A family faces facts about income, costs

Tracy and Graham Benson sit in their cluttered but cozy Bloomington home on a sunny September afternoon with financial counselor Tara McCarthy. They are surrounded by piles of unpaid bills. Aside from the sounds of shuffling paper and the occasional sigh from Tracy or Graham, it is surprisingly quiet considering that four of the couple's six children are home.

But the tension is thick. Tracy is used to managing the day-to-day bills and Graham is lost. He's trying to catch up, but his questions clearly annoy Tracy, who is all too familiar with the depths of their debt.

McCarthy helps the couple organize their finances so they can figure out which bills they can pay and which they can't. Drop one of the financial balls they're juggling, and a bill will go to collections.

Finances weren't always so tight. Expenses grew along with family size while income shrank from two full-time paychecks to one. Tracy, who has been on bed rest with several pregnancies and is due Christmas Day with their seventh, does what she can: trying mortgage brokering from home and child care, but the part-time jobs pay a fraction of her former $35,000 salary.

The couple's expenses are significantly more than their $65,000 combined income. Over the last seven years, they've built up $32,000 in credit card debt and spent $100,000 in home equity. Their monthly shortfall is about $1,000.

McCarthy, who runs Financial Rehabilitation Inc. in Minneapolis, says credit that masks underlying financial problems for many Americans can't last forever. After tapping home equity and applying for new cards or asking for higher credit limits, "eventually you run out of credit and you default," she says. McCarthy sees many clients when their house of credit cards comes caving in. She helps them negotiate with creditors and stave off debt collection, a process she calls "highly messy, brutal, and mean."

In this initial meeting with the Bensons, everything is on the table, from the Lutheran school tuition for two children, to the few hours of family time Graham now gets. That is the first luxury to go.

Second job is recommended

McCarthy recommends that Graham get a second job and questions the $2,500 in tuition, which already is steeply discounted. Looking at the monthly budget, the tuition is unaffordable, McCarthy tells them. But Tracy feels strongly about keeping two of her children in the school where her eldest graduated last year.

McCarthy rarely tells people what to do. "People have to come to their own conclusions and understanding about what they can afford or not," she says later.

McCarthy has them fill out a cash flow, or "allocation schedule." She considers it to be an important visual display of how debt is "eating up their hard-earned paycheck." McCarthy does not include Tracy's small monthly earnings on the cash-flow worksheet. "Her income will be ceasing in December," McCarthy reasons. For now, Tracy can use that income to fill in the gaps for expenses like groceries and gas.

Among McCarthy's recommendations:

Manage their finances together. Money used to be a topic the couple discussed only in crisis. "He won't concern himself with money," Tracy has complained.

But that was before this meeting, which has been Graham's wake-up call. "I didn't really know we were in hot water to the degree that it turned [out] we were," he says later.

McCarthy suggests the two go over their cash flow with each paycheck. The worksheet will give them a visual representation of the money they have. No more blind spending on the credit card.

Up to now, the Bensons have managed money the way many Americans do -- paying whichever bill seemed most urgent at the time and hoping there would be enough to pay the next-urgent expense in line. McCarthy calls it the "financial skeet shooting" method.

With Tracy supervising, Graham fills in the blanks on their September budget worksheet, deciding what will be paid with each paycheck. After setting aside half the mortgage payment, paying the phone bill, and looking at what other bills needed attention, Tracy declares, "We have no money for food this month." For the time being, the Bensons would eat their cupboards clean, and payments due on medical bills, utilities and the $275 activity fees for both True and Ivy's band would have to wait.

Increase income. The family lives frugally and doesn't have gym memberships or latte habits. With next to nothing to cut from their already stretched budget, an increase in income is the only way for the Bensons to start paying down their debts.

Finding a second job falls on Graham. He'd considered one in the past. "But I was thinking we could use a portion of that money for entertainment or frivolities," he said later. "When it was stated as a necessity, the idea caught me off guard for a little while."

Negotiate payment schedules. The Bensons already have negotiated reduced tuition for True, 12, and Ivy, 10. But current cash flow doesn't allow for any payments. Last year, Tracy negotiated a payment schedule, paying half the tuition up front and paying the rest with their tax refund. McCarthy suggests putting off the entire tuition until spring.

She suggests that the couple expand the practice to other bills. For instance, Tracy could ask the band leader whether she can pay quarterly, or even monthly, and do the same with the hospitals and doctors.

This year's college tuition for 18-year-old Tasha was paid with a modest college fund started when she was small. Whatever the college fund doesn't cover, the family hopes to help pay, but McCarthy firmly points out they're in no position to help cover the costs.

Budget each paycheck. McCarthy explains why putting aside half their mortgage payment per paycheck is smart: Mortgages can eat up most of a person's paycheck, but one of Graham's won't even cover it. By paying twice a month, or at least setting aside half, cash flow is freed until his next payday.

Despite the cash crunch laid out on paper, "I don't have a sense of impending doom," Tracy says.

McCarthy often sees debt denial. "I'm not sure if they're buying into where they are financially. If people have access to credit, they feel they have this certain amount of time and then all of a sudden something magically is going to come in and take care of the debt."

Even so, the family remains optimistic. "This year is tight, and we do have tons of debt, but I think overall we have worked hard and enjoyed our kids," Tracy says.

Starting the road back

After the meeting with McCarthy, the Bensons get started immediately. Graham applies at FedEx and UPS. After a few weeks of nail-biting and bill juggling, FedEx hires him as a package handler at $11.52 an hour. With shifts Monday through Friday beginning shortly after dinner and lasting into the night, Graham is tired and rarely is home. "I miss the whole crazy crew when I'm away so much," he said. "But them's the breaks." He's taking home an additional $160 a week.

The day after Graham gets the job, Tracy and the kids are hit by a drunk driver. The family is OK, but shaken. As for the minivan? Totaled.

Tomorrow, we meet Holly Lesmeister, a 30-year-old graphic designer with large student loans and credit card debt who is determined to curb her spending so she can one day afford a home.

Kara McGuire • 612-673-7293 Read Kara's blog: www.startribune.com/kablog • kara@startribune.com