Although Jack would like to renew the lease on his studio apartment, he is facing the fact that he is broke, and needs parental EMT: Emergency Money Treatment. He has an invitation to move into a cheaper one-bedroom apartment, sharing the rent with his younger brother. He already owes his parents $400. He owes his girlfriend, Anne, $600. He has a small monthly car payment and a moderate student loan payment, but the big problem his parents only just learned about is a growing MasterCard balance.
Jack and his father begin by tabulating his last seven months’ deposits and withdrawals. It looks like he managed to maintain a small balance in his checking account, even with an $800 rent payment. His other monthly bills averaged just under $400, including the car and student loans, and his MasterCard minimum payment. Somehow, he lived on an average of $186 in other withdrawals from the bank each month since January 1.
That’s $6.20 a day, for food, toiletries, gas and car repairs, going out with friends, laundry, …? Something is wrong with this picture. Jack must have another source of funds.
The MasterCard’s minimum payment was included among the monthly bills, but as the word implies, that payment has a minimal effect on the numbers shown here, which Jack and his father copy from the credit card’s monthly statements. Notice that his debt to MasterCard increased by $626 since the end of January, which answers the question of how Jack managed to spend only $6.20 per day beyond his regular monthly obligations: he didn’t. He put more than $600 of charges on his credit card, and also borrowed $100 from Mom in April and $600 from his girlfriend in June.
The bottom row shows the month’s current balance for each loan, and the total amount of debt. (We don’t count secured debt here, because the car and student loan payments were included in his regular monthly bills.) The unsecured debts have no direct connection with the bank account. For example, he incurred the debt to Anne when they charged expenses on her credit card. He might end up paying her back with cash from selling one of his guitars.
From problem to solution
Now they compare Jack’s liquid assets and liabilities. Dad puts the Bank Balance table and Debt table side by side, with new rows after July to show the months ahead, in pencil. First, they assume his earnings and spending won’t change, so he has to continue borrowing $221 per month. (His total debt increased by $1,326 over the past six months.) They assume he would use his credit card for that, which would actually incur additional interest charges and raise his minimum payments, but Dad keeps it simple for purposes of this rough forecast. He simply adds $221 to the expected MasterCard balance each month.
What’s the point? To rub Jack’s nose in the fact that by Christmas, he’ll be in the hole to the tune of ten weeks’ income? No: the purpose of this exercise is to look at his options. Jack’s parents have not offered to subsidize his monthly shortfall, because they think it’s high time for him to deal with the economic realities of his situation. Hence he’ll accept his brother’s proposal to share an apartment, saving $400 in rent. He’ll spend that this month on moving expenses, but beginning in August, if he makes no change in his spending habits, his bank balance could grow by $400 per month.
Jack would prefer to pay back his girlfriend and get the credit card debt down, rather than accumulate the money in his checking account. If he gives Anne $400 in August and $200 in September, then stops charging on the credit card and pays it off as soon as he can, how long do you guess that will take? It takes multiple calculations to work out on paper, but is easy with a computer spreadsheet. I can tell you (trust me) that by year’s end Jack still owes Mom, but has paid the MasterCard down to zero and can use it to buy Christmas gifts for Mom, Anne, and his brother.
Obviously, your particulars will be different. But like Jack and his father, sitting down together and tabulating bank deposits and withdrawals, bank balance and money owed each month, leads you and your son or daughter to discuss constructive, realistic options.
