No. of Recommendations: 7
Good Day All,

I will try to keep this as concise and to the point as possible however it is an emotional subject and one that has taken up the past few weeks worth of my free time. If you have some time, please read through and lend a hand. If you're strapped for time, bookmark this and come back, I would appreciate it. This WILL be a success story.

Background: Welcome to middle class America, NJ style. I myself am 22 years old, just graduated from college this past May, and have found myself immersed in the desire to learn more about personal finances, investing, and money in general. I have taken on a more conscientious approach to my own money management and have felt and seen the rewards already. This new knowledge led me to realize how poor of a situation my parents are in financially, and furthermore the effect this would have on the future of both my parents in retirement and my sister in her upcoming college years and beyond.

The law of the land has always been that Dad takes care of the money and whenever someone questioned that, the reply would be "Well you've always gotten what you've wanted haven't you? Then I don't see a problem." Now I will do everyone the favor of holding back my rant against my Dad. Lets just say that laziness pervades itself into every step of ones life. Rant over. Heckling and reminding him of all the mistakes he's made has no positive value in the upcoming challenge.

My parents (mainly my dad) have come to terms with the fact that I am learning about something that they never took the time to learn about and that I am a resource. It took a while but I have made some progress: I have almost 80% of my parents' financial information into Quicken. I have sat them down and shown them the graphs, charts, and In Your Face realities of their financial position. My mom didn't sleep well that night.

My Mom and Dad are 51 and 54, respectively. My Mom is starting her 30th year as an elementary school teacher. My Dad works in the Facilities Management department of a local medical school. They want to retire to Florida, where they plan to buy a home somewhere in the $200-230K range (***This is their mutual goal, and what I see as being the key motivator for their upcoming struggles which I plan to remind them about daily***). My sister graduates high school this year and plans to attend college out of state (doesn't seem possible). I am moving to the Virgin Islands come this October (nor does this seem possible, I can't wait!), and this is the main reason for my recent pushing of the subject with them. I want to leave knowing that they are on the right path.

I figure the best way to do this is to lay out as much of their financial picture, for you all to tinker with, as possible (aside from giving out their account numbers, very unFoolish). Like I said I don't have all of the information yet (my dad and I are planning to sit down tomorrow to get it ALL together). Here's what I have thus far:

Income
* $77,400 Combined Net Annual Salary ($6450/month)
* No other sources of income
Investments
* None
Retirement Estimates
* Dad: NJ PERS Pension. $30,718/year @ retirement age of 61 (2011)
* Mom: NJ TPAF Pension. $47,427/year @ retirement age of 58 (2011)
* SS: $2600/month
* No 401's, IRA's, Nothing.
Home
* $200,000 approx. market value
* 30 year mortgage (No data yet for this)

Debts: Credit Card

Card 01: $3,880 @ 23.99%
Card 02: $2,828 @ 25.9%
Card 03: $6,993 @ 24.99%
Card 04: $7,836 @ 19.99%
Card 05: $6,689 @ 24.99%
Card 06: $? @ ?
Card 07: $6,880 @ 14.99% (Revolving Credit Account)
Card 08: $? @ ?
Card 09: $4,685 @ 24.4%
Card 10: $? @ ?
Card 11: $962 @ 17.99%

Total: $40,755
On top of that there are a painful amount of finance charges, late fees, over limit fees, etc...

That's about the extent of what I know as of now, but either way it gives a rough overall picture.

Plan of Attack: New Jersey has a Pension Loan Program that I have recently discovered and I think it holds the key to tackling their debt. They are each allowed to borrow up to 1/2 of their total pension contributions, which is not to exceed $50K. Interest is fixed at 4% and the repayments are also fixed and deducted from their paycheck either on a monthly (Mom) or biweekly (Dad) schedule (not sure if it is pre or post tax, I am assuming post tax). Combined they can borrow $30,460 with the monthly combined repayments being $627. I see many advantages to this: No late fees due to automatic deduction. 4% as opposed to an average APR of 22.5%. Immediate payoff of $30K worth of debt and the subsequent interest savings. Improved credit rating (I hope). Learning to LBYM due to $627 less that comes in each month.

So this is what we are thinking:

1)Call the credit card companies and ask for a reduction in rates.
2)Take out the full $30K, pay off the highest rate cards with the $30K
3)Cut up said cards, close accounts.
4)Try to roll the remaining balances onto a lower rate card immediately
5)Learn to LBYM... probably the most difficult of all the tasks listed.

That is all we have so far in these beginning stages of our planning. There is so much more to consider and so many things that neither I, nor my parents are probably aware of (tax implications, paying for my sisters college, retirement costs, etc...); which is where you all come into play.

I have less than 1 month to get this plan organized and put into action. I won't be able to get on my dad about these things from the VI like I do while I am here at home, and I don't know if he has the discipline to maintain such a plan once it is implemented.

I've dedicated a large majority of my free time to this matter. I read the boards daily along with spending at least an hour a day learning about some aspect of finance that I did not know about the day before, usually this comes from The Fool or the IRS. I'm also providing my parents with all of the articles I read in hopes of educating them on the matter.

I understand that this was an incredibly long post, and if you've read this far I thank you. I have read the success stories from this particular board and I have this driving desire for this to be another one. Thanks for taking the time to read and respond.


-IslandFoolin (aka, Kyle)

"Give a boy a fish and you feed him for a day; Teach him to fish and you feed him forever."
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No. of Recommendations: 24
IslandFoolin, I think it's incredibly kind of you to want to help your parents out, and to put so much effort into it.

I would be very leery of paying off a large chunk of their debt *before* they learn to control their credit card spending. I realize you're not going to be around to help them with that in person, but hopefully you could provide emotional support long distance. I would be concerned that the $30K would go towards the debt, and that they would then run the cards back up again, or if those cards were closed, they might open new ones or just add to the ones that still have space on them.

Can you help them put a budget together, a payment plan, something like that? Get them a membership on the Fool? (I have faith in exposure to the Fool boards like I have faith in very few other things, I realize, but I truly think it helps a lot a lot a lot.) Have them run the snowball calculator, see how much they're going to be paying these cards. Have them figure out what something they charged two years ago has cost them, plus interest. Other people will come in with great suggestions, I know, I just really think you need to be careful about "doing away" with a big chunk of the debt at one time, before they're learned to LBTM and are both really committed to paying off the CC debt and saving for retirement.

Good luck!


--Booa
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No. of Recommendations: 14
"Give a boy a fish and you feed him for a day; Teach him to fish and you feed him forever."

To your aphorism I rejoinder with one of my own: "You can lead a horse to water but you cannot make it drink."

I think it's admirable that you're taking all this time to educate and enrich your parents -- sort of a Fool evangelist -- but are they going to listen? Are they motivated? Overspending and not LBYM and all the other things that we've embraced need to be internalized in your parents otherwise all the work you've done will be for naught. Imagine, if you will, that the work that you are performing akin to pushing a rope. Ain't gonna happen. :)

Too, you've given a 10,000 foot view of the overall financial situation but you haven't gone into detail on the income and expense situation. With parents that >< close to retirement, I'd be darn leery about doing ANYTHING to upset the pension applecart, even a secured loan with the pension as collateral.

If you have spent a long time on the Fool you know about the snowball. How much of your parents' income is devoted to servicing that consumer debt? How much can they snowball? It takes a surprisingly short amount of time to knock it down if you can begin LBYMing and paying it off in an accelerated fashion.

B-mod is probably not going to happen if you simply throw a huge chunk of cash at the debt and cut out the credit facilities. (All I'll say is "Been there, done that.")

All you've done is relieve the major symptoms, but the "disease" can still be there. And if your parents are seeing fixed incomes on their horizon this can be a much more valuable lesson to learn right now, that to live on a fraction of what they take in. It will stand them in good stead and they'll have the satisfaction of knowing that they did it themselves rather than having it done for them.

Hope I didn't come across too critical. It's a great idea, but I would counsel you to focus your energies towards other ways of attacking that $40,000 nut. Leave their pensions be.
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No. of Recommendations: 8
I agree with the other posters, don't touch the pension until your parents have proven that they can LBYM. Consider it as an option after they have LBYM'd for a year.

One thing you didn't mention in detail is your sister. Does she know about the finances? Are you helping her learn what she needs to know to earn her own money and manage it for school?

Make sure your parents and sister know that they have to fill out a FAFSA (www.fafsa.ed.gov) by the end of February in order for your sister to be eligible for financial aid. You might also help her look for grants and scholarships.

Also, it is a very good thing you are moving. More than once you mentioned nagging your parents. While that makes you feel powerful and superior to them, it is very destructive and has no positive value whatsoever. You need to address your anger and work it out in some other way than directing it to your parents. They will feel your anger and react to it rather than their problems and can make things a lot worse than they are.

Barbara
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No. of Recommendations: 19
Greetings, Kyle, the replies so far are excellent. I will just add a few comments of my own:

1) Congratulations on your burgeoning knowledge! It is going to serve you very well. However, it may or may not serve YOUR PARENTS. Exposure to new ways of handling money may take some time to sink in and while you are helping to open their eyes, they may not be willing nor able to adopt all the wonderful strategies you are finding FOR them. This is a similar situation to having become an ex-smoker, and now a rabid anti-smoker (completely valid). However, for anyone you are around who STILL SMOKES, your own fervor is not going to register as well as you may like. What if your parents don't adopt your advice? Will you still love them and accept them without being condescending toward them? You are learning fast that they are not perfect, nor do they possess the same level of skill that you now do regarding money management. It may be that your next lesson needs to be one of patience, forgiveness and acceptance that they may or may not ever accept your advice. If they do, how wonderful for all. If they don't...

2) I cannot emphasize enough that the only time to drop a pile of money onto existing debts and have it be a salve and not an accelerant is when new, better and permanent money management behaviors have confidently been practiced. Until your parents decide to make such LBYM changes on their own, they run the risk of doubling their debt this way.

3) No matter how much I thought I knew about money management, I was able to impart only a trace at a time (and my parents really do have good skills in reality). Specifically, I recall conversations with my mother about 20 years ago when I was in my 20s - she was not mathematically inclined like I was, and I recognized that "glazed-over" appearance. But the one thing she eventually took away from our discussions was that she was open to (and did) learn how to balance a checkbook. And that was the SINGLE SKILL she attained from all the hours of talk (lecture, probably!) I had with her about money management. Still, in her view, that was the most important thing TO HER to have learned, and what it did for her was to move her into another dimension of thinking about how to manage her own money. This single skill that she mastered was literally for her like learning to read and it opened her up to the world of budgeting - in her own way.

So I have already learned that there may be intrinsic limits on your parents' receptivity to your teaching, and that it is possible they will put the information you convey to work for them in ways you may not have anticipated (nor fully approve of!). Knowledge shared is a gift that, when freely given, provides all sorts of new vistas. Remember to offer what you are learning with humility and you will all be on the right track towards better (at least more informed) financial behavior.

In response to the last paragraph in your original post, you are ALREADY a success story! Your parents certainly have done right by you to have gotten you so open to, and capable of, self-education. You are poised to do right by them, on whatever terms they can accept what you offer, perfectly or imperfectly. Please come back here to share how it is going.

xraymd
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No. of Recommendations: 3
The only way to get a handle of debt repayment is to stop subsadizing your lifestyle with credit cards. Unless your parents have stopped using their credit cards, IMO a loan based on their pensions is a BAD idea because they're most likely to rack up the cc debt again, and apon retirment they'll be in even dire straights since they'll have that other loan effecting their pensions.
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Wow... I must say I did not expect to wake up this morning and find this many replies, I am thouroughly delighted.

The main theme throughout everyones replies seem to be "don't touch the pension." It is hard for me to read that because, as you all could tell, that was the backbone of the plan. But, I realize that people who have done this know better than the people that haven't (myself) so i'm taking heed. My worry is that this was also the gleaming ray of hope for my parents as well, and I don't know how receptive they will be to hearing me say don't do it, yet.

The worry is that they will fall back into or never get out of their habit of using credit cards. Relapse is a possibility with any "addiction" however my parents have already made changes to their spending habits (while not all are good changes), in terms of CC's, well before I became involved in helping them. All of the CC debt from above has been sitting on those cards for a long, long time. They no longer carry any of the cards with them. Everything is paid for through their ATM/Debit card. Everything except the CC bills that is. My dad got into the habit of paying off one debt by incurring another, perhaps we could call that the melting of the snowball. My mom never uses a credit card, shes no worry.

Now that they have a shared goal (the house in Florida) I can see that both of them are alot more serious (for lack of a better word) in changing the way they spend. My mom wants that house badly, I mean really really badly. She's been the shining star of LBYM all her life thanks to the way HER parents raised her. In the past couple of months she has spoken out against my dads spending like she never has before (and he's been receptive) and I think she will continue to be more of a support for this while I am gone.

So basically what I'm trying to get across is that due to the changes I have seen thus far from them, I have faith in them that they can change their habits for good. There is the risk that they will fall back into old habits, but that's a risk I think we're willing (or going to have) to take, but not blindly. With them now using Quicken (we sit down and use it about 3 times a week together) they have an early warning system that lets them know, "Hey, you're over your budget, get back on track", they've never had that before. We're setting up the beginnings of their budget today. And I have turned them onto the Fool, by printing out articles for them to read at dinner, and by emailing them links to certain areas or posts on the boards.

Also, it is a very good thing you are moving. More than once you mentioned nagging your parents. While that makes you feel powerful and superior to them, it is very destructive and has no positive value whatsoever. You need to address your anger and work it out in some other way than directing it to your parents. They will feel your anger and react to it rather than their problems and can make things a lot worse than they are.

I can where you are coming from with this, and really its just a lack of "knowing my parents". I am by no means lecturing them or nagging them and getting them upset. I know how to get what I want out of my parents, heck i've been doing it for 22 years its just that know it will benefit them, not me. Constantly getting on them about it is the only way, and its worked so far, and it will continue even when I move. Thats just how my family works.

My Sister: Typical 17 year old girl, heart of gold, hole in her pocket the size of Montana. She has been privy to all of what is going on with my parents, I make sure of that since they are still her source of income. Starting her first job soon, already knows she's putting away 10% of what she makes. I pay her $1 for every Fool article she reads with the understanding that she cannot spend that money, rather she has to put it towards something she has learned about. But man, it's tough getting a 17 year old girl's mind off of boys, cars, and clothes!!!

Back to the pension loan. I'm still going to heed all of your advice about teaching to LBYM, Proving to be able to LBYM, then taking the loan. But, and correct me if i'm wrong, wouldn't it be a bit "better" to not be accruing all of the interest and fees that come along with that $30K in debt (we're talking about $500 in fees from 3 cards in 1 month)? I mean they will still have about $10K to pay off even after the loan, so they start snowballing on that. *Also if someone could point me to the direction of some snowballing method articles/posts I'd be greatful*

Again I thank you for your replies, I hope to get many more. I'm going to sit down with my dad in a few to lay everything out and get this thing rolling. We'll see how they react to NOT taking out the pension loan.

-IslandFoolin

"Whether you think you can, or whether you think you can't, you're right"
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No. of Recommendations: 2
I would try to negotiate better rates on the credit cards, but "let" the parents work on paying them off rather than pay them off by transferring debt, which is a dangerous illusion. I think they will have more motivation to pay off credit cards than to save to replenish their retirement savings, and that will make up for any difference in interest.

Most people run their credit cards back up after a debt consolidation, even with the best of intentions. I did :( I think your parents need to really *feel* themselves digging out of the hole in order to have a change in attitude.

Best of luck. I recommend Dave Ramsey's Total Money Makeover for them to read. He's a very motivational speaker too, and can encourage them in their resolve to pay off the cc's and continue to live without them.
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No. of Recommendations: 4
<<The worry is that they will fall back into or never get out of their habit of using credit cards. Relapse is a possibility with any "addiction" however my parents have already made changes to their spending habits (while not all are good changes), in terms of CC's, well before I became involved in helping them. All of the CC debt from above has been sitting on those cards for a long, long time. They no longer carry any of the cards with them. Everything is paid for through their ATM/Debit card. Everything except the CC bills that is. My dad got into the habit of paying off one debt by incurring another, perhaps we could call that the melting of the snowball. My mom never uses a credit card, shes no worry.
>>


Congratulations on taking your own financial education in hand and, I presume, devloping some financial goals for your life.

I echo what others have said, though: it's generally a mistake for children to try to parent their parents.

From your comment above, it appears that your parents have already staunched the flow of excess spending. What I'd be worried about is that by showing them how they can tap their generous pensions, dad will decide he can start indulging his spending again.

Actually, I'd say they are in pretty good shape as is because of the generous pensions they will receive. The only hole in that is whether the pension amount is inflation indexed or not. Most private pensions are not, but a lot of government pensions are inflation indexed.



Seattle Pioneer
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Late fees can be avoided by placing the accounts on an automatic payment schedule.

Late payments will age out faster on open accounts than closed accounts. The one positive is that they are probably unable to obtain new credit. Are they going to need to plan for a replacement car in the near future? If they are it will be a shock to them, but they need to plan on paying cash for it.

I agree with the others, they need to learn to control credit before considering a consolidation loan. You did not explain how your sister's college expenses were going to be paid.

1.) They have greater than their income between pensions and social security. This is significant and makes up for the lack of other investments.

2.) They need a budget.

3.) To avoid late payments, setup all cards for automatic payments. If they do not have a budget, this could backfire because of overdrafts.

3.) When you call each credit card company, ask what it is required to be considered for rate reductions. It may take 6 months or more of on time payments.

4.) Determine which card has some available credit. Destroy all other cards and freeze the remaining on in grape juice. There maybe a reason that they will have to use a credit card, but it should not be easy.

5.) Explain the snowball calculator.

6.) Have them obtain at least one credit report. There maybe collection items that need to be dealt with before they will be able to obtain a new mortgage. It will also show if there are other accounts that they have not admitted.

7.) Do they have other credit such as medical or dental bills?

8.) Go to eloans website and use the mortgage calculators. Their monthly payments significantly reduce the amount of mortgage. Their FICO score will increase the interest rates or they may have to deal with a subprime lender.

Good luck, it will not be an easy change for them.

Debra



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Here is the application for the pension loan and includes all the details: http://www.state.nj.us/treasury/pensions/epbam/exhibits/pdf/cl0259.pdf
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No. of Recommendations: 9
Again I thank you for your replies, I hope to get many more. I'm going to sit down with my dad in a few to lay everything out and get this thing rolling. We'll see how they react to NOT taking out the pension loan.

Greetings, IslandFoolin, one way to preface this is to admit to your dad: "I was wrong about the pension loan being a good idea." Then explain the risks of proceeding that way - the risks of cannibalizing the pension are quite real. He is only 54 and could have another 40+ years to live!

Consider the high interest rates a "stupid" tax on his prior fiscal behavior (but don't tell him that!). That tax will go away once his behavior improves. The interest he will pay on his prior unfortunate financial choices is a pittance compared to the future he puts at risk by raiding the pension.

DON'T DO IT!! (Is that strong enough :-) ?)

Your parents will eventually be in far better shape once they jointly decide that their deficit spending must cease. Your family may "work" by pressuring one another (only you know best) but on the off-chance that you would yourself not respond well to a similar application of pressure - some may consider it bordering on manipulation or potentially disrespectful, from either parents to child or child to parents - perhaps the "continuing education" could best take place in the form of continued discussions about ways to go about living below one's means, as opposed to a sudden "solution" to their financial woes which may prove ephemeral and even destructive before they have mastered money management. Revolving debt as your father has done is not the same thing as stopping the outflow.

Read back on the board (or better yet, allow them to reach this inspiration for themselves) about the climbs people have made out of the debt pit. Invariably, the process is slow and initially uncomfortable but accelerates with the snowball approach and begins to become invigorating once small progress is sustained. I think it would be quite difficult to find posts by those who got suddenly out of debt (inheritance, lottery win, 401(k) raid, etc) who STAYED out of debt. The staying power comes from the practice of better habits, over time.

Did I mention not to touch the pension?

Great going for raising their consciousness! That's where it starts. And about your 17-year-old sister: not all of us who were once 17-year-old girls were necessarily clueless about financial management, nor consumed with pursuing boys, cars and clothes. I think you as her older brother may indeed be a good influence upon her, too, through demonstrating an alternative financial pathway to habitual spending. She may be quite receptive to sound financial management once she sees that she is achieving success.

xraymd

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One question I forgot to ask, excuse the obviousness of it or your answers:

What could go wrong with the pension?

I mean that in a curious way, not as a rebuttal, since I honestly do not know and it will be something that I will be asked by my parents.

Thanks,

IslandFOolin
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What could go wrong with the pension?

The most likely is that they have not changed their ways. They now have access to significantly more credit. Within a year they could have both the pension loan and the credit card debit again. A year is an average time for those who pay off debt with a "windfall" to again have credit card debt problems.

Their jobs sound stable but if either are laid off is the debt immediately due? They have no emergency fund to see them through.

Debra
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No. of Recommendations: 8
...Back to the pension loan... wouldn't it be a bit "better" to not be accruing all of the interest and fees...

On paper, yes. In real life, no. They have 7 years until retirement. If they can cut their spending and increase their payments so that their cc debt drops by $500/month, thay will go into retirement not only debt-free but also with better money-management skills.

The big question mark I see in your plan is their mortgage. Normally retirees use the equity in their old house to pay for a less expensive house and get some cash in the process. The extra cash is for an emergency fund, or for long-term health care insurance, for example. Your parents, on the other hand, are planning to buy a retirement home that is as expensive, or more expensive, than their current house. This raises questions:
1. How much equity do they have in their current house? If they are at the end of a 30-year mortgage, they might owe only $5k on their $200k house, and that would be good. If they recently did a cash-out refinance and spent the cash (maybe for your college?), then that's a different story.
2. Assuming they'll get a mortgage on their retirement home, how will they make the payments? From their pension income? Now we're back to the pension, which other posters have addressed.

I think it's fantastic that your parents are taking the time to take stock of their situation and plan for the future, and that you're taking the time to help. One thing I would suggest you add to your homework is to find them a fee-only financial advisor. One good starting point on that research is www.napfa.org.

DH & I are about your parents' age, and with 23-yr-old DD's college paid for, 17-yr-old DS's college coming up, retirement on the horizon, and elderly parents who might need help, we are facing some of the same issues your parents are facing. It can get complicated. Even though your financial knowledge is far superior to that of a lot of people your age, and even better than your parents', it's not quite enough to tackle all the angles. That's why I suggest they see an independent financial advisor.

...My dad got into the habit of paying off one debt by incurring another, perhaps we could call that the melting of the snowball. My mom never uses a credit card...She's been the shining star of LBYM all her life thanks to the way HER parents raised her. In the past couple of months she has spoken out against my dad's spending like she never has before...

Another reason you should set them up with someone else who can guide them, rather than providing all the guidance yourself. I realize they have a shared goal now, but the situation is not one of just numbers on paper. It's about different money management styles within a marriage, spouses' responsibilities to each other, parents' responsibilities to children, and all the historical and emotional baggage that each individual brings to the table.

Good luck.
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No. of Recommendations: 24
Please listen to xraymd and the others! I am not much younger than your parents, and I have to say that I'm finding your approach to this is naive at best and incredibly disrespectful at worst. I KNOW you think (with all the wisdom of your 22 years on the planet) that you have found The Way to Solve Mom and Dad's Financial Woes, but the plain fact of the matter is that this is not something you can do FOR them.

To answer your latest question, "what could go wrong with the pension?", how about the following:

1. If they have not solved the over-spending issues, they WILL end up with the credit cards charged back up and twice as much debt as they started with. I know you don't seem to think this is a big issue, but MOST people who "pay off" their debts via home equity loan or inheritance or pension loan DO end up charging the credit cards back up. Remember that all you know about their finances is what they tell you... are you absolutely positive you've got the whole story?

2. If they leave their jobs for whatever reason, the loan may well become due and payable at the time, and if they can't pay it they will owe taxes and penalties on the amount borrowed.

My DH and I are about the age of your parents, and we paid off almost FOUR TIMES the amount of debt you parents have, using good old LBYM and the snowball method. The thing that really made us go "ah-ha" was joining the www.cheapskatemonthly.com web site (disclaimer: it's a pay site, but I have no business affiliation with it) and working the calculators on the site and doing the "interactive money makeover" that talks about how to STOP USING DEBT AS A SOURCE OF INCOME.

The thing that you don't seem to understand is that the debt is not the problem. The debt is a SYMPTOM of the underlying problem, which is that they are not managing their money properly and are living beyond their means. Unless and until they get THAT problem solved (including funding an adequate emergency fund and providing for normal but irregular expenses), anything you talk them into doing will be a bandaid at best and a catastrophe at worst.

Repeat after me: "Mom and Dad, I was wrong about the pension loan..."
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Kyle,

P.S. Consider changing your profile if that's your real name. Your parents already went way beyond what most people would do by giving you as much information as they have. I doubt they would want it identifiably shared with strangers.
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Greetings, IslandFoolin, what could go wrong with the pension is that if the loan repayments were not handled properly, the amounts become taxable income and diminish the overall magnitude of the later pension availability. This is as serious a danger as is defaulting on a 401(k) loan and is generally strongly advised against. It does not appear that he has any insurance against a disabling injury - what if he were suddenly unable to work and had to live on a reduced pension because he has already raided it?

No amount of promises by your father can be enough to persuade either you OR HIM that he would not default until he practices proper fiscal management! He could start this in place - just by ceasing to spend above what he makes and by reorganizing his present indebtedness by getting himself right-side-up on his loans to pay off late fees and overlimit fees and check every few months on whether his interest rates can be reduced and whether he can balance transfer to other, more favorable terms.

In other words, the same kinds of get-out-of-debt, one-foot-in-front-of-the-other painstaking process that takes root and becomes a fundamental way of improving one's net worth.

Breaking into the pension is not a good idea at this stage, until other measures that he can take RIGHT NOW, IN PLACE have been implemented and can be trusted. Your father needs to ask himself what he has been spending his money on, and he needs to follow a budget with a set-aside for irregular expenses and emergencies. First and foremost, he needs to foreswear further use of credit.

Unless and until that happens, step by step, he is taking a very real risk with his only future security (given no IRA or other savings). Rather than trying to dip into the pension, why not work on what it takes to spend and save day in and day out, week in and week out, month in and month out - and perhaps instead discuss starting a Roth? Most of us here consider retirement monies sacrosanct and would not consider accessing them to finance past money mismanagement. That needs to be fixed in the here-and-now, with better approaches to income allotment, and not by putting future security in peril.

xraymd
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...My dad got into the habit of paying off one debt by incurring another, perhaps we could call that the melting of the snowball. My mom never uses a credit card...
===============================

Won't you be doing the same thing if you use the pension to pay off these debts? How does that change the overall picture and habits?

b
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I KNOW you think (with all the wisdom of your 22 years on the planet) that you have found The Way to Solve Mom and Dad's Financial Woes, but the plain fact of the matter is that this is not something you can do FOR them.

I took offense to this and maybe I shouldn't have... Perhaps I am coming off a little headstrong to everyone, including my family. I will be the first to agree with you that I don't know jack, even with all the wisdom i've gained during my 22 years here, which is why I am HERE, on the Fool, asking for help. My parents did not come to me for help, nor did they go to anyone else, and thats exactly why they are in the situation that they are in and will continue to be unless unless somebody does something. I would love for them to get a financial planner, im going to suggest it, push for it, but pride has stood in the way of this before, we'll see if thats changed any.

Bottom line... if I didnt speak up and start doing something about it, no one would have. They've given me so much in my lifetime I think its time to give back. I am not trying to solve their problems for them, rather im trying to get them to solve them for themselves, they just needed a little kick in the ass. Since I have they ARE coming to me asking for help, so what am I to do? Tell them I can't help? Or do my best to answer their questions then point them in a direction to get answers from people who know better than I. If I came off differently, I aplogize, like i mentioned in the first post this is very emotionally charged. Moving on...

So the pension plan is put aside for now. I am not advocating it to them and I am showing them why, thanks to all of you. Hopefully they will grasp the idea of LBYM. More to come I'm sure.


Kyle

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Greetings, Kyle, you are showing uncommon common sense in coming here and being receptive to any and all input that you receive. Use what you can, and leave the rest! Already everybody in your family is receiving a benefit from having started to really take a deep look at these issues. I think what message is being conveyed here is that nobody is 100% right about what they know and what they do - and that's as true for any of us as posters as it may be for you. Perhaps the biggest life lesson (one I know I am still learning every day) really is humility about what we have to offer. I think you are doing a marvelous job.

I also agree with Mary who suggests cloaking your identity a bit more in your profile, given that you have made disclosures about others' circumstances not your own. That now becomes your resposibility to safeguard.

Further, lots of pride is poised to fall before all is said and done! So I echo the notion that while you have started this process off very well, indeed an independent financial planner (perhaps a consultation with an attorney specializing in estate planning?) could add to the well of knowledge that you have begun to develop and could steer your parents in effective directions none of you presently knows more about. Like mlk58 said, perhaps there are certain financial disclosures your parents may not have made to you. I think it is akin to a physician (which I am) treating her own family member - I am not permitted to write prescriptions for family - and the analogy could hold here, too, as in a future potential conflict of interest given that you are in the direct line of any future estate distributions! And I say that knowing full well that that is in no way your intention and never has been. Just a further consideration to why a level of indirection where advice to your parents is concerned may be a very good idea.

You are clearly very earnest and clearly want to help your parents as fully as possible - and that is admirable. I think by launching the discussions you have planted a very important seed. I further think that by coming back and posting again, even when you may have initially taken offense, shows that you are receptive to all input. That is going to be a great trait! Good luck on your move to the Islands.

xraymd
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I would have them pull all three credit reports from each of the three bureaus. (I avoid the combined reports because it can be hard to tell what info is from which bureau and if one account is on 2 bureaus they will drop one record, but there could be small difference that might be important.)

Look for corrections to make, but most importantly this will show you if they are hiding anything, or if there are other past due accounts they have forgotten that might bite them later on.

Otherwise I think your plan sounds good.
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...cloaking your identity a bit more in your profile...

Done.
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...I would love for them to get a financial planner, im going to suggest it, push for it,...

Tomorrow: "Hi, Mom & Dad. Here's a list of fee-only financial advisors. By fee-only I mean they don't make a commission from selling you any particular investment, they get paid by the hour. So they might have some good ideas, and I think they'll be objective. How about you call 2 or 3 to interview. I'm thrilled to help out as much as I can, but these people do this stuff all the time for a living, so you'll get different advice and then you can weigh all your options."

In one week: "Hi, Mom & Dad. Done anything with the list? Didn't think so. Well, I made an appointment with X on Tuesday, and Y on Thursday, are these times OK? We'll just go in with some questions. Or you can go without me. My schedule's clear then, so I can go with you, or not, whatever you want. If you don't like X or Y, we'll find somebody else."

In two weeks: "Hi, Mom & Dad. What did you think of X and Y?"

Mary
(been there, can you tell?)
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Kyle, it is good that you wish to help your parents. I am not going to tell you anything new in this post that hasn't been mentioned in other posts, but they are among some things to consider.

I have less than 1 month to get this plan organized and put into action.

Consider, though, that this is your plan, not your parents' plan. Unless both of your parents whole-heartedly embrace the plan, it won't work, especially once you move to the Virgin Islands and thus won't be able to provide encouragement.

Encouragement? You are still your parents' child, and you will always be their child. Many parents have difficulty learning a new life from their children. That means that many parents to take anything more than a mild encouragement as both nagging and medling, especially if the nagging is over an area where they haven't asked for help.

As another poster wrote, "You can lead a horse to water, but you can't make it drink." However, you can salt the oats (maybe give them a book that you think would be helpful), but they, or specifically your father, has to get the desire to change and maybe see how it is possible to change, or it won't happen.

Plan of Attack: New Jersey has a Pension Loan Program that I have recently discovered and I think it holds the key to tackling their debt.

No, not yet! It sounds good on paper, but in practice this is too soon, destructively too soon!

A study done for the FDIC found that of those who took out high loan-to-value home equity loans, 70% were back in credit card debt one year later. Reading posts over the years here on the Consumer Credit / Credit Card board have likewise supported similar statistics, not just with a HEL (or HELOC), but also with 401(k) loans, other inexpensive loans, windfalls and overtime pay.

The problem? The discussions here on Consumer Credit / Credit Card board provide more insight than a statistic from a study for the federal bank insurer: if one isn't committed to debt elimination, usually a source of inexpensive funds just becomes an enabler to get further into debt so one ends up with the restructured debt plus additional credit card debt, the result usually being worse than if no loan were taken out.

When does it work? When there is a definite plan to eliminate debt that the couple is actively pursuing, and the restructuring of debt is just a step in that direction, i.e., getting a lower interest rate so that more of each payment can go towards the principal so that the same-sized payments are taking care of more of the debt.

From what you have posted, it doesn't sound like your father has started living below his means. Changing one's lifestyle is initially a struggle because one is learning to avoid most impulse buying, a certain amount of self-denial (probably not abstinance, but still a reduction on discretionary spending), and learning new habits of spending. And, like many habit changes, it is too easy to give up early in the process until one gets comfortable with it. Until your father has made it through a few months of living below his means and concentrating on consumer debt elimination, borrowing against the pension is just too risky.

So this is what we are thinking:

...
5)Learn to LBYM... probably the most difficult of all the tasks listed.


This is the first thing that has to be addressed. Without this, everthing else will be a temporary fix at best. And, yes, this is the most difficult of the tasks listed because it involves change in behavior: the reduction of discretionary spending, fighting impulse spending, maybe even taking steps that would otherwise be considered "stupid" by those who haven't had a spending problem, such as maybe taking the credit cards and making them very inconvenient to use (e.g., locking them up in a safe deposit box at a credit union or bank, or freezing them in a block of water in the freezer), or making a "debt chain" (a paper chain where each link represents a specific amount of debt, e.g., if each link represents $500 of debt, a $40,755 amount of debt would be 81 paper links, and as the total consumer debt goes down past a threashold, break the corresponding link).

Besides LBYM, I would recommend:

- making sure every card receives at least its minimum payment at least by the due date,

- all balances be kept below the credit limits (with at least enough "available credit" so one month's interest doesn't push the balance over the credit limit).

The elimination of over-balance fees and late fees will help the situation as long as the elimination of such fees don't have a corresponding increase in spending. (Yes, LBYM ends up affecting all of one's finances!)

"Snowballing" would be my recommended approach once the above is in progress. ("Snowballing": paying at least the minimum due on all debts except the one target debt, and pay as much as one can towards the targeted debt. Typical suggestion is to target debts that can be paid off in one or two months so one has an early victory, and next target the debt with the highest interest rate because the highest interest rate debt will have the most "bang for the buck" in the form of saved interest and thus becomes the most economical approach when looking at the portfolio of debts.)

Another thing your parents may want to consider is whether they are living in "more house" than they really need, maybe consider downsizing if that makes sense for their situation, or considering renting out a room or two if that makes sense for them to do so. (Renting may open other issues, particularly if they live in an area that has strong renter protection laws. But if it works it may help the "M" part of LBYM.)

1)Call the credit card companies and ask for a reduction in rates.

Good! And if the rate is lower than other cards, your father might also ask about balance transfer offers. This is more likely a possibility a cuple months after that card got paid off: the card issuer knows once the card is paid off that the customer is far less profitable, so they often do have a balance transfer offer so they can start collecting interest again.

Ask again every six months.

4)Try to roll the remaining balances onto a lower rate card immediately

Yes, but also good later in the process. Watch those credit limits! And and ask about waiving balance tranfer fees.

2)Take out the full $30K, pay off the highest rate cards with the $30K

I addressed that earlier in this message. Briefly: while great on paper, the majority of the time it just becomes an enabler to get further into debt unless one is whole-heartedly pursuing a consumer debt elimination plan and this restructured debt becomes part of the debt to eliminate.

3)Cut up said cards, close accounts.

Closing accounts can be counter-productive on several fronts:

- If the credit report shows negative information like late payments, if the accountis open, the late payment info will probably drop off after a couple of years, but once the account is closed it will be 7 years before negative information is dropped off. The negative information in the credit reports will be one of the factors on the interest rates your father is being charged, both on current cards and on potentially new cards.

- If a card is paid off, after a few months the card issuer may have a decent balance transfer offer, which is an opportunity to reduce the cost of carrying a balance while working on getting it paid off. Even if only part of the highest-interest-rate card can be transferred, overall such a strategy can potentially save money.

- Other information going into the credit score (besides late payments) include the total used credit to the total credit limit, the larger the ratio, the worse the score (and thus the highe the interest rates one is likely to pay). If a credit card is closed, it is treated as zero available credit and thus can adversely affect the used/limit ratio and thus adversely affect the credit sore. Likewise, the age of the accounts are considered--the older the accounts, the better.

While I normally don't recommend obsessing about one's credit score, having some knowledge on how one's actions can affect one's score can help avoid some of the larger pitfalls that would make one look unnecessarily risky to current and potential lendors.

For more information abut credit scores, go to http://www.myfico.com/ and look in the "Credit Education" section. I would also recommend your father request credit reports fro all three major credit reporting agencies so he could double-check what the lendors are reporting as well as cleaning up outright mistakes.

* 30 year mortgage (No data yet for this)

This may be a good reason to take a very close look at the credit reports and maybe even pay extra for the credit scores.

If the interest rate on the mortgage is high, it might make sense to refinance the mortgage at a lower rate. However, mortgage interest rates, unlike many other loans, are very sensitive to credit scores (best rates with FICO score of 720 or better) and the good loans are usually not available if there are unpaid collections in the credit report. So, if the credit reports show bad information, refinancing might not be an option. And, like I tried to discourage pension loans above, a cash-out refinance can be as equally financially destructive.

While I don't want to rain on your efforts, I think having a good appraisal of the options and tradeoffs would help you (or rather your father) to fit the options best with the situation. It is hard enough for someone to face a bad financial situation, harder to reveal that to another party but, once faced, it is good to know the most helpful options and their tradeoffs.

I wish you well!
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I have tried to read most of the replies, but let me add my own 2 cents worth.

- First, in addition to the danger of using the pension to bail out the credit cards, the money they take out is not working for them. In order for the full annual payout to be there when they retire, the pensions have to be working at full potential.

- Second, It looks like a number of those credit cards are on default rates, so I strongly agree that credit reports need to be checked and any problems addressed.

- Third, you mention a mortgage but not whether there is any equity in the house. Usually I do not like the idea of using a home as collateral to pay down debt, but in this case if the credit report is not damaged, it may be worthwhile exploring to significantly reduce the finance costs.

- The journey must start with your parents. They need to define their budget. They need to make a decision to cut their expenses. They need to be comfortable with drawing on their pension or their mortgage and understand the risks.

- They may have to consider delaying retirement in order to secure all their dreams. It would be a bad situation for them to take on a retired life they can not yet afford before or just after paying off their working lives.

- Both are elligible for Traditional IRA contributions and should consider utilizing the extra $500 annual catchup contribution to which they are elligible as a means of reducing their tax liabilities and applying the savings towards debt.

- Most of all, you have to resign yourself to the idea that you can not fix their financial situation. You are starting your own life, and you have to begin building your own financial future, whatever decisions your parents make for themselves.

Fuskie
Who joins all other Fools in wishing you well...
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Win, Lose, or Draw.... I'll call it a draw.

Again i'd like to extend my gratitude to all of you. While I may not respond to every reply I have carefully read each and written down most for my parents to consider. I sat down with both of them tonight at dinner and talked everything over.

Things I found out that I did not previously know:

* There has not been a new purchase on most of their cards for a long time. Some of the higher balance cards date back 8, 10, 12 years. This switched on a lightbulb. My parents/dad, while he still spends impulsivley, does not do so via credit card. Seems he just has no idea how to handle / repay debt. AKA poor money management skills, but hopefully getting better. I think this is a great reason for me to believe in the following...

* My parents have committed to a change of spending and eliminating their debt. They told me that after we first talked a few weeks ago and they saw everything on paper that it really hit home and made them talk things over. This mainly applies to my dad, the impulse spender. This, coupled with his new vigor to lose weight is, hopefully, the beginnings of a major lifestyle change. With enough support from the people around him, and my mom keeping a better eye on his spending, I have faith that he can do it, as well as the rest of the family, myself included. After all, all that extra food he won't need will save a few bucks on every trip to the grocery store.

* Aside from the numbers I (UnFoolishly) posted earlier, there is a stafford loan in the 10K 4.4% range that needs repayment. There is equity in the house, part of it was used to help fund my college education and there is currently around 50K "left". The mortgage is also not a pretty number around 150K.

* They have no idea how they are going to pay for my sister's college education. I don't like this, nor have I (or they) even begun to figure this out. (Guess what I'm reading up on tonight and forwarding to dad tomorrow???)

* They feel / realize / think that they need to use their last resort. This is where I did not argue. I resigned from the notion that this is MY problem. I do not know what it feels like to have $40K+ in debt looming over your head for more than a decade. They are ready to move on and they have chosen the pension loan to be their 2nd step (the 1st being a commitment to wiser money management). When regurgitating the warnings that were imposed on me, by you all (thank you) I got an unsuspected reply from my dad... "You think we don't already know how risky this is". I didnt know what to say to that.

This is their problem, as many of you have stated, and if they are willing to take this path, knowing the risks involved, then so be it. I will do my best to calculate those risks or put them in touch with someone who will, so they better understand what exactly they are doing. They have stood behind every decision I have ever made (except buying the motorcycle, but thats a whole different story, which does infact have a happy ending) and I will do the same for them, helping them along the way as best I can.

So that's that... with warnings gone unheeded (or heeded depending on how you look at it) they are moving forward with the pension loan. IF, I say IF, they can uphold their commitment that they have made against credit cards, and IF they can actively manage and monitor their cash flow, and IF they can stick to their budget, and IF they can find a way to put my sister through college without resorting back to high interest lenders.... I think it may be able to work. But that's a hell of a lot of IF's.

As Im sure many of you are shaking your heads, I hope you will be of a continued assistance to me and my family as they trek into this. I'm going to start a new thread on this board with the specific questions and implications of the pension loan and paying off the CC debt and then another on the Paying for College board regarding my sister. I'd like you all to throw in your .02 (or .05 if you're feeling generous) on those threads. Again thanks for all the time you've taken out of your days to help me help my family. I wish I could buy you all a round of your favorite drinks... during happy hour of course ;)

IslandFoolin

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Income
* $77,400 Combined Net Annual Salary ($6450/month)
* No other sources of income
Investments
* None
Retirement Estimates
* Dad: NJ PERS Pension. $30,718/year @ retirement age of 61 (2011)
* Mom: NJ TPAF Pension. $47,427/year @ retirement age of 58 (2011)
* SS: $2600/month
* No 401's, IRA's, Nothing.


If I'm reading this right, they're making $77,400 now, and will be making $109,345/year in retirement (7 years from now, in 2011). It seems like they're going to be OK to me, as long as they get some money management skills in place.

I would set the goal of having all non-mortgage debt paid off by 2011 (without tapping home equity, of course). They could scrimp and save and have it paid off sooner, but they should enjoy these few years coming up as well as retirement, so no need to dig the financial heels in when a light tap on the brakes will reach the same goals. Having gone through the process of getting rid of that debt will give them the skills they need when they do retire.

SeattlePioneer brings up a good point to find out if the pensions are inflation-indexed or not. But since their income is going UP $30k in retirement, they could use that extra $30k for investments to bridge that gap later on if necessary.

I haven't seen this mentioned yet in this thread (but skimmed a few of the replies). The key to a successful retirement is smooth cashflow. That might sound too much like stating the obvious, but it is an important concept to understand. There are many ways to achieve this goal, and arguing over which one is the best will go on as long as the sun keeps rising.

The two main ways to achieve that goal is to either save up a huge nest egg and living on the interest and/or dividends it generates as well as a small percentage of the principal (look up "safe withdrawal rate" or "SWR" over on the Retire Early Home Page.) The other way is to use income-producing means such as buying rental houses and living off the income, or, in your parent's case, pensions. So, just keep in mind that your parents have put all their eggs into the pension and social security baskets, and the risks of those disappearing should be addressed as well.

I second, or third, or whatever, the idea of getting an impartial fee-based certified financial planner to review the books and come up with a plan. For the return on investment and peace of mind, it is some of the best money your parents could spend. Also, I would have them go back to the CFP in about 6 months so that they have some short-term goals to reach. It will also give them somebody else to be accountable to besides you (and themselves, of course).

-Agg97

P.S. BTW, I know what you're going through. I'm 29, my parents are turning 60 and are being forced into early retirement right now. Their "plan" was to keep employed for another couple of years, but some people in India had something to say about that (and they're choosing to "play the victim" rather than seize the opportunities, very frustrating in my book). So, my parents are facing some hard realities right now as well.
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Agg977,

Best of luck with your parents as well.
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Greetings, IslandFoolin, must your parents pay for your sister's college education? Can she pay for it (or at least part of it) herself, through grants, loans and work? As an undergrad, at age 18, my parents did indeed help with school costs - principally tuition, books, room and board - but I paid my own way for my monthly expenses by working during school. I graduated with two bachelors' degrees, concurently earned (chemistry and mathematics), so it didn't hurt me at all academically to provide a portion of my own living expenses. At the time, my parents could afford to help. Then, 20 years later when I went to medical school at age 38, I paid the full freight - not only were my parents now retired but I would never dream of asking them for help. This was MY venture. So I made it my own effort to seek out grants and loans, and succeeded in doing so. As detailed in my many posts to this board (and to the Paying Back Student Loans board), the payback strategy is mine, also. Assistance with college costs is a nice gesture but not if they can't afford it! From the time I was a little girl, my father used to ask me whether I wanted to go to Harvard or to Yale. When I was finally 18, there wasn't any way of financing tuition to a private, out of state school - so I went to the state school for a fraction of the cost. As I said, I turned out okay :-).

By the way, costs for food don't necessarily decrease while losing weight - many of the most successful strategies for weight loss actually have you eating BETTER food than before (protein is expensive!) and even paradoxically MORE of it (in a misguided attempt to trim, many cut food portions and find that it backfires when their metabolisms go into shutdown mode, perceiving a state of starvation).

Congratulations to you and your parents for the consciousness-raising.

xraymd
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IslandFoolin, I think you're doing a great job. People like to assume that us youngin's have no idea whats going on sometimes, and that (fortunately) isn't always the case. That said, ageism does exist and you just got a swift shot to the tail end of it. Next time, just don't mention your age and it may help you get a bit more respect. That's what I've learned for the most part, anyway.

Next, I don't necessarily agree that you should cart your parents off to some financial planner. Sounds to me like you're doing a STAND UP job! I would only advise a financial planner if you didn't understand some aspect of the stock market and preferred someone who spent 24/7 working with it.

You've come here anytime you weren't sure, and the Fools have given you solid advice. So use it! And get those parents cooking for themselves, you don't want them to starve once you leave, do you?

Good luck IF,

-In
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aristocatt posted: Best of luck. I recommend Dave Ramsey's Total Money Makeover for them to read. He's a very motivational speaker too, and can encourage them in their resolve to pay off the cc's and continue to live without them.
-------------------

I SECOND, THIRD, and FOURTH this recommendation!!! Even if your parents aren't using the credit cards anymore, I'd have to bet they don't have a budget that they stick to - they are probably throwing away LOTS of money every month. A debit card is almost like a credit card in that when you make a purchase, you hand over this little plastic rectangle, someone swipes it through a machine, you sign something, and they give you the little plastic rectangle back. You didn't "lose" anything - the purchase didn't "hurt". How much would it "hurt" if you handed them green paper and they handed you back only a little green paper and maybe some silver and copper coins?

CASH is KING!!! Get them to reat this book and see if they would consider doing a cash-based budget for discretionary spending - it WORKS!

jrsmith13
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The fact that you are holding on to this pension-loan-thingy so tightly as the light at the end of the tunnel or "backbone" as you say, is one why your parent's should NOT do it.

Crunching the numbers is only a small percentage of addressing the problem, behavior IS the problem. Yes, they are spending less, but they still see debt as the answer to their problems. And have treated debts that ignored pets in the past. And do you honestly think that they will go through 4 years of your sister's college without borrowing more money? No. Something that they HAVE to provide for with HAVE to be made happen and they WILL borrow.

You have gotten some great responses here and I don't think that you would have if you have not done a lot of things right already. The pension loan could wreck all of that, though--and that's why everyone is so strong in opposing it.

They have stood behind every decision I have ever made (except buying the motorcycle, but thats a whole different story, which does infact have a happy ending) and I will do the same for them, helping them along the way as best I can.

There is something that I think that you should step up and do and that is recouping their cost for your college education. But that's coming from a guy who got his first job at 9, and paid his way through private high school and then college. People have different ways at looking at this. Personally, I never thought my parents were obligated to pay for anything that I didn't need before the age of eighteen.

Fred



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I agree with BOOA.

Do not take this money out until they know WHY they got this far into debt. Too easy to start charging up again. Then they have no money, more debt.

Catleen
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About recouping for my college education. I was all for paying for my own college, taking out all the loans in my name, etc... I began work at 12 years old and since then have paid for all of my luxuries and most of my necessities these past 4 years. My parents have always felt that it is their responsibilty as parents to see to it that their children are entitled to an education. Different strokes for different folks I guess.

Like I posted earlier they have decided that this is the route they want to take, they are aware of the riskiness of it, and they are committed to finding other ways of paying for things instead of charging it. Yes they are using debt to pay off debt, but this debt has a finite end to it. In 5 years the pension loan will be repaid, each repayment being deducted directly out of their paycheck way before they can even get their hands on it.

And hey, if it doesn't work out.... no worries, life will go on.

IslandFoolin
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IslandFooling:

Well, I certainly hope they decide not to attack the pension funds, but it is their money, their lives and they will do what they think is best. Which in turn, may not be the best thing.

Everyone has stated that most people start charging the cards back up again.

But it is their life and they will do what they want. The problem is that attacking the pension funds is an equivalent to the quick fix.

I hope they do learn, but if they don't there is very little that you can really do about this. I would have a chat with your sister about looking for loans and anything that would help pay for college.

Remember that you tried your best and you can lead a horse to water but you cannot make it drink.

I have the same problem with some relatives of mine. When Grandmother died, all of us inherited a piece of money. I had no debt at the time and bought a house. I realized that once the inheritance stopped, I would end up working a second job for a while. Everything is fine with me.

However my relatives bought a house really far out, sold their own house and paid the new house off. With stocks going down, they have attacked all they could to the stocks for the real estate payments. No my relative is emptying her childrens's retirement funds to pay for the taxes. Then my cousin got cancer and will probably be out of work for the greater part of a year, read (less money coming in). When do I think this will catch up? Who knows but it will. I stopped saying anything. I did mention once that they needed to save up for the real estate taxed and got some totally dazed looks. Save up? what is that?

Catleen
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IslandFoolin,

I have not yet read all of the replies but I wanted to chime in with a couple of items that really concern me with your proposed plan:

* No 401's, IRA's, Nothing.

Immediate payoff of $30K worth of debt and the subsequent interest savings. Improved credit rating (I hope). Learning to LBYM due to $627 less that comes in each month.

I won't be able to get on my dad about these things from the VI like I do while I am here at home, and I don't know if he has the discipline to maintain such a plan once it is implemented.

Now for my explanation. Due to the fact that your parents have zero savings/investments outside of their pension plan, they are going to rely on that pension to live in retirement. Between their two pension plans and the SS projections, it looks like they will have a nice income in retirement.

The main reason these items concern me is because it does not sound like your parents have changed their habits that have put them in their current situation. If they raid the pension plans and then rack up more debt, now they are in a worse situation where they are in debt up to their eyeballs and they have nothing for retirement.

Also, by taking from the pension plans, I would not consider the debt to be paid off but rather transferred to a possibly more rewarding location. Sure they have a lot to gain by a reduced interest rate and all of that but I think they also have everything to lose if they have not fixed the bad habits.

I am not saying this plan cannot work, but I would urge extreme caution before considering this plan. If your dad does not have the discipline to stay on a plan without your assistance, who says they will be able to refrain from racking up more CC debt?

I look forward to seeing what others have had to say thus far but I had to throw my concerns out there right away.

dt
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I have not yet read all of the replies but I wanted to chime in with a couple of items that really concern me with your proposed plan:...

I look forward to seeing what others have had to say thus far but I had to throw my concerns out there right away.



Thanks for your concern, and yes this is a lengthy post. I do believe that this IS the changing point for my parents. Just because the change hasn't happened yet (like if they would have changed a month ago) doesn't mean its not possible. Just as a catchup for you until you get the chance to read all the posts, the large majority of my parents CC debt is over a decade old. They haven't been charging for the past couple years, they just haven't been paying it off either. Which is worse? I'll leave that up to all of you to decide, but for now they have changed their ways and they have alot of people supporting them and holding them back (if need be) from falling victim to the CC's again.

Finally, i'm impressed with my Dad immensley. In the past 3 days I can't even count the number of things he's asked me or asked me to find out about their situation and money in general. And no I didn't just run and find him the answers, I sat him down at the computer and showed him where to look, then bookmarked them for safe keeping.

About the sister... i've had her on numerous scholarship sites filling out apps, fingers are crossed. Thanks for everything so far everyone.

IslandFoolin
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Hey, IslandFoolin, if they have indeed stopped charging, and they stay employed and healthy and all is well for the next five years, the pension loan might work out to be a good thing for your parents, with the lower interest rate and the automatic payments coming out of their paycheck. Certainly, since they seem to be intent on using it, the thing to do at this point is to help them deal with that as best as possible.

If the pension loan payback is less than the minimums on all the CCs it is replacing, I would urge you to urge your parents to use the snowball method. For example, if all the minimums on all their CCs right now add up to $1500 a month, and the pension loan payback is $645 a month, I would suggest throwing ($1500-$645 = $855) $855 a month at the cards that didn't get paid off by the pension loan, until those cards are paid off. And then, rather than lower the amount they are paying towards their CC debt, once the non-pension loan is paid off, they could put all $1500 towards the pension loan, until it's gone. Or at least, not just pay the minimum on the pension loan, if they'd like to save some money towards their retirement, or want to help your sister with college, that kind of thing.

I just think that it doesn't have to take five years to pay off the pension loan, and that it's the sort of loan that makes me nervous to have around--your parents are counting on their pensions for their retirement, and while your sister can get all sorts of really low-interest loans to pay for college, it's harder for your parents to catch up on saving for retirement, you know? Anyway, God willing and the creek don't rise, the loan is paid off in five years and no harm done, but even though it will be a lower-interest loan, I think getting them to commit to the idea that they can pay it off early is a good one. I would hate to see something happen to interrupt one or both of their employment two or three years from now...

Good luck, IslandFoolin, it sounds like your parents are really listening and being open to change. And again, I think it's really nice of you to help them, and your sister. :-)


--Booa
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IslandFoolin,

Just as a catchup for you until you get the chance to read all the posts, the large majority of my parents CC debt is over a decade old. They haven't been charging for the past couple years, they just haven't been paying it off either. Which is worse? I'll leave that up to all of you to decide, but for now they have changed their ways and they have alot of people supporting them and holding them back (if need be) from falling victim to the CC's again.

I was able to get caught up. While your parents have to do what gives them the most comfort and what they feel is the best decision for them, I still have one question. If they have not been adding to the CC debt, what have they been doing with their money. While they may not be adding to the debt, if they haven't been making a dent either that would imply their discretionary spending is out of kilter.

Finally, i'm impressed with my Dad immensley. In the past 3 days I can't even count the number of things he's asked me or asked me to find out about their situation and money in general. And no I didn't just run and find him the answers, I sat him down at the computer and showed him where to look, then bookmarked them for safe keeping.

It is great that you guys have that openness to discuss finances. One question I have for you is how will your parents react if they follow your advice and their situation gets worse? Only you know that for sure but I would hate to see them grow to resent you for the path you led them down, or at least what they perceived as the path you led them down. From the way you describe your parents, I don't think that would happen but I wanted to throw it out there.

Again, even though many of us may not think this is a great plan, that does not mean it cannot work for your parents. The best laid plans will only be successful if they are followed. If your parents can stick to it, this could work out quite well for them.

With regard to your sister, it is great to help her get educated on the available scholarships and grants. One question on her college education is what are her expectations as to financial support from the family, as well as where she wants to go to college. Is she willing to go to a local community college for two years to reduce costs? I know you mentioned she wanted to go out of state. Why? What advantages are there? What disadvantages? Again, school loans are always a possibility. Personally, I have school loans that I am paying and my interest rate is close to 2% which is not bad at all.

Keep up the good work, one step at a time. And don't forget to focus on yourself. You cannot fix the problems of the world in one day so try to keep everything in perspective and don't lose sight of your own ambitions.

dt
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<<If the pension loan payback is less than the minimums on all the CCs it is replacing, I would urge you to urge your parents to use the snowball method. >>


I wouldn't ---for all the reasons already mentioned. A few days of enthusiasm for a new idea is easy enough. Years of disciplined spending control is not. So far, it's only the threat of expanding debt that apparently motivated these folks to begin control spending.

The interst they have been spending on the credit cards may have been the most valuable spending they made --- beacause it effectively deterred them for yet more spending. Why mess with success?


Seattle Pioneer
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The interst they have been spending on the credit cards may have been the most valuable spending they made --- beacause it effectively deterred them for yet more spending. Why mess with success?

Very interesting point.

FYI... Pops sent in the loan applications already, which I really wish he didnt do. I'm not going to rant but patience is a virtue he does not possess. So now the topic switches to: Where to put this new money when it arrives in about 2 weeks? Which cards to pay off, pay off as many as possible, or spread the 30K out over all of them? Credit reports have been orderd and I have a feeling will decide whether or not the accounts get closed or remain open (with the lower/$0 balances).

I really think they have no idea how much work is ahead of them.

IslandFoolin

"Ignorance is bliss"
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Which cards to pay off, pay off as many as possible, or spread the 30K out over all of them?

Generally, the priority would be:

1. Get the credit card balances below their credit limits. It is vital to avoid over-limit fees (nad corresponding penalty fees).

2. The highest APR debt. If you don't know which has the highest APR, look for the highest interest rate. This will give you the most bang (interest (dollars) reduction) for the buck.
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IslandFoolin,

Let me start by congratulating you on your interest in educating yourself on financial matters, and for your willingness to step up to the plate to try to help your parents get their financial house in order. Even though your dad has made the unFoolish decision to tap into the pension funds, you can still help guide them in using them wisely to resolve their debt issues and stay out of future trouble.

I frankly do not think your folks are ready to meet with a Certified Financial Planner at this point. Instead, I'd recommend that you convince them to meet with a credit counselor. If there's credit union locally, that's a good place to start a search for one. I have a long-time friend who does this for a living, and she is very skilled at helping people learn to live within their means, solve debt problems, improve budgeting skills, and adopt better money management strategies. Assistance from a credit counselor should be lower cost than from a CFP. Once they've gotten the basics more under control, advice from a CFP will be more worthwhile.

Good luck with this project, and I hope you enjoy life in the VI!

Cori
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Thanks for the continued replies everyone... We're waiting on the credit reports that my dad ordered for free from the 3 major agencies. My mom's contract has finished being negotiated (entire school districts contracts that is) so this weekend, inbetween the beach time and work of course, i'm going to have them set up a budget for the coming year, listing their income and mandatory expenses to start with, and then see how much they have left over and try to budget that accordingly.

And what a suprise it was to recieve my weekly Fool E-mail newsletter today, only to find this post listed in it! That blew my mind, it may not be that big of a deal but I think its awesome how "connected" (for lack of a better word) this whole place is... hopefully one day someone will stumble across this and be able to use it to their, or their parents advantage. Again, many thanks.


IslandFoolin
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After reading your post and some replies, it sounds like you want to go ahead with the pension loan idea. Pension loans used with caution can work very well. Before going that route take a look at the mortgage on the house. Your original post had no info there. What is still owed on the 30yrs and when will it be paid? Is a refi possible to get extra cash for debt?
Also, As you start paying off cards with the snowball method , by all means stop using them but don't cancel them all right away. Keeping one or 2 cards with zero balance will help the FICO score. After paying off one or 2 cards then other companies may be more receptive to lowering their rates as the see the fico score improving.

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I like chiming in. I have read a lot of the responses but not all. Therefore, I am probably going to repeat some of what they said.

I wouldn't touch the pension. There are a few reasons for this:

1) Their pension is their most valuable asset
2) They should be able to pay off their debts with their incoming income
3) Their pension is their most valuable asset
4) They need to cut back their lifestyle anyway as they approach retirement
5) Their pension is their most valuable asset


I would not do anything to possibly jeopardize the pension. Did I mention it is their most valuable asset? It really does matter if it is inflation indexed or not- you should find this out.

If you had a bunch of savings, how much could you safely draw out a year? About 4%. This means that each pension you mention is worth 25 times what the payment is.

Lets look at them closer:
* Dad: NJ PERS Pension. $30,718/year @ retirement age of 61 (2011)

This is worth $767,000 dollars if you had an investment paying out 4$.

* Mom: NJ TPAF Pension. $47,427/year @ retirement age of 58 (2011)

This is worth $1,060,675 if you had an investment paying out 4%.

So you are suggesting to possibly jeopardize two million dollars of assets to pay off a measly 30K? Forget it- it is insane. Now admittedly the pension is worth both less and more than the investment. They will have nothing to pass onto their heirs. However, from their perspective of survival, this is not relevant to their financial picture. On the flip side, even if the market tanks for a decade, they have their pension. A two million dollar portfolio does not offer such guarantees.

They have a hefty salary right now, nearly 80,000 a year. No offence- but this is huge- TWICE the median HOUSEHOLD income of the united states. Most of those households have a bunch of kids running around. Admittedly, they have a kid about to go through college- but a lot of households do.

They should take 10k of that money a year and put it towards credit card debt.

They should take another 10k of that money and put it towards the other kids education.


What they need right now is not a source of ready cash. What they need is a budget. If you were to sit down with them, you could walk through the budget ideas. Here are the major ones:

Sell any new cars and buy older ones

Sell their larger house and buy a smaller one to pay down debts and save for the new house

If they can get a budget in line, they should be great. If their expenses are matching their income- they are going to be in trouble. A pile of cash is irrelevant compared to the budget itself.

Good luck
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I have been lurking here for a couple of months, and this is my first post.

It is this:

DON'T TOUCH THE PENSION!

I am very fortunate that my dad was taught LBYM by his folks (they lived through the depression in the '30's). He taught it to me. But I have discovered that, even though I know the rules, I can still slip (and I did this past summer).

I suspect that without the long term practice of LYBM, and making it an unconcious lifestyle, your parents will simply end up with twice the debt, and all by mortgaging their future.

Three years of LBYM should be enough time to establish a pattern that is not likely to relapse. Having said this, three years of snowballing should have already significantly wiped out their credit card debt. These two things coming together at the end of a three year period will set your folks up for a comfortable retirement. But only if they

DON'T TOUCH THE PENSION!

That's my two cents.
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