If the McCue family were a corporation, it would need a turnaround artist.
Crushed under a pile of credit card debt and student loans, they’re losing sight of their goal of homeownership as prices in their suburban Chicago area surge past their reach, despite a good income.
“It’s frustrating,” said Kandace McCue. “I feel like we’ll be renting the rest of our lives.”
Kandace, 43, is a rehabilitation specialist at a Veterans Administration facility who helps blind people learn to walk with a cane. She loves the work and pulls in a steady income of $61,371.
Kevin, 39, is a union electrician with highly variable income. In good years he has pulled down nearly $60,000 in annual income, but he was laid off most of 2005, collecting jobless benefits of about $800 a month.
Though Kandace dreams about taking their two school-age children on a beach vacation to Aruba, daily living expenses eat up their entire paychecks. Their checking and savings account balances combined are below $1,000, but they can’t account for where all the money is going.
In other words, they don’t know what they don’t know, which is problem No. 1, said financial planner Bruce Brinkman of Rockford. Budgeting and tracking expenses are essential for the McCues and couples in similar situations, he said. Various new tools can help.
Filling out Brinkman’s standard living-expenses worksheet, Kandace accounted for about $53,000 in annual spending. That doesn’t include income taxes or retirement savings, but it still leaves a knowledge gap.
“My first impression is that there is potential for real wealth accumulation because of their incomes,” Brinkman said. Kandace and Kevin have retirement savings plans through their work, another plus, Brinkman said.
But student loans totaling roughly $31,000 and car and credit card loans of $44,000 represent a huge drag on that potential. Kandace has a master’s degree, the couple owes $28,000 combined on a 2001 Neon and a 2004 Dodge Caravan, and they accumulated credit card bills during Kevin’s layoff to the tune of about $16,000. All told, their debts nearly equal one year’s before-tax combined salary.
The debt is weighing on their future, and the lack of detailed knowledge about their daily spending will ensure that the problem continues, Brinkman said.
“There has to be an overall strategy to reduce the debt” and get a handle on living expenses, he said.
Kandace agreed but said budgeting always has been difficult.
“What I’m lacking is the big picture,” she said. “I’m a reward-myself-now kind of person.”
When Kevin gets an assignment after a long stretch of unemployment, for example, Kandace immediately spends more because she feels they’ve lived through a period of deprivation.
Brinkman suggested the McCues try out a budgeting software program that will help them track expenses more closely so they can work out two family spending plans. The first plan would assume Kevin is working nearly full time. The second would be for layoff periods and would pare expenses to the bone to avoid more credit card buildup.
To do that, he suggests dividing all expenses into non-discretionary and discretionary categories. The non-discretionary expenses, including housing, utilities, food and insurance, may be able to be reduced, but some amount each month will have to go to these categories. The discretionary categories are all negotiable.
Because the McCues find budgeting such a chore, Brinkman suggested trying a software program that focuses more on the daily budget than on detailed household accounting and investment tracking.
His pick, online provider Mvelopes (www.mvelopes.com), is running a 30-day free trial, so the family can give it a try without making another financial commitment.
The online system links to your bank and credit card accounts, automatically pulling spending data into “envelopes” you have designated for certain expenses. It’s modeled after the old-fashioned system of keeping grocery and other money in envelopes at home. So if the grocery envelope gets emptied before the end of the month, that category icon flashes red.
But any online or software budgeting program requires upkeep, a real chore for some people. To maximize your potential for success, Mvelopes founder Steven Smith recommends minimizing cash purchases so that as much spending as possible is automatically tracked through the program.
Of course, people who can’t resist the lure of credit shouldn’t try this approach: It will mean bigger bills.
Also, people typically create too many spending categories. Stick to 20 or fewer and you’ll stand a better chance of adhering to the plan, Smith said.
Once a budget is worked out, Brinkman said, the couple needs to prioritize their debt payments, paying a little extra per month on the high-interest credit cards while keeping up with the education loan minimums.
Brinkman also suggested checking out credit card balance-transfer offers. Those deals are getting less generous but are worth a try, he said.
Until that debt is more manageable, he said, adding to retirement plan savings doesn’t make sense. But the couple does need to pare those discretionary items to start allowing for some money each month to go into an emergency savings fund and toward an eventual down payment on a home.
The couple wants to spend about $170,000 on their first home, so they’ll need at least $17,000 to make a 10 percent down payment.
Finally, Brinkman suggested allocating the $46,500 in Kandace’s retirement plan to cover as many asset classes as possible. Her government plan doesn’t offer real estate investment trusts or commodity-linked funds, so he recommended a somewhat aggressive allocation to international and smaller-capitalization stocks for their long-term growth potential.
Although it would be tempting to take a loan from her retirement account to pay off debt, Brinkman doesn’t like the idea because if their spending doesn’t decrease, they could be headed for more serious financial trouble.
The couple has less choice in Kevin’s union retirement plan but agreed to educate themselves about how that money is being invested.
“I realize I haven’t thought enough about some of these issues, like when we plan to retire,” Kandace said.
She’s considering this exercise the wake-up call.
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