Personal Finance Course, 11:373:353 (01)

Department of Agricultural, Food, and Resource Economics

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Personal Finance Case #11

Sue and Dan Shimo, 37 and 42, are experiencing a cash flow crisis. Sue has been disabled and unable to work for the past five months. She is awaiting a verdict on her application for Social Security disability insurance in a few months. Previously, she earned $24,000, in addition to Dan's $33,000 salary, so the family has lost 42 percent of its income.

Unfortunately, the Shimo's expenses haven't decreased accordingly. In fact, they have increased. Over the past year, the couple's credit card balances have soared to a total of $8,400 as they took several cash advances to pay household bills. Sue must also pay $450 per month out-of-pocket for anti-depressant prescription drugs.

The Shimos have known for some time that they are spending more than they earn. What they are unsure of, is by how much their expenses exceed their income. They have also spent down their emergency savings to $1,200, which is less than a month's expenses. Before Sue left her job, the couple had $3,500 in savings.

The Shimo's largest household expense is their $1,165 mortgage payment. The interest rate charged is 7 ¾ percent. They are also paying about $200 monthly for minimum payments on their credit cards and have a $296 car lease payment. They recently paid a penalty to terminate Sue's car lease early. "Without a job, I simply couldn't afford to keep the car," she explained.

The Shimos admit that they've never kept good financial records. They have also lived "paycheck to paycheck" for over a decade and have no retirement savings or education fund for their seven-year old child. "As soon as we got paid, the money was gone," said Dan.

The Shimo's net worth (assets minus debts) is $28,720, reflecting the fact that they have saved very little and have a high debt load. Their assets include $1,200 in a passbook bank account, $1,800 in checking (being held for bills), $2,600 of life insurance cash value, their $105,000 condo, and $20,000 of personal property. Sue had a 401(k) with her previous employer but spent the $2,800 balance when she received a lump sum distribution earlier this year.

Household debts total $101,880 and include a $92,000 mortgage balance, $8,400 on four credit cards, and $1,480 (five more payments) on Dan's car lease. The Shimos recently got hit with a $29 late fee when they were unable to make a payment on one of their credit cards by the due date. To add insult to injury, the annual percentage rate (APR) on that credit card increased from 14.9% to 28.4%.

Sue and Dan each has $50,000 whole life insurance policies and health insurance paid by Dan's employer. Neither has disability insurance (except for the short-term state benefits), an omission that became very apparent since Sue has been unable to work. Their condo and auto insurance have $300,000 liability limits.

Neither spouse has a will. "Truth be told, we don't know who to name as a guardian," explains Sue. "That is the real reason that we haven't seen a lawyer." The couple could only guess at a retirement date: when Dan is 67. This is currently the age required for unreduced Social Security benefits for people born after 1960. The Shimos have never calculated what they need to save.

Instructor: Dr. Barbara O'Neill, CFP®, Extension Specialist in Financial Resource Management and Distinguished Professor
Office: Room 107, Cook Office Building, 55 Dudley Road, New Brunswick, NJ 08901
Phone: 848-932-9126
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