- Shelley Streit, advisor, Guiding Light Financial, Stettler, AB
- Pat White, executive director, Credit Counselling Canada, Toronto
Walter and Anne are in their late 50s and live in calgary. Walter owns a medium-sized business and Anne works full-time in human resources. their combined monthly net income is $8,000. they want to retire when Anne reaches age 60 and is eligible for her full pension—Walter will be 62.
*Walter and Anne are composites of clients of Credit Counselling Canada member agencies.
Walter and Anne have difficulty making their minimum monthly expense payments. Both habitually use credit cards for most spending because of the reward points, and Anne has been off work for the last six months due to a medical condition that will require surgery.
Walter’s trucking business, which in past years benefited from a low Canadian dollar, has further suffered from the economic downturn. Yet the two haven’t adjusted spending in response to the decreased cash flow.
Client balance sheet
|RRSPs $750,000 combined|
|Non-registered investments $125,000|
|Pension Anne has a defined-benefit plan; Walter has none|
|Mortgage $100,000 remaining, $1,236 monthly payment|
|Line of Credit $38,000 from financing new roof and required home renovations|
|Credit Cards $40,000|
Degree of difficulty
7 out of 10. An advisor must provide solutions to cut spending, work with professionals to develop a succession plan for Walter’s business, and develop new short-and long-term budgeting and financial strategies.
“The advisor should be prepared for an open discussion about where the client is financially, rather than how they got there,” says Streit. Ask open-ended questions such as, “Is there something you would like to change with respect to cash flow or your personal debt?” Leave judgments out; instead, reassure clients you’ll provide the tools to succeed.
Walter and Anne aren’t willing to sell the cottage; it’s winterized and they want to retire there. Also, their children and grandchildren visit there often.
The bank isn’t willing to finance a consolidation loan; it’s concerned Walter’s business isn’t viable due to his age and lack of succession plan. The house’s value may also depreciate.
Their credit card and line of credit payments are late, and the bank’s threatened to demand immediate payment in full on the line of credit. The couple considered a consumer proposal, but if it’s not accepted by all creditors, they could be forced into bankruptcy and have to liquidate assets.
Streit notes high-net-worth clients often look good on paper because “credit card balances and lines of credit may not be disclosed. Without all the information, the advisor could end up making recommendations that aren’t suitable.”
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.
“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, 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
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.
Credit ratings affect debt
Before they met with an advisor, Walter and Anne financed a hot tub through a don’t pay-for-six-months promotion. They also signed up for a store credit card they’ve never used; and the lending limit on that credit card is factored into their debt ratio. Cancelling two unused cards with significant limits improved their debt ratio immediately.
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.