With credit cards maxed out due to years of chronic over-spending, plus lingering HECs fees, and other personal loans, 30-something Brunswick-based psychologist Ariadne Lack was struggling just to service the interest on a whopping $35,000 in debt. To make matters worse, she had no assets to her name (beyond super) and had not filed a tax return for years.
Desperate for help, Lack turned to Collingwood-based financial planner Susan Jackson, after seeing her business listing in a local phone directory in April 2002. What attracted her to Jackson’s firm, recalls Lack, was the implication within the company’s name – Women’s Financial Network – that it was set up to service the needs of female clients.
“Limited as they were, my previous experiences with financial planners involved grey-headed men in suits talking a foreign language who weren’t able to empathise with my predicament,” recalls Lack.
“And considering the financial mess I was in, I wasn’t sure if too many financial planners would have been too bothered to try and help me until I had something to invest.”
Lack’s two most precious dreams – of one day opening up her own private practice, and moving from “shared digs” into a home of her own – relied on changing nasty spending behaviours.
So Jackson’s initial recommendations focused on a debt-reduction strategy.
“Just as it had taken some years to get into this debt, realistically I knew it would take years to get her completely out of it,” Jackson says.
Based on a plan to immediately commit 80 per cent of Lack’s then $33,000 net annual income to expenses and debt reduction, Jackson estimated that it would take Lack up to five years to put this debt behind her. To ensure that Lack stayed committed to her debt-reduction program, Jackson arranged meetings every month for the first two years.
“Fortunately, Ariadne realised that unless she changed her reckless spending behaviours she would remain in a rut, and this would continue to stifle her ability to progress both personally and professionally,” Jackson says.
Each fortnight, Ariadne’s salary was allocated across three different areas: bills, debt-reduction and spending. This meant she: a) had the money to pay bills as they came due; b) was progressively reducing her debt; and c) clearly identified how much there was left for spending.
“Regular meetings spent indentifying situations where Ariadne was vulnerable to overspending, or making poor money decisions, allowed us to work on creating some new behaviour around managing her finances,” Jackson says.
“Getting all her tax returns up-to-date resulted in a tax refund which also helped provide some monies to get this new system into place.”
No pain – no gain
While there was no avoiding the pain involved with paying down this debt swiftly, Jackson says it was just as important to cater for unexpected expenses, plus a small allowance for entertainment.
She says it was also important to allow for the odd relapse in buying behaviour triggered by random bouts of restrained “retail therapy”. But to minimise potential moments of weakness, Lack recognised the need to replace the reckless buying behaviour inherited during childhood with a new way of thinking about budgeting.
Having identified that Lack kept her work life on track through her diary, Jackson suggested that she also start using it to help manage her finances.
“Susan helped me grasp a better understanding of money, and through this I managed to pay down all my debts within four years,” says Lack.
With the debt completely paid off by mid- 2005, Lack looked to Jackson for advice on how to establish a private practice as a self-employed registered psychologist. In addition to charging a nominal rate for surplus office space within her building, Jackson also assisted Lack with marketing; identifying the right business structure; tax and compliance issues; plus managing business cashflow, especially during the set-up phase.
With Jackson’s assistance, monies that Lack held within a poorly performing Government super fund were rolled into a fund of her choice (Australian Ethical Fund). And by contributing to her super on a monthly basis, Jackson says Lack is reducing her tax bill, while building up her retirement savings.
And while she continued to meet with Jackson every two months, Lack says that what was happening in the business rapidly became the primary focal point of these catch-ups. She says she couldn’t have contemplated setting up her own business had she still been in debt.
“The good money management disciplines Susan taught me created a solid foundation on which to build my business,” says Lack.
“On a personal note, being so seriously in debt was never going to be the right environment in which to enter a relationship with my future partner in life.”
A continual improvement in business cashflow, combined with improved spending habits, plus no outstanding debts, effectively created a multiplier effect in Lack’s ability to save. Within five years, Lack had amassed sufficient funds to be able to buy a home, together with her partner, Hutch.
In 2009, Lack and Hutch bought their pri- mary residence in Melbourne’s inner north suburb of Preston, for $678,000. And the ownership of another property, belonging to Hutch, was restructured to create tax-effective debt while providing some tax benefits for both of them.
Neither Lack nor Hutch wanted to talk about the “yucky stuff ”, but Jackson says they recognised the need to formally distinguish between individual and jointly-owned assets – should they ever part company.
“At their request I facilitated a discussion that helped to pre-determine the methodology needed to recognise ownership if they split and kids were involved,” says Jackson.
“This allowed them to come up with a plan that they were both comfortable with.”
Having decided to start a family late in 2010, the pressing question, adds Jackson, is how the couple will cover necessary expenses and mortgage payments when Ariadne goes on maternity leave. And while this strategy is still evolving, all parties agree that getting ahead with the mortgage is the smartest strategy.
“During the time Ariadne is on maternity leave, this strategy allows them to either revert to an interest-only loan or redraw some of the payments made in advance,” Jackson says.
Playing to strengths
Looking back, Lack says that when she first met Jackson, Lack was similar to many of her professional friends, who despite having cerebral “horse-power” were never taught financial literacy. Lack also recalls how Jackson’s ability to “de-jargonise” financial language resonated with her obvious need for plain speaking on money matters.
“We all have areas where we struggle, and my relationship with money happened to be my weakest link,” confesses Lack.
“By teaching me the psychology of money and how to change some unhealthy buying behaviour, Susan taught me to play to my strengths.”
Lack says she quickly realised that the financial knowledge Jackson was transferring was just as valuable as the professional mentoring Lack had been accustomed to paying for as a psychologist.
More importantly, she recognised that if she didn’t improve her financial acumen she’d remain in a professional rut indefinitely. One of the most empowering acts, recalls Lack, was eventually cutting up her credit cards and sending them to Jackson in the post.
“I started to change my behaviour when I finally realised that shopping was not an immediate cure for everything, and this galvanised my willpower to realise my financial dreams,” she says.
Lack’s ability to chart a course of wealth creation was embedded in her ability to successfully pay down debt, Jackson says. She doubts Lack would ever have moved into self-employment, let alone home ownership, had she not been able to correct long-standing negative beliefs about money that were holding her back.
“Financial planning is ultimately about helping people create the lives they want,” says Jackson.
“But planners are unable to do this unless they’re non-judgemental and sufficiently approachable to forge meaningful relationships with clients.”