The Newlands look like misers, but their finances tell a different story. They had racked up $26,000 in credit card debt, despite household income of nearly $100,000 a year after taxes.
The easygoing couple — a wooden sign in their kitchen reads "Relax" — acknowledge they have spent mindlessly on pricey throw pillows, unwatched DVDs of NBC's sitcom "Friends" and a host of other forgettable items.
"We've squandered our money on a lot of frivolous junk," says Helen, 44, a former accountant.
Eating out has taken a big bite too. Until recently, the family could be found up to twice a day at the Red Lobster, Souplantation, McDonald's or other chain eateries. Their restaurant tab last year was about $8,600.
Of course, not all of their spending is indulgent. They give generously to their church, donating $3,600 annually. They also devote a lot of time and money to their children's sports, forking over $1,800 a year for team dues and equipment.
To help make ends meet, they've chipped away at the equity in their home, which over 14 years has more than tripled in value to $660,000. The Newlands have converted this asset to a spendable reservoir of money through a $50,000 home equity line of credit and a $92,000 second mortgage.
But Delia Fernandez, a fee-only certified financial planner in Los Alamitos, says the Newlands have been lulled into a false sense of security.
"A lot of consumers who have used their home like an ATM have been at a great party," she says. "But now it's time to take a look at their spending."
The Newlands want to get out of debt in a hurry. Aside from the credit card debt and mortgages, Ray has a $45,000 student loan from his days at UC Irvine. With the mortgage, credit and student loans, about 36% of their monthly income, or $3,500, goes toward servicing their debt.
"It's like a slap in the face," says Ray, 45, a risk management consultant. "We always thought we made plenty of money."
The Newlands know they need to buckle down. They recently cashed out $12,000 worth of stock investments to pay off some of their credit cards. Helen also converted one of her credit cards to a 6% interest rate for the life of the card, a vast improvement over the 18% rate she had been paying.
Fernandez says those are smart moves. But although the Newlands' debt is onerous, she's more worried about the couple's habitual overspending and their lack of financial planning.
"If you live up to a lifestyle, you generally don't go back down the curve," cautions Fernandez.
After their first child was born in 1996, Helen stopped working for three years before becoming a part-time bookkeeper. She no longer earned $40,000 a year, but the couple spent as if she did.
When their credit card debt surged to $14,000, the Newlands took out the home equity line to pay down the debt, polish off car loans and forge ahead with home improvements. Two years ago, they took out a second mortgage to wipe out the home equity loan and fund purchases including a home entertainment center and new plumbing. Meanwhile, their credit card debt swelled as they put vacations, Christmas gifts and property taxes on plastic.
Fernandez says the Newlands are like a lot of couples who fail to clamp down on spending after having kids and downsizing to one income.
But spending isn't their only problem, she says. They haven't put enough away for their kids' college expenses. They don't have any cash on hand to bail them out in an emergency. What's more, the Newlands haven't done any estate planning and don't have a will. The couple also lack clear financial goals and a financial plan.
The Newlands refinanced their home with a 15-year mortgage, saving them from hefty house payments in their retirement years. But they failed to consider that this would jack up their monthly payments substantially, squeezing their cash flow and making it tough for them to pay down other debts.