Alan & Dawn: Reality Check

Alan & Dawn Ronning could be the poster couple of the modern American family. Alan is in the medical industry and Dawn is a full-time mom of four with one child already out of the home. They bought a home, two cars, have two student loans, a credit card and one personal loan. It all adds up to one large pile of debt. They could be the poster couple because many American families are in the same position and facing the same challenges that they are. As we peer into their financial situation I am sure that many of you will be able to relate in some, if not all, areas.

At our first meeting we took inventory of their income, expenses and what their monthly balance sheet looked like so we could establish a starting point for a budget.

Take-Home Income (after taxes):
$62,760 annual salary ($5,230 monthly)
$4,200 – $24,000 bonuses ($350 – $2,000 monthly)
$500 business reimbursements (monthly)

Short-Term Debt:                                       Monthly Payment:
Les Schwab Bill —— $1,200.00 ——- $1,200.00 due w/in 30 days
Property Taxes — — $1,200.00 ——- $1,200.00 due by Oct. 31st
Credit Card ———- $10,500.00 ——$160.00
Dawn’s Van ———- $12,100.00 ——$256.89
Alan’s Car ———– $22,200.00 ——$380.00
Student Loan #1 —– $17,500.00 ——$164.17
Student Loan #2 —– $37,000.00 ——$350.19
Personal Loan ——- $28,000.00 —— $375.00

Total Short-Term Debt: $128,500.00 — $1,686.25 (not incl. Les Schwab or property taxes)

Monthly Expenses:
Tithe ————-$675.00
Food ————-$400.00
Utilities ———-$200.00
Transportation —$450.00
Miscellaneous —-$250.00
Phones ———–$335.00
Auto/Home Ins. –$240.00
Life Insurance —-$46.00
Property Taxes —$300.00 (reduces to $200 after Oct. 31st)
Home Mortgage —$826.46 (negative amortization loan; $255,000 balance)
School Tuition —–$611.00 ($5,500 per 9-month term; private grade school)

Total Monthly Exp. = $4,333.46 — Total Debt = $383,500.00

Monthly Balance = $60.29 (based on min. monthly income)

At first glance this budget may appear satisfactory; after all the month ends with a positive balance. However, this budget does not consider the fact that there is no savings being withheld or the financial risk that their large short and long term debt creates. If Alan and Dawn were to continue making only the minimum payments on all their short term debt, it would take over 9 years to be debt free except their home! And that’s if they never used debt again for any purchases or loans. Then you would have to look at the terrible home loan they have. Simply put, a negative amortization loan (also named “pick your payment”) only requires you to pay a low monthly rate that is below the monthly interest of your loan. Since the bank isn’t going to give away or lose money, they make it up by applying the difference of the payment you make and the amount of a monthly interest and add it to balance of the loan! If you didn’t catch that it means you owe more on your home each month! These loans should be outlawed in my opinion, but that’s a separate issue for another post.

Alan and Dawn want to be completely debt free and setting themselves up for a solid financial future. To do this we need to create room in their budget for savings, a better home loan, and far less financial risk. I’ll show you how we have started this in the next segment on Alan and Dawn. Hopefully after seeing this you will be inspired to take a closer look at your financial position and make changes as needed.

Alan & Dawn: Check-Up #1

(We are checking in on Alan & Dawn. For those of you who didn’t catch the first installment of this real life series, you can find it a few posts back labeled Alan & Dawn: Reality Check. The financial figures and situations used herein are the actual ones faced by Alan & Dawn. They are an awesome couple making a determined effort to change their financial behaviors in order to one day live financially independent.)

It’s been two months since Alan and Dawn started their journey towards financial freedom which involves them getting debt free. To do this they have made many hard decisions and have focused on getting their finances working for them instead of the other way around. Here’s how they are doing so far.

Original Budget: $6,080.00 income – $6,019.71 expenses = $60.29 Balance

Their original budget barely got them by each month and it didn’t account for expenses such as a portion of an upcoming property tax bill, the Les Schwab bill, a few other one-time miscellaneous expenses, and left nothing to put towards an emergency fund or debt reduction. Alan and Dawn wanted to get aggressive about paying off debt so we started cutting away at the fat (debt). Roughly one-fourth ($34,300) of their total debt and over one-third ($636.89) of their monthly minimum payments were tied up in two vehicle loans. There was nothing wrong with the vehicles other than the fact they couldn’t afford them and they were keeping Alan and Dawn’s monthly finances strapped down. So they took the huge step of downsizing their vehicle debt. Alan sold his late model BMW and Dawn’s ‘05 Dodge Caravan. This step alone dropped their monthly auto payments by $195.82, and also reduced their total debt from $128,500 to $116,400. That’s a debt reduction of $12,100 by making one good decision. It also allows them to get out of debt 45 MONTHS sooner and saves them almost $18,000 in interest payments!

New Budget: $5,230 income (not incl. bonuses) – $5,150.82 expenses and set asides = $79.18

They were also able to pay off the Les Scwab bill ($1,200) and fully fund their emergency fund ($1,000). These are huge steps in the right direction. Perhaps the biggest savings and testimony so far came only a few days ago. You see, Alan and Dawn had planned on sending their son to a private Christian school beginning in September that would have cost them $611 per month. This was $611 that they didn’t currently have and didn’t see coming in the foreseeable future. Dawn particularly sacrificed a lot when she agreed that they would have to put off the private schooling they had been planning for and enroll him into public school instead. About a week or so after making that decision they received a miraculous phone call. A relative who had been watching Alan and Dawn’s new financial commitments to getting out of debt and living the way God designed to them to live heard about the schooling change they had made. Motivated by the faithfulness of Alan and Dawn, this relative decided to pay for their son AND another one of their children’s private education…100% w/out repayment! Hello!

You won’t be able to convince Alan or Dawn that God doesn’t honor people who follow His principles. They could have tried to force the issue, but instead they made a decision based on God’s principles and then let God be God. Too often this is the reason that people do not experience God’s hand in their financial life. They want or need something so bad but instead of allowing God to work His way, they try to make something happen on their own and end up with less than what God could have done. Way to go Alan and Dawn, you guys are doing awesome. Your testimony is already impacting people and God is going to use you and your story to affect many others!