planner hopes they can recoup some of those losses by also selling their home and their second rental property. He believes those transactions will net them about $113,000. The financial planner then wants them to use that money to pay off their $60,000 credit card debts. If they take all of these steps, they will actually have a few thousand dollars leftover to save and invest.
By getting rid of all of their real estate, they will also unload expensive tax bills, mortgage payments and maintenance fees — drastically cutting their monthly expenses. When all the dust settles, they will be able to afford to rent a house in their neighborhood on Matt's current salary, and still have about $1,200 extra cash every month to save and invest. Compare that with the $6,250 the Petersons are now losing every month. Drastic problems require drastic solutions!
Richard and Carol
With a lifetime of financial, legal and administrative operations experience, Richard was at the height of his career making lots of money managing other people's businesses. He quit his high-paying job, sold one of his outside investments for $1.25 million, bought a new Ferrari and started day-trading stocks. What a life...until his oldest child started college with huge out-of-state tuition; his Ferrari insurance cost $7,500/yr.; another child started a 20 year career of drug and alcohol rehab; his health insurance cost went from $2,000/yr. to $25,000/yr.; his credit card debt mushroomed to over $60,000 and the cost of his beach home, his mountain home, his Palm Springs condo and his Maui beachfront condo brought his monthly cash outflow to over $25,000/mo.
Things needed to change and fast! Richard sold his Ferrari; he dumped his Palm Springs condo; he then sold his beach home and his Maui beachfront condo and made enough to pay off all his debt and start investing the rest. Richard moved into his mountain home and began the process of converting it into a huge estate. Now that Richard's third child has finished college, Richard and his wife live totally debt-free and enjoy life on their lovely $3 million estate in a ski resort with millions of liquid investments. And they have more than enough cash flow to significantly contribute to the comforts of their 3 children without denying themselves anything!
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Small minds cause
more headaches!
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