Case Study 1: January 2012 Update

We first met our case study about a month ago. Even though I have met up with them a couple times since then, I figured a monthly update would be sufficient to monitor their progress and their unique journey to a better financial future.

The following net worth summary is based on information that was accessible at our last meeting. You will notice that some numbers are unchanged as new information was not yet available.

January 2012

Assets
Chequing

1,996

Savings 1

127

Savings 2

1,200

Term deposit

16,149

RRSP 1

15,242

RRSP 2

30,849

Total

65,563

Liabilities
Credit Card 1

23,073

11.99% interest rate

Credit Card 2

5,292

21.99% interest rate

Credit Card 3

0

PAID OFF!

Credit Card 4

0

PAID OFF!

RSP Loan

19,240

13% interest rate

Credit Card 5

7,918

19.99% interest rate

Home Renovations

1,870

0% interest rate

Total

57,393

Net Worth

8,170

                  + 5,494

Month 1: Action items

  1. Cash only. No more credit cards or debit cards. No more credit cards; still required some debit transactions.
  2. I set up a budget for them. Yes, I know, most will hate this step, but we need to have an understanding of where the money is going and learn to curb the spending. Done!
  3. I want them to reduce their fixed expenses down to 42%. This will involve steps such as cutting out unused cable services, removing an unnecessary cell phone and paper billing (cell phone companies charge you money to send you a bill. Seriously?), and remove any unnecessary bank charges. Done! The toughest part for them was cutting down their cable services. We are working on alternative shows and/or channels that can supplement the change. Last thing I want is for them to be miserable! :)
  4. I want them to reduce their variable expenses down to 13%. This is going to be the interesting part. They will have $700 that will be used for groceries, transportation including gas and any transit passes, as well as all entertainment, clothing, haircuts, subscriptions or eating out with friends. This has been pretty good. With a month under their belt, they realize that they can use another $200 for discretionary spending, and we figured out where the money was going to come from.
  5. Change any credit cards with annual fees to cards without annual fees. Done!

Month 1: Goals

  1. Credit Card 3 will be paid off. Done!
  2. Additional payments, beyond the minimum payment, will be made to credit card 4. I want to systematically pay down their credit cards, starting with the ones carrying the highest interest rates. Done! With an additional paycheque this month, they were able to completely pay off credit card 4! Woot woot!
  3. Set up an ASP after opening an ING Savings account. This will serve as their emergency fund. Done! We are starting with a monthly contribution of $100 each to their accounts and will hopefully increase this once we have a better understanding of their cash flow.

With a month under their belt, they realized that the spending plan that I set up for them is pretty reasonable, but have negotiated an additional $200 for miscellaneous expenses. They are currently contributing $400 a month to an advisor to invest in mutual funds on their behalf. After a couple of discussions, I have (hopefully!) convinced them that their priority should be paying off their very expensive debt instead of investing in mutual funds for the time being. Once their consumer debt has been cleared, then we can start chatting about investing, with the primary goals of setting up a comfortable emergency fund and maximizing their TFSAs. So if they discontinue this $400 contribution to their RRSPs, they can use $200 towards their discretionary spending and use the other $200 towards paying down their debt.

It’s been a pretty good month overall! They’re working hard sticking to the spending plan I set up for them and they especially enjoy the credit card balances shrink to zero!

Month 2: Action items

  1. Their saving accounts are earning pennies (literally!) every month. The balances will be transferred to their ING savings accounts to earn 1.5% instead.
  2. They have noticed that there are service charges showing up on their bank statements and are unsure what they are. They will investigate these charges with their bank this month.
  3. They are going to call credit card companies 2 and 5 to see if they can get a reduction in the interest rate. This is a tough call for anyone to make, so it will be interesting to see what kind of response they will get.
  4. They have to cancel their current $400 contribution to their RRSPs in order to boost the amount of money they have in their spending plan as well as have some additional money to put towards their credit cards.
  5. They are currently contributing $100 each to their ING savings accounts. Based on this month’s cash flow, I would like to see this number increased a bit going forward.

Month 2: Goals

  1. Make additional payments towards Credit Card 5 beyond the minimum payment, and have it completely paid off by April.
  2. Have Credit Card 2 completely paid off by June.

The best part about this month’s goals is that they were their OWN goals. Pretty ambitious, but I know they can do it!

What do you think of their progress? What do you think about the action items and the suggestions I made for them? Are you in a similar situation? If so, have you made any steps towards fixing the problem? Do you think it would be easier to do if you had someone to keep you accountable?

Are you enjoying the case study and the update? Would you like to see more case studies on here?

Check out their story which continues here!

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