When Monica Neilson first wrote to us, she explained that for her and her husband, Chris, “our financial situation is the No. 1 cause of stress, which says something considering what we do for a living.”

Chris and Monica are both cops. (We’ve changed their names and some details to protect their privacy.) Chris says that he’s been shot at five or six times during his 29 years with a municipal police force in Metro Vancouver. Monica, too, has seen her share of tough customers. But for both of them, finances are scarier than felons.

As police officers in one of Canada’s biggest cities, they earn a combined income of almost $170,000 a year, double the national average for families. Yet they never have a penny left at the end of the month. With two young sons at home, as well as three older children from Chris’s first marriage, their expenses are overwhelming them. They use credit cards and personal loans to make up the shortfalls. They feel as if they’re slipping into an abyss of debt.

Although Chris, now 50, is eligible to retire next spring, the Neilsons wonder whether he will have to take up a new career to cover their monthly expenses. “We are worried that we will be so far in the hole that we won’t be able to afford to do the things we dream about,” Monica wrote. “There must be strategies we can implement now to help the situation, but we have no idea what to do.”

Background

Chris grew up in Surrey, B.C., where his mother was a homemaker and his father drove a delivery truck. Money was always tight. His dad organized the local soccer league, and Chris remembers a day when his father bought a pair of soccer shoes for a boy in the community who couldn’t afford them. Chris knew his dad could not really afford the shoes either, but the thought of a kid having to give up the sport was unacceptable. “That taught me that some things are more important than money.”

Chris joined the police force in 1980, when he was 22. While he was attracted to the excitement of police work, that wasn’t his only motivation. “Probably the main reason I chose policing as a career was the job security and the benefits,” he says. “I just thought I would do my time and then I would be taken care of for the rest of my life.” Now a sergeant with almost three decades of service, Chris earns more than $95,000 and can retire with full benefits in March 2009.

Monica is 10 years younger than Chris and has been a police officer since 1997; as a constable, she earns more than $70,000. Like Chris, she grew up in financially modest circumstances. When Monica was 6 years old, her mom and dad divorced. Her mom went off to explore the world, giving up financial security to do so. Monica and her brother lived with their father, who later remarried. “He was brought up in a traditional English household, and money just wasn’t something you talked about,” she remembers. “I have no recollections about his money situation, although I remember him using coupons at Safeway. And I remember having to beg to get any money at all. When I wanted an allowance to buy clothes, it was a huge issue.” Money was even tighter after her father was laid off after 20 years with the same employer.

Monica and Chris met on the job, fell in love and were married in 2000, a year after Chris’s first marriage ended in divorce. The couple bought a home together in Surrey and have two sons, Ryan and Justin, aged 3 and 6. Monica took two maternity leaves to be home with her boys, but since then the couple has managed to arrange their schedules so they can get by largely without outside child care.

The Challenge

With a family income of almost $170,000, the Neilsons are frustrated and confused about why they aren’t better off. “We are not big spenders,” Monica says. “I’m not a shopper. If I were, then I would understand where the money goes, but I don’t feel that we can cut a lot of things.”

Their unavoidable expenses include paying more than $850 a month to Chris’s ex-wife to support their children, now 22, 19 and 16. Both Chris and Monica also have huge payroll deductions: in 2007 they paid almost $3,000 in income tax each month, plus about $1,300 in registered pension plan contributions. Subtract another $2,000 for the mortgage and $450 for Monica’s car every month, and that accounts for more than half of their salaries.

But it gets worse, Monica says. “We have four personal loans with our credit union. And we have credit cards that keep getting racked up because they’re paying for all the expenses that inevitably come up: vet bills for the family dog, home maintenance, even diapers for our youngest.”

The debt is what’s keeping the Neilsons awake. Their loans are relatively small (about $7,200 in total), and the rates are reasonable, but the payments are still about $900 a month. On top of that, they have over $15,000 in credit card debt, most of which carries an interest rate of 18.55%. In the past, when their debts become unmanageable, they consolidated them or rolled them into their mortgage. “The equity in our house has been keeping us afloat,” Monica says. “You can only do that for so long.”

Especially when you want to move. While their home is big enough for their family of four, Monica says “it’s as old as Chris and certainly needs more repairs than he does.” Several weeks before they arrived for the makeover, the Neilsons put their house on the market, asking $539,000. They planned to buy a smaller, but newer home in a beachfront neighbourhood. They estimated that the move would add at least another $100,000 to their mortgage, which currently comes in at $317,000.

The Neilsons are worried about how they’re going to pay for Ryan and Justin’s post-secondary education, which won’t come along until well after Chris and Monica are retired. While the couple expect their sons to contribute something toward their own schooling, they would like to help as much as they can. They recently opened RESPs, though they don’t know how they can contribute to them when they are already stretched to the limit.

The makeover

By the end of their first makeover session, Monica was in tears as she considered their future. Could she and Chris break the pattern of spiralling debt? Could they really think about retirement when they are barely able to scrape by each month?

What quickly became clear during the makeover is that Chris and Monica are in almost perfect harmony when it comes to their financial goals. Unlike many spouses, whose different approaches to money cause endless sparring, they are both frugal, and both put a high value on security. “I’m willing to take risks at work,” Chris says, “but I don’t want to take risks with my family’s well-being.”

They’re also truly happy together — during one of the makeover sessions, Amanda Mills, a financial therapist, asked everyone to give an example of a perfect moment, and Chris said his came when he realized that he wanted to be with Monica forever. (Monica, who answered first, had said her perfect moment was buying her Toyota Corolla, but quickly asked to change her answer.)

During the seminars with Warren MacKenzie, Norbert Schlenker and Derek Foster, the Neilsons realized that they probably do not have the background — or the stomach — to put any significant amount of money in risky investments. “We’re not money people,” Chris admits. “Even though I know they dumbed down their presentations for us, most of the time it sounded like they were speaking another language.”

As the week unfolded, however, Chris and Monica learned that they don’t need to worry about investing, because their pensions are so generous. Neither do they need to fret about overspending. “I know you’re stressed, and you’re refinancing from time to time, and I don’t think that’s the best thing,” said MacKenzie on Day 1. “But not all of the money going out is being spent: some of your spending is really saving.” He pointed to their pension contributions, which total nearly 10% of their gross income. That’s far more than most Canadians will ever save. “Between the two of you, you’ve got pensions that are worth about a million bucks, and you can begin to draw on that next year.”

The advice

Chris and Monica came into the makeover thinking they were doing something horribly wrong. They felt like members of the working poor.

Norbert Schlenker helped them to see that simply isn’t the case. “You’re strapped every month because you’ve got big tax bills, you’ve got huge pension contributions, and you’ve got a big mortgage. You might ask how someone with such a high income could have no money left, but more than half of it goes to just those three things. And you’re supporting two families. You shouldn’t feel bad about this. Not at all.”

The Neilsons had not realized how valuable their pensions were. If Chris retires next year and chooses the “joint life” option, his pension will pay out about $3,500 a month as long as either he or Monica is alive, and the payments are fully indexed for inflation. His plan also includes an additional benefit (called a Special Agreement) of $217,000, which Chris can take as a lump sum as soon as he turns in his badge.

There’s more good news. Three of the couple’s four personal loans will be paid in full by this fall, reducing their expenses by about $800 a month. “That should make it much less of a scramble. This is a really short-term problem,” Schlenker said.

Both MacKenzie and Schlenker suggest that the couple hold off on moving to a more expensive home. If Chris chooses to retire in March 2009, he can collect his Special Agreement payout and use that huge sum to pay off two-thirds of their mortgage. Then, if he works at a new job while collecting his pension, the Neilsons can be mortgage-free in another five or six years. At that point, if they choose to move, they can do so without dragging along a massive home loan.

The one thing Chris and Monica must do is to get their credit cards under control. They are carrying a big balance that’s costing them about $200 a month in interest. “See if you can get a lower rate on your credit card,” Schlenker advises. “Or see if you can put it on a line of credit at prime, because that will save you money every month.” When their three loans are paid off, they can take that extra $800, apply it to their $15,000 credit card balance and retire it in about a year and a half.

Schlenker says the couple should reduce their debt load before they worry about saving for their kids’ education in RESPs. “I know you’re looking at your kids and thinking, ‘We should put some money away.’ But by the time your kids go to university, you’ll have lots of money. It makes no sense to put money into an investment that earns 6% on average when you are paying almost 19% interest on a credit card. Wait until you’ve eliminated your high-interest debt and then, if you want, you can get started with an RESP using a Couch Potato portfolio.”

Six weeks later

The Neilsons are feeling a whole lot better about their outlook. Chris and Monica now realize that their biggest misconception was not appreciating the value of their pensions. “We never really considered pension contributions as a savings fund,” Chris says. The Neilsons were shocked to hear that Chris’s annual pension income (around $42,000) will be equivalent to what amillion-dollar portfolio would generate.

One of the first things the Neilsons did after the makeover was to pull the For Sale sign off the lawn. “At this point in our lives, it just doesn’t make sense for us to take on a bigger mortgage,” Monica explains. “For me, my goal is to work less, not more. And, unfortunately, moving to a nice house means I would have to work full-time longer.”

The Neilsons plan to take the $217,000 that Chris will receive from his Special Agreement in March 2009 and put all of it toward their mortgage, which will knock the principal down to about $100,000. Then, as a “three-income family” (Chris will collect a pension and find a new job), they can pay off their house in five or six years. They’re not sure where they’d like to move after that, but Vancouver Island looks inviting. “The housing prices are cheaper there,” Monica says. “So when we do sell, we hope to get something that’s much nicer for the equivalent price.”

They have applied for a secured line of credit at prime, which is currently less than 5%. Monica had resisted doing so in the past, because she was worried that they would be tempted to draw on the line of credit. But the math finally convinced her: by moving their credit card balance onto the line of the credit, the Neilsons will pay less than one-third the interest they were shelling out before. They’ve cancelled their MasterCard and will keep only their Visa, which has a better rate and a much lower limit. “Keeping our debt down now seems achievable,” Monica says.

Chris concurs. “Our goal now is to get both of us retired as soon as possible,” he says. “The sooner we can both pack it in, the sooner we can both just stay home, travel, raise our boys and enjoy life.”

While the Neilsons have no pressing need to invest, they have decided to put away about $1,000 in a Couch Potato portfolio. Chris wants to get familiar with the logistics in case they decide to invest later on.

The biggest threat to the couple’s early retirement is their propensity to overspend. They know they’ll be tempted by the extra $800 a month they will have coming in when their three consumer loans are paid off. Their challenge will be finding the discipline to use those extra funds to pay down debts.

Can the Neilsons control their spending? Will they be able to pay down their debt and achieve the retirement they dream about? To find out, read their blog at www.moneysense.ca/monicaandchris.