Report on Business runs a little feature called “Financial Facelift”, where they take a regular person who is worried about retirement and lay out their life for everyone to read, and then call in a financial advisor to help him/her plan their financial strategy.
It’s a lot like a personal finance blog profile with advice.
Here’s the one I read in the Globe & Mail I picked up today:
Debts leave little room to manoeuvre
By: ANDREW ALLENTUCK
August 4, 2007
In Ottawa, a federal government employee we’ll call Helen is 39. She has several university degrees and a mid-level management job with the federal government. Her accomplishments are overshadowed by her debts – $40,000 of student loans, a loan for her registered retirement savings plan, a car loan, loans to buy a furnace, a computer and a mortgage. Her interest payments add up to about $2,272 a month, and she is forgoing dental work, home repairs and even cable television in order to save cash to pay her bills. Her net worth is negative and, unless she gets her debt-service charges under control, she will wind up living under strained circumstances.
“My lifestyle couldn’t be described as extravagant,” Helen explains. “I cycle to work from May through September and otherwise take the bus. I bring my lunch to work every day and have dinner in a restaurant maybe four times a month. By improving my current situation, I trust that comfortable retirement at age 60 or, with luck, at 55, is a realistic goal.”
What our expert says
Facelift asked Caroline Nalbantoglu, a registered financial planner with PWL Advisors in Montreal, to work with Helen to find ways to pay off her debts more quickly and to plan for her retirement.
“She has no leeway in her monthly cash flow that will allow her to direct additional funds to the elimination of her debt. If anything, she currently runs at a small deficit. Her problem is that she has been sold financial products with expensive insurance by people who get commissions from sales,” the planner says. “What has to be asked is what benefit she received after paying all the fees?”
Helen’s dilemma is all too common. She made a major investment in herself and now earns an entirely respectable income of $87,000 a year before tax. But as Ms. Nalbantoglu points out, Helen’s discretionary income is lagging far behind her gross as a result both of taxes and her substantial debt load. The problem is how to increase the choices Helen has in future.
Helen’s challenge is to eliminate her student debt, now about $40,000. Before she can do that, she has to pay off credit-card debt with interest rates as high as 14 per cent a year.
………
Helen has also purchased life insurance on the RRSP loan. The life insurance was unnecessary, the planner says. Helen has no dependants nor anyone to protect in the event of her death. The life insurance should be cancelled.
Helen could sell her car, which she estimates is worth $15,000, and use the proceeds to pay down $16,000 outstanding on her car loan, freeing the $389 a month she pays to service it.
The savings in depreciation, fuel, repairs and insurance will represent a change in lifestyle, but it is the easiest way to start paying down debts. The total savings, $389 for the car loan and $110 in operating costs, will allow her to pay off her $300 monthly credit-card bill and allow her to discharge the debt in half a year, Ms. Nalbantoglu says.
……….
At this point, Helen can buy a car or make a down payment on a townhouse. Currently, she has only $12,000 equity in her condo, so she will have to save diligently to buy a more expensive property. It would be prudent to put a car toward the back of her priorities, for in 4½ years when her mortgage term is up, she may have to renew her loan at a higher rate.
………..
“I bought into the RRSP loan as the responsible thing to do, but no one told me to pay down loans before taking on more debt,” Helen says. “As for selling my car, that’s not going to happen because I use it to visit family in the area. But I do see the advantages of working to 60. It’s been a useful exercise.”
You can read the entire article here.
FB: What I can’t understand is sure.. she needs a car. But does she need a $15,000 car? The financial planner already told her that she’s running at a small deficit every month, even while she’s pinching the pennies!! Why couldn’t she sell the car, get a beater car, or even better, just RENT a car when she needs to use it to visit family in the area? Renting a car is only about $50 a day, plus the cost of gas, and if you only visit family once a month or so, it’s better than paying $386 a month.
She also pays extra cash just to have a transit pass to take the bus in the winter, and that’s another $100/month or so alone. So she’s spending about $486 in transportation a month… when she could be spending about $200 (assuming 2 family trips/visits per month).
I’m not really sure that she’s all too concerned about her situation, even though she’s running at a small deficit. She could definitely cancel her life insurance plan which would free up some cash, but I don’t understand why they also wouldn’t advocate she build a small emergency fund to pay for things like a new water heater when it breaks, or repairing her teeth… your health is more important than a $15,000 loan on a car that you’re shackled to. Yet she still wants to try and retire at 55 instead of working until 65.
The most irritating comment from “Helen” is… I bought into the RRSP loan as the responsible thing to do, but no one told me to pay down loans before taking on more debt. Well.. an RRSP loan is a debt right? Why wouldn’t someone (logically) assume that you pay DOWN a debt, before taking on more debt? Sure, you can claim financial ignorance, (I for one, admit to being VERY stupid in my University years and reckless with money), but it sounds to me like she’s trying to shift the blame.
Note the words: “No one told me” in her sentence.
Lady, you’re a grown woman! No one will tell you what to do with your money, except those who want their grubby paws on it! You have to take charge of your own life (if you know you’re financially flailing), swallow your pride, and ask for help. There is a non-profit Debt Counselling Credit Association of Canada available, plus other such instutitions, and a plethora of personal finance articles, books and blogs out there.
I think her problem lies in more than what she’s letting on, and I think the financial advice given is a bit of a wash. People reading this, are going to see themselves in the profile and be unaware of the two basic fundamentals of personal finance I can see missing from this article: (I am sure there are more)
A. Making an emergency savings fund for repairing your teeth, getting a new water heater, etc.
B. To stop using all methods of debt and acquiring new debt and start trying to live on cash alone (which.. by the sounds of it, she isn’t, as she ran up credit card debt, along with RRSP loan debt, still had education debt, AND she has a mortgage).
And many other things that may be missed in an article.
Even more annoying is the writing of this article: Her interest payments add up to about $2,272 a month, and she is forgoing dental work, home repairs and even cable television in order to save cash to pay her bills.
Umm… That’s a lot of money to be paying in INTEREST payments for one thing, and for another, “…forgoing…even cable television in order to save cash”. Well, TV isn’t a basic necessity of life is it? Food (Check), Shelter (Check), Oxygen (Check) and Clothing (Check). That pretty much covers it in my book, and it sounds like she can’t afford what she’s doing right now, but the advice being given is inadequate.
*shakes her head* Maybe I’m totally off the mark (someone please, correct me!!) but I don’t think that Helen wants to be helped, that the advice being given is complete enough to be useful (missing out on the fact that she needs an emergency fund, etc), and the article itself is a bit silly to even make the subtlest of claims that TV is a basic necessity of life.
The other Financial Facelifts are a bit better, but still a bit of a joke.
The financial planner in one, says that the lady needs to go back to work full-time to make their dreams of getting a house come true. He estimate daycare costs, and clothing costs, etc… but then Penelope* goes and says: “Yes, if I go back to work, we’ll have daycare costs, and a maid to clean, as well as a dishwasher, etc”… I’m thinking: Oh .. my. There are couples out there, who work full-time, have 3 kids, and STILL manage to make it work without a maid. A maid is NOT a necessity, it’s a luxury, and I think people are mixing up what real necessities are with what luxuries are.
Necessities = NEED
Luxuries = WANT
I know raising children can be difficult as it saps your energy when you come home and all you want is a cup of tea, an hour of TV and peace and quiet… but you do what you’ve got to do, to make your dreams come true. And if not getting a maid for $200 a week, or whatever it is you’d be paying her, then that’s another $200 that could be saved if you …*gasp*…did the work on your own, with help from your Husband.
Another family is worrying about their finances, and they are afraid that they might be chopped down to one income that’s unstable (he owns his own consulting business that seems to be doing well right now). But what they are MOST worried about is keeping their lifestyle up. They still want to keep their expensive cars, go on $10,000 vacations, send their kids to private schools, and keep up the way their life is.
I have some harsh news for these folks, they could (instead), send their kids to PUBLIC schools (what would the Joneses say!?), take cheaper vacations, and start cutting back on their expenses now instead of when the corporate axe falls.
I think the main thing missing in all of these articles is the push for frugality. It’s been said time and time again, SAVING and being FRUGAL are the paths to financial wealth and independence. I am not sure that these articles are really pushing that – it just seems like a lot of numbers to maximize their taxes, evade certain penalties and trying to keep barely afloat.
- Interest rates how I hate thee…
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Ms. MiniDucky
on Aug 9th, 2007
@ 11:19 AM:
I do wonder how much of that article is factually accurate, but if it is, it’s no surprise Helen would even consider buying another car with the money from selling the car to begin with. A little dotty, but somehow, predictable.
I wonder if it’s an inability (or unwillingness) to judge things from a long AND short term perspective that just makes the whole situation worse?
And the very idea that sacrificing anything they *want* for the greater good seems utterly foreign to these interview subjects. I sure hope someone knocks some sense into them!
Fabulously Broke in the City
on Aug 9th, 2007
@ 3:35 PM:
Oo I never thought about the embellishments and word massaging that writers do to make it more ‘readable’.. I was more focused and concerned about the fact that other “real” people, who don’t really understand finance all too well (either from ignorance or other circumstances), would take that advice and heed it, without learning the basics first!!
I just kind of shake my head and wonder if they could see (like you very aptly pointed out), that there are other creative ways to take control of their finances and to make it work for their situation and improve what little they have. *sigh*