Line of Credit Debt Case Study

by | Apr 17, 2020

It’s time for another financial planning case study, drawn from real life work with our clients here at Spring, but smudged and blended artistically to keep you from recognizing your next-door neighbour with line of credit debt. 

As always, these case studies are meant to illustrate the value of client-centred financial planning, designed around the unique personal values and life story of each person we work with. Remember: the solutions articulated below were designed for the client, and while you may see yourself in some of the details, these are the recommendations that created success for them. You should seek professional advice before applying these solutions to your own situation.

In February, you met Troy and Annie, who worked on their cash flow with Kathryn to renovate their debt. Then, you met Zoe, who worked with Sandi and Darryl to retire alone after losing her husband, Wash far too early. This month, meet Baby and Johnny.

Baby and Johnny in a Cash Flow Corner with Line of Credit Debt

Baby and Johnny were busy professionals with two young children and one big problem. They made good money, were saving for the future, and Baby was religiously tracking every penny they spent…but they weren’t making any progress on their line of credit debt. 

Baby was frustrated because her spreadsheet could tell her what they spent last month, but not what was going to happen this month…and the line of credit balance didn’t budge. 

Johnny was frustrated because he knew they weren’t making progress, so he would cut spending where he could until, unavoidable things like camp fees and new brakes would come up…and the line of credit didn’t budge.

When they heard about Spring from a friend, they were prepared to invest in a financial plan, thinking: If only we knew how much we needed to save for retirement, we would have the motivation to cut back on spending and finally get this debt paid off.

In their Discovery call with Sandi, however, she quickly uncovered that although they might benefit today from a long-term plan, they would get much more value from putting their frustrations with cash flow to bed for good before looking ahead to the future. 

Enter Kathryn Mandelcorn, Director of Cash Flow Strategies. At first, Baby and Johnny were skeptical about investing in a cash flow plan. Won’t spending thousands of dollars to get one-on-one coaching set us back instead of getting us ahead? 

Baby was worried that all of the data she had tracked in her spreadsheet would be thrown away in favour of a generic plan. Johnny was worried about spending the very little time they had after work and kids every day to learn a whole new system for managing their money. 

But after trying (and failing) to make progress on their own for so long, and hearing how Kathryn described the way other clients felt after the hard work with her was done, both Baby and Johnny felt that the time had come to risk getting help. 

First, What Do You (Really) Want?

Kathryn structures her cash flow meetings so that every participant gets an equal voice and the first question she wanted both Baby and Johnny to answer was: What do you want, really? 

The obvious answer was that they wanted to get their line of credit debt paid off, like, yesterday. But below the obvious answer were the deeper, real answers:  

Baby and Johnny wanted to spend money they already had on gifts. Baby wanted to go on vacations without coming home to a credit card bill. Johnny didn’t want to be surprised by new brakes, camp fees, or the vet bill. Neither of them wanted to fight over who got to buy a new book or go out with friends more in the last month.

And – plot twist – it turns out that Baby didn’t actually want to painstakingly track their spending every month and would be happy to have those hours to spend on something fun. 

After setting the intention of their work together, Kathryn started combing through their bank account statements and Baby’s spreadsheets to pull out their fixed monthly expenses. She explained that these regular obligations, like their mortgage, RESP contributions, phone plan, and subscriptions were the skeleton of their spending and savings plan: regular, predictable, and automatic. 

To this skeleton, Baby and Johnny added how much they wanted to spend monthly on regular things like groceries, eating out, babysitting, and beer. Finally, they added annual amounts for things like a nice vacation, clothes, regular car and home maintenance, camp and activity fees, and vet bills, along with the extra line of credit payments they would need to make to have it paid off in a year. 

Unsurprisingly, their income and expenses didn’t balance. 

Making Trade-Offs

Not to toot our own horn, but this is where Kathryn really shines. She gently walked Baby and Johnny through the long, difficult process of weighing what was really important to them:

  • getting that line of credit debt paid off
  • taking a vacation
  • preparing for the next car repair

and what wasn’t (at least not right now): 

  • anything more than just replacing outgrown clothes
  • landscaping the backyard this year
  • six subscriptions they’d either forgotten about or never used) until their plan balanced 

After this meeting, there was homework: Baby and Johnny needed to open one new chequing account and several new savings accounts. The chequing account they’d been using for everything was restricted to just income and fixed expenses. The new chequing account was for monthly spending only, and each savings account had a purpose: the car (gas and maintenance), the house, their clothes, the kids, and the pets. 

Kathryn calculated how much Baby and Johnny needed to transfer to each account with every paycheque to support the amount they were going to spend, and they set these transfers up to happen automatically. Last, they took a deep breath and set up an aggressive automatic payment to their line of credit.

Testing the Jump (and Falling Flat)

Finally, it was time for Baby and Johnny to put all their hard work with Kathryn into practice and live with their new spending and savings plan. 

Their first month didn’t go particularly well: Baby forgot that their annual CAA membership and Dropbox subscription were due that month (she had the data in her spreadsheet, but her spreadsheet couldn’t warn her) and took the money from their clothing account. Johnny realized he had forgotten to enroll the kids in March Break activities, and had to use all of the kids activity account and withdraw a bit from the line of credit. 

At their next meeting with Kathryn, they were discouraged, but this is also where Kathryn really shines. (In case you haven’t realized it yet, Kathryn just generally shines all the time and that’s why our entire team and every one of our clients loves her).

Kathryn helped them see that of course there were surprises in the first month! That’s why cash flow planning isn’t just building a spreadsheet, balancing the numbers, and sending clients on their way – otherwise the learning curve that everyone experiences feels more like a roadblock and it’s really easy to quit.

She reminded them that in the past they would have responded to this surprise with panic and stress, and that consciously adjusting future spending in a thoughtful and targeted way is exactly what their spending and savings plan was built for. 

Together, they incorporated those annual expenses into their plan, adjusted their clothing and activity allowance for the next two months to account for the withdrawals, and decided to skip eating out twice in the upcoming month to make a small extra payment on the line of credit debt and get the repayment plan back on track. 

Nobody Puts Baby (and Johnny) In a Corner

A year later, Baby and Johnny described the value they got from investing in a cash flow plan: 

Baby: Our line of credit balance finally started going down, and kept on going down until it got to zero. We haven’t withdrawn from it since that one time the first month of our plan!

Johnny: Baby and I have a Money Day Date every other week, and now we’re both reviewing how we did and planning together. I feel like I’m a full partner in this and that feels great.

Baby: Oh, and I haven’t touched my spreadsheet in months. That’s hours of time I’ve been happy to spend on literally anything else. Plus, we each have our own monthly allowance that we get to spend on anything we want, guilt free. I don’t get mad about Johnny getting to spend more money on books than I have on going out with my friends, because we each get the same amount and choose how to spend it. That’s huge. 

Johnny: We have money for our next car repair in the bank already, and can go on our vacation next month without keeping our fingers crossed against the car breaking down at the same time. I feel incredible about that.

The work Baby and Johnny did together, facilitated by Kathryn, reaped benefits beyond just the interest saved on their line of credit debt or the time Baby recovered when she stopped tracking their spending. When they take the next step with Spring and look at their long-term plan, they’ll know exactly what the life they’re comfortable with costs and how to adjust their spending to make room for more long-term savings if they need to. 

We’ve helped hundreds of clients like Baby and Johnny get themselves out of a spending corner and ready to plan for the rest of their lives. Please contact us if you have a corner you’d like help to get out of.

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