Personal Finance Case Study: Tools to Prepare for the Unexpected
Photo by Pixabay via Pexels
Do you regularly have unexpected expenses crop up that make your family budget go awry? Here's a client case study that might give you tools for your personal finance toolbox.
Dreams vs Emergencies
Occasionally I'll share real client case studies in the hopes that these challenges might be relevant for you, dear reader. In all instances, I've changed names and some identifying characteristics but the essence of the situation has remained the same.
Meet "Darren" and "Emily". When we first met, Emily told me the family was very interested in moving out of their rented two-flat, and buying a single family home. But they didn't seem to be able to save for the down payment even though they both agreed this was their main goal.
Darren and Emily both worked in helping professions, noble work but also work that isn’t known for being well-paid. Fortunately Emily's job came with a pension that would provide much of their income needs in retirement. They were keeping afloat financially but were mainly living paycheck to paycheck. And, they had dreams of buying their own single family home large enough to accommodate their blended family of 6. They were motivated to do almost anything necessary to buy a home, and came to me looking for help figuring out how to do it.
Unexpected Expenses Getting In the Way
They both were very aware of their bank account balances, and weren't generally spending more than they made. They each had their own systems of budgeting to keep them on track week to week until the next paycheck.
The problem was that they had no ability to cover any unexpected expenses or emergencies. Each time an out-of-the-ordinary expense arose, they had a miniature crisis on their hands, which caused strife between the two of them and anxiety waiting for the next surprise.
For example, their car needed new tires and brakes, and because they had no extra savings, they put the expense on their credit card, anticipating that they would pay it down in 3 or 4 months, even with the 24% interest rate.
But then they got their income tax returns done only to find out they owed more in taxes than they expected, so now they had a debt to the government to pay on top of the credit card bill. This type of problem kept arising every few months, making it nearly impossible for them to become debt-free, much less save for retirement.
Darren and Emily Aren’t Alone
My recent clients aren’t alone in their challenges. According to the National Financial Educators Council, which aggregated data from several recent financial literacy surveys, 55% of Americans can’t come up with $1,000 for an emergency. 60% of Americans are saving $0 toward retirement. And 55% of Americans have credit card debt that isn’t paid off in full at the end of the month.
Action Plan: Budgeting and Rainy Day Savings
I worked with Emily and Darren to help them establish a budget for regular spending. We looked at their current spending, and they realized they frequently ate out during the week, triggered by either parent coming home hungry after a long day at work, and no meal plan ready for dinner. But where to eat? With several picky eaters among the children, they sometimes got take-out from two different restaurants for just one meal. With a family of 6, even a trip to McDonalds or Chipotle cost over $100.
Darren and Emily decided to order a meal delivery service 3 days a week, just for the two of them. They agreed it would be easier to make kid-friendly meals with pantry items at home than find prepared meals all the kids would eat. And with their own meals taken care of, they had more time to prepare a quick kids' meal and saved money on food.
We also worked together to build up their bank savings account to protect against unexpected expenses. Both partners set up automatic bank account transfers to their savings account from every paycheck, so they don't need to think about saving each week. Both of them are good at not spending more than what's in their checking account, so removing the savings before they have a chance to spend it felt like a reasonable plan for them.
And, I showed them how much credit card interest they paid over a typical year. Their desire to buy a home acted as a motivator for them to work hard towards eliminating credit card debt because they would obviously prefer to put the money they spent on interest towards their future down payment. The savings account would help to prevent them from falling into more credit card debt.
Income: the Other Side of the Cashflow Equation
Finally, we talked about the other side of the cashflow equation: income. Darren decided to do research on typical salaries for his level of experience within his industry, and was able to successfully negotiate for a raise at his next review.
These changes helped my clients feel empowered and informed about their finances, and most importantly, they felt hopeful that their dreams could become a reality one day.
Tips for your Personal Finance Toolbox
Establish a budget. Examine where you spend money today that doesn't align with your goals. Make a change.
Build up a Rainy Day Fund to protect you from unexpected expenses. It may not accumulate quickly, but setting up automatic savings over time is a great path.
Review your credit cards or any other loans to calculate how much you pay in interest over a year. Imagine what else that money could be allocated towards, if you didn't have the debt! Make an extra payment each pay period instead of only once a month.
What action might you be able to take today, to improve your financial situation? What’s holding you back from taking that action? Consider how hopeful you might feel after making one change to improve your personal financial situation today.