Hey there, time traveller!
This article was published 23/11/2012 (1283 days ago), so information in it may no longer be current.
Cheryl and Larry are seeing red.
But they're not angry so much as they're frustrated, anxious and a little perplexed about how they could be racking up debt after all they've been through over the past few years.
"We are both trying to re-establish our credit after finishing a consumer proposal in the last year," says Cheryl, 41.
"We owned a small business and incurred a lot of debt while running it."
The couple, who both work in sales, grossed almost $120,000 combined last year or about $7,757 in take home pay a month.
Despite the six-figure family income, the parents of two young children have virtually no savings. Larry has no work pension and Cheryl only recently enrolled in hers.
Yet they have racked up their credit cards to the tune of $6,600, and they've done so only in the last six months after individually applying for credit without telling each other.
Although they have little other debt -- they owe $50,000 on the house and have a car loan -- balancing their household budget is an elusive goal.
In the past, Cheryl has largely left managing the finances to Larry, but she now realizes she will have to play a bigger role.
"Larry doesn't know where his stuff is half the time and he's very laissez-faire about money," she says.
"Considering we just paid off the consumer proposal, really scrimping and saving in, we were hoping to get a little breathing room, but it seems our situation hasn't improved at all."
Debt counsellor Christi Posner says, on paper, this couple should be in good shape financially because their income far exceeds their expenses. Yet they are still struggling.
"What this tells me is that there is a deeper issue here," says Posner, with the non-profit agency Credit Counselling Society.
"Debt is merely the symptom of a larger underlying problem."
At the heart of their problem is poor communication. One hand doesn't know what the other is doing.
"The two of them have kept separate bank accounts, and secret credit cards have been applied for and used," she says. "Secrets about spending, saving and debt get in the way of open and honest communication and can be detrimental to personal relationships; this is called financial infidelity."
And it can be very destructive to a family's well being -- both financially and emotionally. Fortunately, Larry and Cheryl are not deeply in debt, and they have overcome a major financial setback -- the failure of a business.
Posner says the prescription to their problem is straightforward. They need to talk regularly about finances.
"They should start with something routine, such as how to better utilize Cheryl's free bank accounts to organize household bill payments, or how to set limits on spending," she says.
Of course, sitting down to discuss finances can be an uncomfortable experience at first because it can lead to conflict. But this is natural and even productive because they will learn where they both stand regarding saving, spending and their future.
It's all about values, Posner says.
"Simply put, values are about what's important to us," she says. "If Larry and Cheryl argue about money, the real issue they're arguing about may be much deeper and harder to see."
Values are built on past and present experiences and relate to our education, upbringing, culture, age, gender, work experience and even health.
"When it comes to our finances, we tend to spend money on things we value."
For example, someone who values security usually saves and avoids debt. But another person may value excitement and freedom, and spending money is a way to express that.
In a relationship, people with different values can still get along quite well, but they need to be open about their differences.
Once Larry and Cheryl are talking, they can begin focusing on the numbers, and a good place to start is their expenses. Posner says this is a red flag in their situation because they're obviously underestimating their costs.
"The list of expenses submitted by Larry and Cheryl total $3,936 a month," she says. "That means that there is over $3,600 that is unaccounted for every month."
Their budget, however, seems to be missing a number of important costs, such as gasoline, car repairs, clothing, entertainment, gifts and hair care.
"After adding in averages for those and other categories, I estimate their expenses are likely closer to $5,866, but that still leaves over $1,700 unaccounted for monthly."
For the next couple of months, they need to track their spending, aiming to reduce discretionary costs between five and 10 per cent.
Posner says one particular area where they likely can trim expenses is ATM withdrawals.
"Over a 30-day period, there were $1,600 in ATM withdrawals from Larry's account, which will be very hard to trace back," she says. "I recommend limiting any cash withdrawals unless they are living on an all cash system and tracking each penny."
Once they get a handle on where the money is going, they can start focusing on the future. This involves building a budget they can live with that incorporates paying the bills, having a little fun, saving for the future and eliminating their debt.
They certainly earn enough money to address all goals, but their short-term focus should be eliminating the credit card debt. Allowing high interest debt to linger is an enormous waste of their money.
"By making minimum payments only, it will take Larry and Cheryl over 50 years to repay their credit card," Posner says.
And they have no reason to be making only the minimum payments. The couple should easily be able to come up with a plan to pay off the cards in six months -- paying about $635 in interest -- while still working toward their other financial goals.
And among those goals should be setting money aside for emergencies, which is just as important as saving for college and retirement.
"Larry's income fluctuates from month to month, so it is essential they put money aside when he earns extra income to help out when he earns less income," she says.
Once they're on track, building up a 'just-in-case' reserve to cover six months of expenses, then they can start thinking about saving more for the long-term.
And Larry and Cheryl have lots to think about. Their future is promising, Posner says.
They just need to talk regularly and honestly about their finances.
"It's all about working together as a team toward the same goal."