luxury-cruise-ship

The Solution

Explain the importance of compiling all income and expenses, including fixed, annual and discretionary spending. Most people think they spend less than they do, so this must include daily coffee, lottery tickets and/or hair appointments.

Streit says clients should set up a program that automatically tracks everything they spend. Walter and Anne also need to check their credit ratings to fix any discrepancies.

They need to spend based on current cash flow, rather than at the prior double-income level, and create a spending plan until Anne returns to work. They should stop using credit cards until they’re paid in full. Any debt repayment should concentrate on the highest-interest debt first.

Read: Make your clients’ debt disappear

“The couple should take their revised spending and repayment plans to the bank to revisit adding the line of credit to their mortgage,” says White. The bank may reconsider if it sees the detailed financial plans.

“Once the highest-interest cards are paid off, the couple should save for annual lump sum payments for their mortgage. A smaller mortgage will [let them] retain reasonable equity even if housing prices decline,” says White.

Once their credit rating improves (see “Credit ratings affect debt,” right), they can investigate “an all-in one solution and use 50% of the value of their home to consolidate all their debt obligations,” says Streit.

This solution results in a lower interest rate on the debt and reduces their multiple monthly payments to one.

Their discretionary expenses include:

  • Eating in restaurants several times per week
  • Symphony subscription
  • Prepaid Alaskan cruise
  • Purchasing books and magazines

Steps for reducing or eliminating these expenses include:

  • Forfeiting the 20% deposit and cancelling the cruise
  • Attending one symphony concert and cancelling the subscription
  • Limiting restaurant meals to once a week; bringing bag lunches
  • Borrowing books; cancelling all but one magazine subscription
  • Scaling back entertaining
  • Making do with existing wardrobes

Warning

If a couple increases spending when one of them returns to work, they’ll slide back into the debt hole. Extra income isn’t an excuse to spend.


Walter needs to develop a succession plan for his business by working with a professional valuator, as well as tax and estate-planning experts. The couple should also revisit their plans to retire early.

To rebuild a financial buffer, Walter and Anne have decided to continue following their pared-back spending plan after Anne returns to work. Eighty percent of her income will be funnelled to debt repayment, and 20% will be earmarked for establishing a fund for future home repairs.

Client acceptance

6/10

Walter and Anne cut discretionary spending and were able to redirect about $1,750 a month toward debt repayment. Unwilling to forgo their winter vacation entirely, they chose a shorter break that cost less. Walter is working on a business succession plan and Anne has returned to work.

Originally published in Advisor's Edge

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