House of plastic cards collapses for couple

Your Money

August 05, 2007|By Janet Kidd Stewart | Janet Kidd Stewart,Tribune Media Services

To maintain their lifestyle after a job loss, Ginny and Jim Kallioinen built a house of plastic cards. Now it's in danger of tumbling down.

While they are paying their bills on time, their overall debt, including first and second mortgages, has reached scary proportions, consuming nearly 70 percent of their total gross pay. That includes some debt for which they are only paying the interest, not principal.

Their story might ring true with a lot of other indebted couples. To fight inflation, the Federal Reserve has boosted short-term interest rates in recent years, and that raised rates on credit cards, home equity loans and adjustable home loans - squeezing people such as the Kallioinens, who live outside Orlando, Fla.

"We want to retire someday," Ginny, 55, wrote in requesting a Money Makeover. "However, at our ages and with the bills we have, we don't see that happening until we are at least 70."

Even that would be a dream at this point, according to an expert analysis of the couple's finances. All told, including housing debt, they owe $428,960. With assets of $465,702, including their vehicles, they eke out a positive net worth of slightly less than $37,000. And they're spending more than they're taking in, although a new job for Ginny will help on that front.

"Your numbers are quite serious," said Paula Hogan, founder of Hogan Financial Management, a Milwaukee wealth management firm. "You are almost at the edge of the cliff, and it is appropriate to take some action immediately. I don't think retirement is even on the horizon."

The couple have had negative cash flow for several years, and they will have to cut expenses or take on second jobs to turn that around.

Hogan said cutting back a little on spending and tweaking their retirement portfolio won't make a dent in their problems. Because of the precarious nature of the Kallioinens' financial picture, Hogan considered some drastic measures to help get them out of their predicament.

But first, she wanted to know what got them in trouble in the first place.

The simple answer: credit.

Married 16 years, the couple have been in a destructive spending cycle virtually the whole time. They filed for personal bankruptcy protection in 1994, vowing never to do so again.

But in 2001, Ginny left a $50,000-a-year job as an executive assistant after her boss left the firm, and her career path has been spotty since then.

To fill the gap in income, the couple began putting daily living expenses on credit cards. They refinanced their home three times in seven years, taking out cash each time. Then they added a game room to their home, and Jim, 57, bought a motorcycle. They also owe more than $67,000 on a truck loan and a car lease.

Ginny worked sporadically as an administrative assistant, then decided to pursue a license to sell real estate.

"That little venture wound up costing us $5,000, and it turned out that in order to be successful in real estate, you need about $25,000 to market yourself," she said. "Since we didn't have that amount of money to spend, I had to get another job. I have bounced from job to job and can't seem to find anything that is a good fit."

Recently, things started looking up on that front for Ginny.

She just accepted a full-time job as an administrative assistant with an engineering firm that pays nearly $30,000 a year. The small firm doesn't offer benefits, but she might be able to advance as the company grows.

She also has continued to dabble in real estate sales and should receive about a $3,500 commission payment soon.

Meanwhile, Jim has been a master electrician for a Florida hospital for more than two decades. With on-call pay, he'll make about $50,000 this year, but Hogan thinks that with his skills and experience, he could be earning more. Still, his benefits are good, and he has managed to put away $65,432 in retirement accounts, including employer matching funds.

"The big thing that jumps out here is their career potential," Hogan said.

Both spouses are healthy and educated and should be able to bring in decent salaries, she said. "Your major financial asset is your career, and not having that lie fallow is one of the most important things you need to do."

Even with the regular paycheck coming in from Ginny's new job, it won't be enough to turn the debt ship around, Hogan said.

The couple needs to start dealing with all their debt before - not after - they get behind on payments, she said.

First, they should consolidate their two home mortgages into a single, 30-year fixed rate loan, Hogan said. With their strong credit rating and payment history, she said she believes they might qualify for a 7 percent rate, even with their high debt level.

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