A Timely Case Study In Financial Planning

by: Eric Parnell, CFA

I recently encountered the following financial planning situation. It is a most challenging case study, so I thought it worthwhile to take to Seeking Alpha to see what others believed might be the best way to handle this scenario. I am interested in your perspectives after reading through the challenge.

The situation deals with a husband and wife. They have been together for a long time and they need for financial planning help, as they are currently on an unsustainable path with spending that is well beyond their means and debts that keep piling up each and every year. For example, last year they made roughly $270,000 as a couple, but they spent $380,000. This behavior over the last few years has caused their household debt to more than double to $1.6 million, which is a staggering total given the amount of their annual take home pay.

The couple has shown the ability to embrace spending discipline in the past - a decade ago they had done a good job of working together to clean up their finances and had actually reached the point where they had some money left over for savings after paying all of their bills. But some tough times over the last decade caused both the husband and wife to lose their budgetary discipline. And it's not necessarily clear whether both sides fully recognize that they even have a problem today. This fact alone may make it even more challenging for the couple to work together to solve their financial problems any time soon.

Before going any further, it is important to note a few key points about the couple's relationship. They don't get along very well, and their relationship has been particularly contentious in recent years. But splitting up is definitely not an option, as they have to stay together for their kids. In addition, the husband and wife have taken turns managing the finances over the years with mixed results at best. At present, the husband is in control of the household books.

In delving deeper into this case study, we'll begin by focusing on the wife. For the purpose of discussion, let's call her Reba. She has traditionally been the more spending conscious of the two. But when she was managing the family books several years ago, Reba fell into some bad spending habits of her own. This along with the fact that they hit a particularly rough financial patch on her watch a few years back is a big part of the reason why she is no longer managing the household budget today. In the years since, Reba seems to have returned to her thrifty ways and is now pushing particularly hard to get their spending under control.

The husband - let's call him Dennis - is far less interested in doing anything about spending. In fact, he recently told his wife he doesn't even think that they have a spending problem, and they haven't even bothered to agree on a household budget in recent years. Instead, Dennis thinks they can solve their problem by trying to increase their income and hitting up a few of their kids for money who are now out of the house and doing well on their own. After all, he says, these kids wouldn't be as successful as they are today without the support they got all along the way from their parents, so its only fair that they pitch in to help out. Of course, it should be noted that some of these same well off kids actually added to the problem along the way, as the reckless actions of a select few a number of years back forced the parents to step in with a lot of financial support that contributed to putting Dennis and Reba in the spot they are today.

While not necessarily clear that Dennis and Reba have the ability or resources to come up with enough money to cover all of their extra spending even with the help of their well-to-do kids, it may prove tough to convince Dennis otherwise since he is still the one driving the financial decision making process, particularly since he remains the primary bread winner in the household with his contract recently being renewed at his job.

Highlighting the extent of the spending problem, the couple has been spending so much in recent years that they keep maxing out their credit cards. Dennis has called the credit card companies a few times already in recent years to have their credit lines increased, but each time the couple quickly runs up against these new limits. Just the other day, Dennis called up the credit card companies and demanded these limits be increased once again without question. Reba is interested to see how this approach works out for him, particularly as their credit scores keep getting worse with each passing year.

What about the kids and their needs? This is an important question, for it is on the kids that a good deal of the spending is made. Some of the children still live at home or have greater needs than others, while some as mentioned are now on their own but are leaned upon more to help out where they can. And whether right or wrong, it is the various demands of the kids at any given point in time that will drive the spending decisions made by the parents. Like some parents, one of the biggest problems that both the mother and father face in dealing with their kids is the ability to say "no" to all of their various needs and actually stick to it. Instead, both have found it far easier to cave in and say "yes", which has played a big part in leading them to the financial problems they face today. And once a child has been promised something, it can prove difficult to take it away.

Adding to the complications for this family is how the kids even learn about what their parents are doing in the first place. The parents have had the tendency over the years to do things behind closed doors and are not the most straightforward in communicating with their kids. To try and overcome this problem, the kids have long relied on their graying nanny to try and find out the information they need to know. The nanny - let's call her Medea - still to this day listens in on the couple and shares her thoughts with the kids about what the mother and father are doing at any given point in time, including their financial decisions. But Medea seems to like Dennis quite a bit more than she likes Reba. As a result, the kids typically hear things a bit more from Dennis's perspective than Reba's. While this has made it somewhat more challenging for Reba to get things done in dealing with the kids to fix their finances, she does have her dad - let's call him Reynard - that also lives with the family in the attic and often speaks out in her defense. Although a number of the kids complain that he's a crotchety old man that should be ignored, others actually tune out what Medea has to say and go to him instead to figure out what's going on with their parents. This has helped result in the kids having very different views about exactly what is going on and how things need to be fixed.

Another wrinkle to this whole situation is their uncle - let's call him Fred. While traditionally a quiet intellectual man who largely kept to himself, he has been throwing money around like it has been growing on trees in recent years. And every time it seems like Dennis and Reba are going to be forced to make some tough decisions to deal with their financial problems, he shows up with more money to help see them through. Fred's seemingly reckless behavior with his money cannot continue forever, however, and depending on how things play out he may actually need to take a good portion of this money back at some point, which will only make things more complicated for Dennis and Reba down the road. So the sooner they can try to fix their current problems, the better.

Looking ahead, an increasing number of the kids may need to rely on the support of their parents despite the increasing financial strain they are already under. Some of the other children, however, are becoming increasingly concerned about how much additional support they are going to need to provide to the rest of the family in the future. But given all of the debt that has already been racked up by this couple along with these future family needs, it seems clear that an increasingly heavy financial burden will be passed along to the kids and the grandchildren down the road. How much so remains to be seen.

All of this leads to the critical question. With spending in excess of income and a mountain of debt to deal with, who is right in this case - Reba or Dennis? And what should the couple do to begin working their way out of their financial predicament? What exactly are the real and sustainable answers to fix their problems? Given these vexing questions, I am interested in your perspectives.

This is an important case study for all of us to consider, for 51% of the American public just cast their vote stating Dennis still has the better plan to fix the problem, while 47% think Reba has it right. But given that we are all going to be left to deal with the results of these actions whether good or bad, the more that these problems begin to get sorted out today, the better we will all be in the long run.

This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.