American Capital Planning Blog

ACP Blog, created by Bonnie Ashby Sewell, CFP®, CDFA™, AIF®

The Price of Free Advice

Boy Leaning photo 300x200Joanna made plans to celebrate.  At 10:06 am on February 22nd, 2007, her divorce was finally final!  A bit too early to enjoy an adult beverage, she headed straight for the outlets.  Retail therapy was in store and she looked forward to some healing!  Have any friends who’ve done this?  The people who love Joanna want her to be happy, healthy and healed.  But they also want her to be able to pay the bills she racked up in her celebration.  Joanna’s first stop should have been to her trusted advisor.  Instead, fast forward 7 years when Joanna comes into my office.  She is now in her mid-50’s, has had a few health issues and is still earning about $65,000, not that much more than in 2007.  What has changed, she explains is there isn’t much left in her accounts and she thinks she might have to sell her home so she can send her last son to an expensive college like the first three sons enjoyed.  She pushes all her paperwork across the table.

I can see she hired an ‘advisor’ from a well-known big firm and she’s taken the time to list her expenses on a sheet I sent over before our meeting.  While looking over tax returns, her spending, and her account statements, it’s clear she’s underwater every month by $5,000.  I ask her what plan she’s been working off of until now and she says she was expecting her investments to do better and her money to last longer.  She says at least her ‘advisor’ never charged her for his time.  We lock eyes as she bears a sheepish grin acknowledging the ‘oops!’ hanging in the air.  Back in 2007, Joanna walked away from her 23 year marriage with $960,000 in cash, a paid for home she thinks is worth $975k now, and a $5k/monthly support check that ended last month.

Blame is a waste of energy given the now urgent need to act.  Joanna says she’s ready to get serious and get started.  We have the home appraised –that comes in at $725k, which is $250,000 less than she was figuring in her head.  We factored in another 8% or $58,000 in her case for selling costs (commission and closing statement entries) leaving $667,000 as the net amount Joanna can expect from the sale of her home before taxes - another surprise for her.  She’s been testing the idea of earning more and reports at her age with her health issues, unable to work more hours - employers have not shown a willingness to hire her yet.  Reviewing her expenses, she agrees there are items she can reduce but is most worried about the son waiting to go to that expensive college.

I get paid to be straight with people.  They get to hate my answers.  Here’s what we did with and for Joanna.  We modeled life going forward with no changes.  We asked her who would be willing to take her and her son in before the end of the year should she decide against making changes.  Then we modeled life with very, very sharp and immediate changes.  She chose immediate and substantial pain over certain destitution.  We sold the home.  She banked $600k from her home sale, paid her credit card off, and started renting a townhome a few counties over to lower her expenses.  She takes about $2k each month from her accounts to supplement the $5k she earns.  We worked on identifying those things she cared most about paying for while identifying the ability to work at the same level and pay her bills on her own.  Many days, she cursed us, the heavens, her former ‘advisor’, and her ex but in the end, Joanna enjoys a level of confidence she says she’s never had.  Her health issues are improving.  She will not be sending her son to the expensive college and instead has included him in on some of our meetings as we help him get used to the new normal.  He says he likes seeing his mom happy and healthy and thinks she’s healing.

Big price to pay for ‘free advice.’



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