Overspending on a six-digit income

Helen and Ray Newland don't look like big spenders. The Brea couple lives in a modest, 1,800-square-foot home built in the 1950s. Helen drives a dusty, decade-old minivan, and Ray's Hawaiian shirts have seen better days. Their two children get hand-me-down clothes from the neighbors.

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.

If the Newlands had a financial plan in place, they could have weighed the consequences and assessed the trade-offs before making such a decision, Fernandez said.

"You may not need a planner," Fernandez says. "But you've got to have a financial plan."

She recommends that the Newlands pay the minimum amount on their credit card debt but forget about paying it all off immediately because it's at a fairly low interest rate. The same goes for Ray's student loan, which carries only a 3% rate.

Fernandez implored the Newlands not to refinance again and leave their mortgages alone.

Instead, they should focus on cutting expenses to save for their children's college, stashing away three to six months of their combined salary for emergencies and increasing their insurance.

Fernandez warns the Newlands that college costs are spiraling upward at about 6% annually, double the rate of inflation. To pay for just half of both their children's college tuition, the Newlands would need to find an additional $640 a month in their budget.

She also recommends that Ray buy a $250,000 life insurance policy to complement the $300,000 one he has through work — which will give him coverage even if he changes jobs or is laid off. She also advises that they buy an umbrella insurance policy to cover Helen's liability when she shuttles other kids in her van.

One bright spot: The couple have socked away $380,000 for retirement, mostly by contributing to company-matched 401(k) savings plans, and are on track to accrue nearly $2 million by the time Ray reaches retirement (presuming that he continues working and contributing through age 65). That's a nice nest egg, Fernandez says, and will be even nicer if they can pare down their debt.

The Newlands insist they are doing so. They've nixed the $130-a-month housekeeper, traded in Mary Kay for Oil of Olay and dine in on breakfast burritos and hot corned beef sandwiches that Helen makes. They've shaved expenses by about $1,300 a month. But Fernandez says they need to penny-pinch even more. To cover college savings, create an emergency fund and add insurance, they'll need an additional $1,000 a month.

How will they come up with the cash? Taking care of the kids is a priority, so Helen doesn't want to work full time for seven more years. But she believes that she can take on a few more bookkeeping clients and still pick up the kids after school. Recently she added $300 to her monthly income. And Ray's hard work just earned him a 3% raise.

Another money-saving idea: Fernandez recommends Ray use a stock purchase program at work to fund their church donations. Currently Ray sets aside 1% of his income to purchase his company's stock at roughly a 15% discount. Fernandez says the couple could donate the stock certificates to the church to reduce their out-of-pocket donations and get a tax write-off. She also advises signing up for a health savings account to cut medical costs.

Will the Newlands be able to curb their unconscious spending and stay the course?

"We're not going back on credit card debt," Helen says. "We're now actually thinking about where the money comes from and where it goes."

Do you need a money makeover? Each month the Sunday Business section gives readers a chance to have their financial situations sized up by professional advisors at no charge. To be considered, send an e-mail to makeover@ Include a brief description of your financial goals and a daytime phone number. Information you send us will be shared with others. You can also send a letter to Makeover, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012.



This month's makeover

Subject: Helen and Ray Newland

After-tax combined income: $99,000

Goal: Get out of debt and save for kids' college education without Helen needing to return to full-time work.

Assets: $660,000 home; $370,000 in two 401(k) accounts invested in stock mutual funds; $10,000 IRA account

Liabilities: $213,000 first mortgage; $92,000 second mortgage; $45,000 student loan; $26,000 in credit card debt that was recently reduced to $16,000

Recommendations: Don't refinance home again to pay down credit card debt; cut expenses and begin saving immediately for children's college tuition and an emergency fund. Boost life and auto insurance; create a will and handle other estate planning issues; create and maintain a financial plan and budget to stay out of credit card debt.

About the planner: Delia Fernandez is a fee-only certified financial planner in Long Beach and owner of Fernandez Financial Advisory. She is a member of the National Assn. of Personal Financial Advisors and specializes in middle-class clients.