13 Feb 12 Money Makeover: Monkey on their backs

Helen has a pet name for a bank loan dogging her family for the past few years.

“I like to call it the ‘orangutan,” says the 31-year-old mother of a four-year-old child from a previous relationship.

Helen and Braden’s finances:

Braden: $36,601 ($2,286 net a month)

Helen: $15,985 ($1,332 net a month)

Child support: $240 a month

Child Tax Benefit: $290 a month

Universal Child Benefit: $100 a month

Total monthly income: $4,248

Monthly expenses: $3,308 not including Helen’s work expenses that average about $1,000 a month

Bank loan: $10,597 at 11.5 per cent

Settled credit card debt: $688 at zero per cent

Visa: $450 to $500 ongoing balance at 19.99 per cent

Overdraft: $450 over every month

Mortgage: $205,594 at 3.89 per cent fixed

Total debts: $217,779

Braden Group RRSP: $28,818

Home assessed value: $240,000

Total assets: $268,818

The $10,000-plus loan isn’t the only debt monkey on her and her partner Braden’s back. She still owes $688 in credit-card debt from a past relationship.

“My winner ex-husband went on a shopping spree before I could cancel this card,” she says. Fortunately, Helen contacted her creditor, explained the situation and now pays zero interest on the debt.

Although the couple have been slowly making progress eliminating both debts, they’ve also been living off a Visa card — always near its $500 limit — and overdraft on their bank accounts.

The couple also own a home worth about $240,000, on which they owe $205,000. Braden, 28, earns about $36,000 a year working for a telecom firm. He also has about $28,000 in a group RRSP and $75,000 in life insurance.

Helen earns about $15,000 a year running an ‘adult’ version of Tupperware parties. She has no savings and has been denied life insurance coverage because she was deemed not healthy enough to qualify. She’s not ill — just a bit out of shape, she says.

Helen and Braden’s goals are to get the orangutan off their backs, to not run a deficit every other month and to build up savings for emergencies and the future.

It has been a tough grind so far, and they want no-holds-barred advice to improve their situation.

“I need to have somebody to tell me ‘Look. You’re sucking right now. This is how you fix it,’ ” she says.

Given all they’ve been through, Helen and Braden are doing very well, says certified financial planner Jan Fraser. they have a home and are very near to carrying no debt except for the mortgage.

“They’re slightly cash flow positive-based on their numbers,” says the adviser with Fraser and Partners in Winnipeg.

But after a closer examination of their financials, it’s fairly plain to see why they often struggle to stay out of deficit every month, Fraser says.

Even though the couple have a budget, it doesn’t include many items that arise over the course of the year and would put the books out of balance.

“I didn’t see anything for clothing,” Fraser says. “And I didn’t see anything in there for the little incidentals that just slay budgets when people are this close to the line.”

They also spend about $250 a month on entertainment. It’s not an outrageous figure, but it’s the most obvious place they could cut costs until the $688 credit-card debt is paid. At the moment, they’re paying $60 a month — double the minimum payment — on the debt. if they could slash monthly entertainment costs by $100, using the savings to make additional payments, the zero-interest debt would be paid off in five months instead of a year.

Afterward, they would have an additional $160 every month for household expenses or to pay down the orangutan bank loan even faster. right now, they pay $252 a month on the $10,000 loan, and it will be paid in full in about five years. if they increase payments by $160 a month, the orangutan will be gone in about two and a half years.

They would then have about $412 a month they could use for RRSPs, an RESP for their son and emergencies.

Yet until the debts are paid off, Braden and Helen are still vulnerable to financial shocks — like car and home repairs and other emergencies.

Fraser says they also need life insurance for Helen, even though she’s been turned down for coverage.

“There’s an insurance company in Canada that insures people who are uninsurable,” Fraser says. Coverage is deferred for two years and premiums are higher than normal coverage, but it’s worth the cost because they have a lot of debt, few assets and a young child.

Paying for insurance, however, isn’t affordable for them at the moment, she says.

They likely couldn’t cut costs enough to come up with a monthly premium payment, she says. The only way they could find additional money is to increase income — something they should consider even without the need to pay for insurance.

Braden will likely receive a wage increase almost every year, but that’s not an immediate fix.

That leaves it up to Helen to increase her income.

“Network marketing is a ‘go big or go home’ proposition,” Fraser says. “To be truthful, very few make much money, but they get to write off their expenses; they have fun and they get the skill development and the ability of caring for their kids.”

Helen earned $15,985 at her job in 2011 and paid no income tax after deductions.

But she works about 30 hours of prep time a week and then attends 10 to 15 parties in a good month. A good party lasts about five hours. On average, Helen is earning $8.30 an hour — based on a 40-hour week — compared to minimum wage at $10 an hour. furthermore, the expenses she incurs on the job, which aren’t reimbursed by her ‘employer,’ are a big reason why they have trouble making ends meet every month. their monthly expenses without her job are about $3,300, and their income is about $4,248 a month.

But her work expenses — including businesses lunches, car repairs and gasoline — can be anywhere from a few hundred dollars in a slow month to close to $2,000 in a busy month.

On a positive note, network sales have given Helen great sales experience. but unless she can double her sales in her current occupation, they will continue to struggle with household finances and debts.

“Helen might be able to find another sales position where she’s using the same skills and deriving the same pleasure from interaction, and yet she’d be making significantly higher income from it,” Fraser says.

According to the Manitoba Job Futures website, a retail salesperson earns on average about $31,700 a year. if Helen could earn $25,000 a year, she would take home about $7,000 more a year after taxes — not including most taxable deductions and non-refundable tax credits — than she earned last year.

That’s about $590 a month more cash flow. with that, they could pay off all their consumer debts in about two years and pay for Helen’s life insurance. in a very short time they would be well on their way to saving for the future.

For Helen, giving up a business she’s built isn’t an easy choice, Fraser says. but for her family’s sake, she needs to weigh the pros and cons of running a business that earns very little money versus finding full-time employment in a similar line of work that could dramatically increase the family cash flow.

And it’s not a decision to be made alone, Fraser says.

“They really need to figure out what they value most in life — what’s most important — and that would give them a lot of guidance in their current situation.”