Extreme Financial Makeover, Month One

The challenge is simple: can I flood a couple with financial know-how, motivation, and accountability for 12 months, and change their financial life forever? Well, yes I can. But I’m going to prove it, once again. I’ve done extreme financial makeovers in the past, I’ve written books on how to do it, but now I’m going to put my money where my mouth is. I’ve agreed to work closely with a financially struggling couple for 12 months, detail and document every moment of it, and show you exactly how financial change takes place.

Meet Randy and Candy Bandy. I changed their names, obviously. Randy is a police officer, and Candy is a hair stylist. Randy has an amazing haircut, as you would imagine. We chose a couple that has been married for 10 years. They note the best two financial years of their marriage as the first year of their marriage and this past year of their marriage. As you will see below, if this past year was one of their best years, then their previous years must have been pretty rough. This isn’t to salt their wounds; it’s simply reality.

 

Stress Level

(1 – not stressed to 10 – very stressed)

Randy – 6 (Randy admits that his stress level is low because he doesn’t look at their finances regularly, as a coping mechanism)

Candy – 8

Income

Randy makes $50,000 annually and is paid $1,200 bi-weekly

Candy makes $500 cash per week (no taxes withheld upfront)

Debts owed

Store Card #1 200
Medical Bill #1 212
Medical Bill #2 300
Store Card #2 400
Store Card #3 500
Family Loan 1,000
Credit Card #1 1,100
Credit Card #2 2,000
Student Loan 2,400
Bank Loan 3,200
Store Card #4 3,600
Credit Card #3 3,700
TOTAL 18,612

House

Home value: $115,000

Mortgage balance: $115,000

Terms: 30 year mortgage

Monthly mortgage: $721

Savings

$0

Life Insurance

Randy – $150,000 (if he were to die in the line of duty, Candy would receive an additional $450,000)

Candy – $100,000

Here are a few of my observations, as well as some comments made by Randy and Candy:

  1. Randy thinks the biggest problem is the timing of their bills.
  2. They both admit to a major convenience dining-out problem.
  3. They have no will or trust for estate planning purposes.
  4. Candy’s income can fluctuate up, but she generally doesn’t make any less than $500 (net) per week.
  5. Randy is concerned about their credit scores.
  6. When they have extra money, they pay extra ($25-$50) on many of their debts.
  7. Candy handles the finances, and reports regularly back to Randy

Here’s the good news, Randy and Candy have a $3,876 tax refund coming. Here’s the bad news, Randy and Candy were ‘kinda gonna use it to help their financial situation. “We’ll probably pay off some debt, save a little, get some things for my truck, and some stuff for the kids.” Does that sound like a good plan to you? Well, objectively, it’s not. ‘Kinda’ is the operative word here. I asked Randy and Candy if I could present an alternative to their plan. They said I could.  I’ll share that with you, here in a moment. But first, we must digress.

Here’s what I know from 15 years of experience, when you have $18,000+ in consumer debt, $3,876 feels like $20. When you’re in debt and you’re feeling like you can’t catch a break, chunks of decent money sometimes seem insignificant. People love to talk about why debt is bad, and I disagree with many of the reasons they come-up with. I can tell you that debt stinks because it ties you to your past financial decisions and it warps your perspective as to what’s possible. $3,876 is incredibly powerful for any financial situation, especially Randy and Candy. And while it certainly can’t pay off all of their debt, it can create some margin. You want margin. Randy and Candy were leaning strongly towards using their tax refund as an escape from reality. People do this all the time. As I pen this blog post, families from all over the United States are on Spring Break trips that they can’t afford, because they are trying to escape reality. Randy and Candy don’t really like their financial life. They wish it was different. They want to feel like it’s different. They, like many people, are willing to spend good money to make it feel different. They shouldn’t.

Here’s the plan I shared with Randy and Candy. This is the best use of $3,876

  • Open a savings account, at a bank they aren’t currently banking at, and put $800 in the account. They are to have no ATM or online access to this money.
  • Pay off Store Card #1
  • Pay off Medical Bill #1
  • Pay off Medial Bill #2
  • Pay off Store Card #2
  • Pay off Store Card #3
  • Pay back Family Loan
  • Do whatever they want with $464

If they play their cards right, they can fund a starter emergency fund, pay off six debts, and eliminate nearly $150/month in minimum payments. Those minimum payments, along with other money, will be used to payoff the next lowest balance debt, over the next few months.

Randy’s jaw dropped. He didn’t think this was possible. While I certainly could have used the remaining $464 to get a start on paying down Credit Card #1, I didn’t want to push my luck. Over the next 12 months, I’m asking Randy and Candy to make huge changes. I’ve learned that if I push too hard, too soon, then the changes might not stick. We’re combatting 120 months (10 years) of this couple’s financial decisions; the cold-turkey approach won’t work. When I deal with situations like this, I look to create momentum. In fact, technically there’s a better way for these people to pay off their debt, but it doesn’t take into account human nature. Human nature is what causes our financial problems. You sure as hell can’t ignore human nature when you try to solve our financial problems. Besides, if they were good at using technical solutions, they wouldn’t have all this debt in the first place.

I plan on talking to Randy and Candy in about 30 days. I’ll be looking for interest, engagement, and motivation. If they have it, we can move on. If they don’t, we start over. That’s how this works. I’ll report back.

****If you choose to comment on this blog post, do not insult Randy or Candy. I’m giving you intimate details of their financial life so that we can all learn from the turnaround that’s coming. If you choose to be disrespectful toward them, your comment will be deleted and you will be prevented from commenting in the future. EVERYONE’S financial life has skeletons in the closet, including mine. And if they were aired publicly, it would seem justifiable to poke fun at things, but it isn’t.

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