Monday, August 27, 2007

Not-so-expert Expert Advice

There's a "money make-over" story in today's Kansas City Star featuring a Lenexa family. No, I don't regularly read the Kansas City Star, but I do read Boston Gal's Open Wallet, where I found the link to the story. I found myself disagreeing with virtually every aspect of the "expert's" advice.

The Riesters have an annual income of $85,000 for themselves and their two pre-teen sons. They owe over $62,000 in credit card debt and are looking at school loans that will come due in another two years.

Initially, they followed Dave Ramsey's Debt Snowball plan. But, according to the article,"the snowball rolled slowly, the Riesters found. One weakness in plans such as Ramsey’s is that they often overlook the growing interest costs accumulating on the biggest balances at the end of the line."

Say what? If one is making minimum payments, there should be no "growing interest costs." Minimum payments on my credit cards pay all of the interest for that month plus a few dollars towards the principal. The balance goes down slowly, but it DOES go down. In fact, if one is paying only the minimum, that minimum also goes down, if only by a dollar or two.

So what exactly are the Riesters accumulating?

The answer may be in this statement: "For the Riesters, this combination of unplanned costs plus compounding interest on their unpaid balances swelled their $43,000 balance due to more than $62,000."

Why do I have the sneaking suspicion that it is the former rather than the latter than caused that $19,000 increase?

Then, the expert hired by the paper tells them to "use a significant part of their household savings and future increased income to build an emergency fund of at least $10,000 before ramping up future debt payments."

Keep in mind that they have already put aside the Dave Ramsey emergency fund of $1000. And that they have an unbudgeted $285 per month at their disposal to put toward debts.

I just don't get it. They will soon owe $45,000 in deferred school loans. But the financial expert thinks they can pay $62,000 in credit card debt in two years? On his plan?

The math makes no sense to me.

But then, neither does much of anything else in this article.


Unknown said...

I hope they like dog food in retirement.

Sorry, but I'd be telling the kiddos to remember fondly all the nice vacations, nice clothes, dinners at restaurants, and cars over the years.

Because that was their college fund. Pick a high paying career if you plan to go because you're paying for it.

Engineering My Finances (EMF) said...

Here's the root cause. From the article.
Their children, Noah Madmon, 10, and Jacob Riester, 2, 'would need something, and I would use my credit card,' Stacy said. 'I'm a mom.'

Somehow my stay-at-home mom managed to feed and clothe 5 children without resorting to credit cards. Stacy's a mom, but is she an adult?

Grace. said...

$19,000 just for what the kids wanted? They are 10 and 2!

I think this family has bigger problems ahead.

mariam said...

Ouch, ouch!

I really hope that they don't make it as bad as it sounds with the "I'm a mom" bit. But Grace is right, $19k for 10 and 2 year olds? What concerns me is what kind of financial values the kids will grow up with...

SavingDiva said...

I don't understand how someone can get over $60k in debt and not flip out...I would have cut up my cards a long time ago...and my little boys would be working paper routes for the $19k of stuff they need!