Americans plan for many things. We plan our vacations, we plan our retirements, we plan our weekends. But very few Americans plan on becoming disabled, on becoming ill, on having to leave work for an extended period of time. That's unfortunate because nothing can wreak havoc on a financial plan like a health-care shock. Case in point: David and Marcia Palmers, a married couple who live in the Pacific Northwest.
David, age 40, and Marcia, 37, were living the good life, he as a public employee and she as a professional in the health-care industry. David and Marcia, whose real names have been changed to protect their identity and exact state of residence, had household income of $75,000 and lived what they described as a frugal lifestyle, taking pains to avoid what some might consider an extravagant lifestyle. True, they recently moved into a larger home and took on a larger mortgage. But they could afford the larger mortgage payment based on their total household income. In fact, not unlike many American households, much of their discretionary and nondiscretionary or fixed expenses depended on both husband and wife's income.
Unfortunately, Marcia didn't have long-term disability insurance. And when she became unexpectedly ill and had to take a medical leave of absence, the holes in their financial plan became all too apparent. They didn't have a way to replace Marcia's much-needed income; she didn't have long-term disability insurance. What's more, they exhausted fairly quickly their emergency cash reserves fund. And so, as Marcia racked up medical bills, as their total indebtedness (excluding their mortgage) rose to nearly $70,000, making ends meet became a challenge. Once regular savers, the Palmers began living paycheck to paycheck, paying the minimum amount due on their auto loan payments, their mortgage, and credit card bills. Plus, David's eliminating what he calls unnecessary expenses — dining out, their video subscription, and his cell phone.
Up until recently, it was unclear whether Marcia would return to work. But after several months of treatment, Marcia is at long last able to return to work. The Palmers now need a plan to pay down all the debt they accumulated over the past year. Plus, they have to figure out a way to get their savings back on track. And, if all that wasn't enough, they have to figure out a way to keep paying for all the things they want and need now. David, for instance, needs surgery on his knee. What's more, Marcia and David want to start a family and adoption may be their only choice. "I'm not thinking about retirement," said David. "I'm hoping to stop living paycheck to paycheck."
What's a young couple to do? We asked FPA member, Bonnie Hughes, CFP®, a principal with American Capital Planning, LLC to analyze their finances and create a plan.