Raymond and Sally are what almost everyone wants to look like and act like when they pass their 80th birthday. Sally still volunteers at the local elementary school and Ray is a landmark at the local golf club. They seem to have everything – good health, a fine daughter and son-in-law and three adorable grandchildren. Their lifestyle, while not extravagant, could not be considered modest either (overspending).
They still spend two months every winter at Vero Beach, Florida. They love to entertain and, although many of their friends no longer travel to spend time with them at their winter beach residence, they stay very busy. To break-up the summer months, they have been known to sneak a cruise into their schedules.
Ray and Sally lived conservatively while working and raising their daughters in their suburban home. They still talk about their feelings when Ray retired at 65 even though that was 16 years ago.
Ray frequently comments that “we never thought we would live this long or this good.”
Ray is the money manager of the household and has been during their 58 years of marriage. Friends have marveled at how, even when interest rates dropped dramatically and the stock market lost so much value, Ray has always seemed unaffected. Sally figures that all that time he spends watching the financial news on television must be paying off (overspending).
Things are not always what they seem
But, Raymond has a dirty little secret. It’s not an addiction to prescription drugs, it’s not a bookie named Vito, and it’s not a secret child. It’s something the industry calls a HELOC, or Home Equity Line of Credit combined with credit cards.
A few years ago when interest rates and the stock market both dropped, Ray visited his local banker and decided to “use the equity in his home.”
Thus, Ray merely started writing checks on the equity of the house to supplement their retirement income. Frequently the checks paid the minimum required payment on their credit cards. The required monthly payment on the HELOC was so low it was hardly noticeable. Life was good.
Then, interest rates started to rise and the required monthly payment on the HELOC rose and became a little painful. Then, the law changed requiring that credit card companies raise their minimum payments. It is now approaching a very major crisis for Ray and Sally.
“Ray, are your wife and your daughter aware of this?”
“No, I don’t want to worry them.”
Well, somewhere in this big city is a wife and a daughter, and a son-in-law too, who are in for a big surprise. This family is about to incur some very major lifestyle changes.
Overspending could be any family’s situation, including yours. What planning steps can you take to prevent springing Ray’s surprise on your family?
What Should You Do?
Initially, consider creating a financial scorecard. This is a simple and valuable tool that families use to control household expenses.
At the end of each year:
- List all savings and investment accounts with their balances.
- List all amounts that were deposited or withdrawn from the accounts during the year.
- List all debts with the amounts owed.
- List all amounts paid on principal or the amounts added to the debt.
This is a concrete way to spot a pattern of increasing withdrawals and increasing debts. If you identify increasing debt – the solution is not to simply ignore the problem, but rather to seek financial assistance. A financial planner can help you identify options and create specifically-tailored solutions designed to turn around your ever-increasing debt load.
Finally, to prevent detrimental lifestyle changes, it is important for all members of the family to be observant of these tell-tale signs of overspending and to be advocates for immediate problem resolution.
By Philip C. Benedict, CFP
Benedict Financial Advisors, Inc.