The end of a love affair with debt

Two stories about the personal finances of two families in the current issue of Money Magazine paint a disturbing picture of Americans and their money, one that is probably far more representative of contemporary life in the U.S. than most would like to admit.

• Our Kids Are Driving Us Broke - Budgeting basics for kids and parents
  
• Burned out: Recovering from a fire - On the brink of financial disaster
  

The first report tells of the Miller family in Utah where it appears to be much easier to watch the HELOC grow than to say "No" to their kids.

Kerri and Mike Miller have a spending problem. Three of them, in fact.

There's 12-year-old Kate, a seventh-grader who covets a pair of $160 boots, prefers clothes from American Eagle rather than Target and recently got a $300 cell phone.

There's nine-year-old Landon, who has a voracious appetite for video games. And their youngest, four-year-old Claire, will soon start taking ski lessons (cost: $224, not including equipment).

All three kids attend summer camps that run about $60 a day for each child. And then there's the cost of babysitting ($200 a month), preschool ($4,000 a year) and braces ($3,000).

Even with Mike's six-figure salary in commercial finance, the Park City, Utah, couple's ends are nowhere close to meeting.

"I look at how much money we spend and I think, 'Where is it going?'" says Kerri, 44, who is a stay-at-home mom.

It's not all going to the kids, of course: Mike and Kerri have their own indulgences, like the hot tub they put in last year.

The home-equity line of credit they opened two years ago to pay for home improvements now often serves as a safety net when they come up short at the end of the month. The balance is almost $50,000.
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Study participants said that a desire to keep up with the Joneses led them to splurge on their children. No wonder the average upper-income family will spend $182,000 on each child by the time he or she turns 17, according to a survey by the U.S. Department of Agriculture.

Of course, all kids need stuff, and there's no reason to completely deprive them of things that they'll enjoy and even show off to their peers.
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When it comes to expensive activities, such as skiing or an over-the-top Sweet 16, consider: Are you paying for this because your kids will really enjoy it or because the neighbors do?

"There's nothing that says you have to have a party as big as everyone else's," says Plantation, Fla. financial planner Ben Tobias.

Do parents teach their kids anything about money these days?

The word "No" would be an excellent beginning to a conversation about what money is, where it comes from, and how, generally, it's a bad idea to spend more than you make.

Actually, this conversation would be much more helpful for the parents than for the kids.

Does anyone teach parents about money these days?

Meanwhile, after the recent fires in Southern California, Kevin and Nicole Martin are digging out from the pile of rubble that used to be their house and the pile of debt that used to be their personal finances.

The Martins had just spent three years renovating their four-bedroom home; the property, including the land, had recently been appraised at $1.4 million. It burned to the ground in less than 2½ hours. The family escaped safely but lost most of their possessions, as well as Emily's cat, Trina Tree Stump. The date was Oct. 22- Kevin and Nicole's 13th anniversary.

How does a family bounce back from such a catastrophe? Like so many victims of last fall's California wildfires - which destroyed at least 1,500 homes from Santa Barbara to the Mexican border - the Martins were devastated. In the weeks immediately following, Kevin and Nicole couldn't eat, Emily had nightmares, and Haley, the baby of the family, suddenly didn't want help from anyone.
Cracks in the financial foundation

The Martins are also facing severe financial repercussions. They were initially euphoric at receiving $1.1 million from Farmers, their insurance company, just two weeks after the fire ($785,000 of the total was earmarked for rebuilding the house). But they've since learned that the settlement probably won't come close to covering the cost of rebuilding, replacing their belongings and living in temporary housing until the work is completed.

The fire also exposed the cracks in the solid financial foundation the couple thought they stood on. They earn a comfortable living: Kevin, 38, an industrial engineer with Qualcomm, and Nicole, 37, who runs a home-based window-treatment business, make $145,000 a year.

But the couple had borrowed heavily against their house, in part to pay for a risky real estate venture, leaving them with loan payments that eat up more than two-thirds of their net income. And while they do save steadily for retirement, they have little cash on hand for emergencies. As Hal Schweiger, a financial planner in San Diego who reviewed the family's finances, put it, "They're right on the brink".

Their plan would have worked spectacularly if home prices had kept going up at 20 percent or more every year.

One of the major cultural changes that has occurred over the last few decades is the astonishing change in the way many in the U.S. view personal debt. Not only are we, as a nation, more comfortable with owing more and more money to banks, we seem to embrace the whole idea because we get more and more trinkets in return.

Of course it looks like that love affair may soon be coming to an end.