I recently had a meeting with a woman who is struggling financially and she was looking for a way to make things better for herself and her kids. She has had a rough last 12 months and is trying to put the pieces back together and find a way to move her life forward. This time last year, her husband was killed in an auto accident and that has obviously changed the course of her life. Unfortunately, he was unemployed at the time and his only life insurance was with his prior employer and he did not transfer it to himself when his company closed their doors for business. So, she is a relatively young widow who received no life insurance benefits and was the sole income earner for several months prior to that. She has maintained her sense of humor and can smile and say “Worst year ever!” She knows that she will recover and rebuild, and now she’s ready to. The only thing she didn’t know was where to start. So, she started with a conversation…That conversation turned into a series of conversations and she now has a plan for how to turn things around. Here’s where she started: She had an ongoing monthly “structural deficit.” The cost of her mortgage, car payment, utilities and groceries (even using coupons and shopping for deals) exceeded her monthly take home pay. That was before she even put gas in the car or did anything with her kids. She was slowly draining her savings account on a monthly basis. But, she had no idea where her money was going the 1st time we talked. She walked out of our first meeting feeling a bit unburdened by telling someone in the financial world about her problems, but there was not much on her “to do” list after the meeting. She would have been overwhelmed if the list were too long. So, it was simple. Figure out where your money goes. She signed up for Mint.com and used this expense tracker to go back and review/categorize the expenses from her last 3 bank statements. She said all things considered, she spent just about an hour on this, and it gave her some clarity and direction. She was ready for the next step.
The next step for her was coming back in for a meeting where we reviewed her expenses and looked for ways to reduce them. We looked at her paycheck & her tax withholding to see if there was a little bit more she could squeeze out of each check by reducing the large tax refund she routinely receives. She would put the refund check in her savings account and deplete it throughout the year. That made her feel like she was going backwards. Instead, she reconfigured her W-4 using this IRS calculator to get a little more money in each check so that she could take less from savings each month. That gave her a better feeling, but it pointed out a glaringly obvious point. Her income simply wasn’t enough to cover her lifestyle. She was around $600-700/month short. She thought she might be $100-200/month short but had never done the math to figure out the real number.
We talked about ways to either reduce expenses or raise her income. For expenses, the biggest cost was her cost of housing. She could sell her house and move into a smaller place, but her mortgage balance is slightly higher than her house’s value so it might be a tough road. Plus, her kids love the house and she doesn’t want them to move so soon after losing their dad. So, downsizing right now is not an option. We talked about a 2nd job, but her kids are in middle school and just not old enough to fend for themselves for long stretches of time if she had to work a job at night or on the weekends. We talked about renting out her extra bedroom to a student (she’s near a college), a flight attendant (she’s near an airport), or a business person who travels to her city frequently, and she seemed to like that option. We hopped on Craigslist to see what people in her area were charging to rent out a bedroom and it was in the $600-800/month neighborhood. Coupled with a small reduction in her expenses (she decided to drop her landline & use only her cell since the only time she uses her landline is when she answers telemarketing calls) she felt like she has a solid game plan for stopping the slow erosion of wealth. Once she gets the renter, and sees the expenses reduced, she plans to increase her 401(k) contribution in hopes of “making up for lost ground.” I’m excited to meet with her in a few months to see how her story is evolving. I have high hopes that she will be in much better financial shape this time next year than she is today.
I’d love to hear other ideas about what she could do. I’ll pass along any idea that I get here. So, what would you suggest to her?