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Struggling with less

The Baltimore Sun

Layoffs and subsequent lower-paying jobs have taken a toll on Terri and Kevin Beirne of Orlando, Fla.

Four years ago, they both were laid off briefly within a few weeks of each other. They missed fewer than a month of paychecks, but their income took a big hit.

Her new job with another employer paid just 5 cents more per hour than what she would have received in unemployment benefits. His pay has progressively returned to his old rate, but several jobs later she makes about $8,300 less per year than she did before the layoff.

Now the couple has $16,791 in credit-card debt and combined car payments that nearly equal their $800 mortgage bill each month.

All told, their net worth, $70,969, is just a little more than one year's income for the couple, not a healthy number considering that he is just six years away from traditional retirement age.

"Because of the layoffs and some bad choices, we have huge debt," Terri Beirne wrote in a letter requesting a Money Makeover. "I feel like we are living on the edge. If either one of us becomes incapacitated, it will be financially devastating."

Like a lot of couples, they found it difficult to cut living expenses when their income fell, and they took refuge in credit cards. Then they compounded the problem last year by taking on two new cars with six-year loans, justifying the expense by reasoning that they both need reliable transportation for their commutes.

"I knew [the car purchase] was a bad deal walking out of the dealership," she said. But her 33-mile work and school commute convinced her to make the deal. She's an apprentice who is training to be a mechanic in the engineering department of a large company. When she finishes training in two years, she expects a 40 percent bump in pay.

In the meantime, the car purchases are the "elephant in the living room" of the couple's finances, said Phil Dyer, a financial planner with Dyer Financial Advisory in Towson, Md.

"The cars are depreciating faster than they are paying them off, so it's unlikely they'd be able to sell them for more than the loan amounts," he said.

Although their house payment as a percentage of this year's projected income is comfortably below the recommended 28 percent (it is under 15 percent), their other debt throws them into uncomfortable territory. After figuring in the two car payments and the amounts they have been paying on the credit-card bills, the couple's total debt service accounts for 40 percent of gross pay.

Even if they made minimum payments on their credit cards, the amount would account for just under 36 percent of gross pay, too high to make a budget work long term, Dyer said.

And those figures assume they each continue to work 40 hours per week the rest of this year to gross $64,800. Both are hourly workers, and Kevin Beirne, a production manager who builds displays for conventions and other events, said he sometimes sees work slow down in the final quarter of the year. She has more opportunities for picking up overtime hours, though her school schedule limits how much she can take on.

That means the couple is going to have to cut spending, work additional hours for the next couple of years until she graduates to a higher-paying job or both, said Dyer, who also serves as deputy director of financial education for the Military Officers Association of America.

"I realize you have already cut most extra spending, and that your financial problems are related more to dual job loss than financial irresponsibility, but redouble your efforts to find any extra money you can. Even $50 to $75 per month can be critical at this juncture," Dyer said.

"Review each and every expenditure and think about small things, like packing a lunch to work rather than buying one, avoiding expensive treats such as gourmet coffee and even switching to 2-liter bottles of soda instead of using cans or smaller bottles. While none of the individual savings will make or break you, sweating the little things can make a big difference."

The budget doesn't include much wiggle room for hobbies, such as Kevin Beirne's love of fixing up old cars. And for the past year, she's had extensive dental work, a portion of which isn't covered by insurance. Those expenses are mostly behind her, she said, but even small unexpected costs in the next couple of years would wreak havoc on their plan.

Seeking to help them get a handle on the task ahead, Dyer had the couple answer a series of questions about their life goals, their feelings about debt and their financial desires.

The exercise revealed her strong fears about the damage another financial setback would cause. It also sparked a discussion of the age difference between the two and how that complicates priorities.

He is healthy and has no plans to retire soon. That's good, because he has saved very little for retirement, has no company-paid retirement benefits and will have to rely mostly on Social Security. His retirement will have to take a back seat to the debt problem if the couple stands any chance of getting back on track, Dyer said.

The good news is that she, at 45, will have quite a few working years left after the retirement of her husband, now 59. That means she can help supplement Social Security.

But for now, the couple needs to pay down the bills and give her a sense that she is stepping away from the edge.

Rather than haphazardly making credit payments month to month, Dyer recommended paying the minimum due on each, with the exception of their lowest-balance card.

This also happens to be their card with the highest interest payment, so putting every available dollar toward that card, which has a $1,350 balance, will knock it down quickly. That will be psychologically important for the couple, Dyer said.

Once that card is paid off, they can move to the next-lowest balance, which carries their next-highest interest rate, he said, instructing them to move through the cards until all that remains is the mortgage.

Next, the couple needs to boost their term life insurance coverage from a combined $125,000 face value to at least $425,000. This would help a surviving spouse retire the couple's outstanding debts if the other died, Dyer said.

He urged the couple to draft wills and health care directives and explore benefits at work such as flexible health-spending accounts to save money.

They also should reallocate their existing retirement money, he said. The bulk of her individual retirement account is in a money market mutual fund.

Finally, once the consumer debt is paid off and she is earning more, the couple should redouble efforts to sock away as much as possible toward an emergency fund and those retirement accounts, he said.

With a plan in hand, the couple said they are feeling better about their situation.

"We were really floundering around, just trying to pay what we could here and there on those cards," she said. "Now I feel good about what we're doing."

yourmoney@tribune.com

Janet Kidd Stewart writes for Tribune Media Services.

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