Raising your Debt Cieling

Raising your Debt Cieling

Today we are having a Toy Story marathon. Everybody has been sick and grumpy the last few days, with a wonderful break between the fevers and the hoarse coughing. and on to today's topic...Debt!

What do you do when your income drops unexpectedly? Lets just say you belong to a 2 income household and you lose one. Hypathetically. What is your first reaction?
Are you a spender, or a saver? Do you have reserves? Credit cards? Other sources of income? What should you cut first?

Let's play out this scenario with a hypothetical family. Joe and Jane Spenderson are dual breadwinners. they have 1 child. Mom and dad live with them too, as well as great grandma. They live in a large home on the coast of California. The kids are enrolled in private school as well as several activities. Great grandma requires full time care. Mom and dad pay a small rent to live in the "in-laws quarters" behind the house.
Jane loses her job.
Jon says not to worry, they have plenty in the bank. They continue their lifestyle with no changes, other than Jane is now at home full time, coordinating the maid service and meal deliveries. The months tick by, their savings is gone, their credit cards are maxed out.
At this point, they open a second mortgage on their home. Now flush with new cash, the whole family goes on a Cruise to relieve their stress. Their son takes on another activity and mom is just tired of it all and starts spending her time at the spa.
The funds run out again.
They dip into granny's Health Savings Account.
The funds run out again.
Jon drains out Juniors college funds.
The funds run out again.
You see where I am going with this?
The family is now hugely in debt, there are no college funds, there is nothing to provide for granny, or mom and dad for that matter, their house is underwater.
At this point they decide to hold a family meeting.
Jon announces that there needs to be some changes, and that the family is welcome to submit their ideas. An argument ensues, in which everybody holds on dearly to the things that matter most to them. Junior wants to stay in private school as well as hockey, football and fencing, Jane wants to continue at the spa. Jon likes his beamer. Mom and dad like their current rent rate. Granny needs her private nurse. After hours of arguing their new plan looks like this:
Jon will pull out a third mortgage on the property, Mom and dad will pay double the rent, granny's pills will be rationed and the family can't afford to buy groceries anymore so they will just eat out.

Hmmmm.....

Let's revisit this scenario, replacing the previous family with the Frugalsons.
Ben and Beth are dual breadwinners, They have 3 children. Mom and dad rent the apartment over the garage and great-grandpa lives with them.
Beth looses her job, their income is reduced by half.
Ben immediately holds a family meeting. Everybody agrees to cut back. Ben will carpool and take his lunch to work, Beth will take over helping granny out, Mom and Dad will pitch in a bit more rent and the kids will drop one activity each.
Time goes on and their savings slowly dwindles.
They dip into their vacation savings and replace the bills with IOU's.
Still they are not making it.
Ben feels bad for all the sacrifices his family made and takes out a credit card. Debt creeps in.
When that card is maxed out, they have another meeting.
First, the family agrees to tear up the vacation IOU's, it was imaginary debt anyway. Beth will start selling extra things around the house on e-bay. Ben will take on extra hours. Mom and dad have their eyes on an investment property next door, and ask to stop paying rent in order to invest in it, in return they will give a portion of the income to the family. The kids agree to help keep up the yard work on both houses.
The months pass, the debt is slowly eliminated. The neighboring property is bringing in a healthy rent and Mom and Dad are able to increase the amount they were paying in rent by 25% The kids found great satisfaction in doing the yard work and have branched out to mow several neighborhood lawns. They are now adding to their college funds. Ben got a promotion at work, Beth was able to hire on a home health nurse part time to give herself a bit of a break. The family took a small vacation that year and ended with a small surplus in their family fund.

Think on this awhile, we will analyze it later, as the movie has ended and my kiddos are hungry for dinner.