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Fairy-tale wedding creates real
debt
The
money problem
Joan shares her money concern with
the Diva: "When I was growing up, my family lived from paycheck
to paycheck and I hated it. Now I'm married, and find my husband
and I are living the same way -- we can never seem to get ahead."
Joan and Bill spend more than they earn. They
make up the difference by piling up debt.
Joan couldn't afford her college tuition and
is now saddled with a $15,000 student loan. They borrowed $21,000
to help finance an elaborate wedding. When they need money for travel
or other expenses, out comes the Visa card, which currently carries
a $4,000 balance.
They're living in a $230,000 three-bedroom home;
Bill's trust fund took care of the down payment. The trust fund
is history, and the couple found themselves with mortgage payments
($1,400), debt payments ($1,600) and a lifestyle that demanded more
cash than they earned.
Together, they bring in $5,080 a month; they
were spending $5,670 a month. To stop the $590-a-month deficit,
they added $15,000 to their mortgage debt and used the proceeds
to pay off one of the loans. It got them off the hook this time,
but it's not a habit they want to get into.
When asked what her money weakness is, Joan
was quick to reply, "Trying to keep up with the Joneses and spending
money I don't have." She said Bill's weakness is impulse buying.
He recently blew $600 on a 36" TV to enhance his viewing pleasure
while he watched the Super Bowl. They already owned three working
televisions; this fourth was an indulgence.
Joan and Bill have never learned how to manage
their money. For example, they received $9,000 in cash gifts for
their wedding. With no savings, huge debts and more expenses than
income, what did they do with that $9,000? They put a deck on their
home.
The couple would like to have a baby in three
years, and Joan is talking about being a stay-at-home mom. She's
asked the Diva to help her get her financial house in order so she
can stop living from paycheck to paycheck and start planning for
the future.
The wedding
Joan and Bill's friends all had big, expensive
weddings, so it seemed like the right thing to do. Their country-club
wedding cost $41,000 last year. They saved up $8,000; Joan's family
kicked in $12,000; they borrowed $15,000 from the bank at 14 percent;
and Bill's father gave them a $6,000 interest-free loan.
This debt was incurred by two people earning
a moderate income and with the following financial issues:
- No emergency savings. What's going to happen
if either loses a job or they're hit with a large, unexpected
house expense?
- They are not contributing the maximum to
their deferred retirement plans at work. Money for retirement
will not just appear 30 years from now; they have to put it away
now.
- Both want to earn master's degrees within
the next two years. Joan's still paying for her undergraduate
degree. They need to think belt-tightening, not new loans, to
finance the advanced degrees.
- They want to have a baby within the next
three years and forfeit one income so Joan can be a stay-at-home
mom.
The Diva isn't saying Joan and Bill didn't deserve
their fairy-tale wedding; she's just saying they couldn't afford
it.
Tracking the expenses
Joan has identified the following as their
highest priorities: Keeping their home ($1,400 per month), getting
their master's degrees ($370) and paying off their debts as quickly
as possible ($1,450). The Diva suggests the following cuts in their
other expenses to help them reach their goals:
- Groceries ($50): Cut back on expensive snacks
and shop the sales.
- Clothing/laundry ($60): No new clothes until
the debts are paid off.
- Movies ($20): Borrow movies from the library,
for free.
- Recreation ($10): Cut back on going out until
the debts are paid off.
- Gifts ($50): Give small gifts with large
love notes.
- Dining out ($10): Cut back until the debts
are paid off.
- Travel: ($300): Declare a moratorium on out-of-state
travel. Visit friends and family after debts are paid off.
The Diva's "payment push"
strategy
Joan and Bill want to pay off their debts
as quickly as possible. By employing the Diva's "payment push" strategy,
they can be debt free by July 2002. Here's how it works.
They continue to make the same payments they
are currently making on their debts. The debt with the highest interest
rate gets the "payment push" of the extra $600 from belt tightening,
plus any additional money that comes in from raises, refunds, selling
stuff they don't need or an unexpected windfall.
As soon as the debt with the highest interest
rate is paid off, the "payment push" goes to the debt with the next
highest interest rate. And so it goes until all the debts are gone.
When that happens, in approximately 16 months, Joan and Bill will
find themselves with an additional $1,450 in their pockets each
month. At that point they can loosen their belts a bit and start
planning for their future.
The Diva Concludes
Joan and Bill have opened up a dialogue
about money, and they really want to get better at managing it.
Joan's consciousness was raised during a discussion about the things
they'd like to have when they have the money. A strange thought
popped into her head: "Just because we have the money, doesn't mean
we have to spend it." Say "hello" to savings, and "goodbye" to living
from paycheck to paycheck.
By making a conscious decision to accumulate
savings, Joan and Bill will take a major step toward getting their
financial house in order. The Diva recommends the following to help
Joan and Bill reach their goal of financial freedom:
Success is a journey, not a destination. The
Diva wishes Bill and Joan the best of luck as they travel along
the road to financial freedom. The Money Makeover is a weekly feature
of Bankrate.com. The Money Makeover is a weekly feature of Bankrate.com
in which money experts help readers untangle their finances. Do
you need to get your financial house in order? Could you benefit
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