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From boom to bankruptcy: Falling behind in your 40s and 50s

CNBC Digital presents the third in a series of five articles by members of its Financial Advisor Council on worst-case financial scenarios affecting clients in four age brackets: millennials and younger Gen Xers; people in their 40s and 50s; 60-somethings and pre-retirees; and those already in retirement. This week's guest contributor is Sheryl Garrett, founder of the Garrett Planning Network.

Imagine my surprise when I received a call from a client asking for a referral to a bankruptcy attorney. Ten years before, we had enjoyed regular contact, typically meeting at least a couple times a year.

Over time, our contacts grew more infrequent; however, we stayed in touch periodically, and things were chugging along nicely for several years.

The caller, Sally, had completed two advanced degrees and had more than tripled her income. Her husband, Bob, continued advancing in his career with the government. Their financial security was on solid footing, and things seemed to be getting better all the time.

However, after years of public service and substantial encouragement from influential people in his field, Bob took a gamble and pursued his longtime aspiration of running for public office. The time, energy and money required far exceeded this couple's expectations. Two failed campaigns wiped out this family's financial security, which had taken so many years to attain.

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The couple had his pension and a little retirement account remaining, but nearly all other financial assets had been depleted. They were down to just over $4,000 in their savings account, and their expenses exceeded their income by $800 per month. Bankruptcy appeared to be their only option.

Upon receiving this news, I asked that we get together and discuss their situation in detail before contacting a bankruptcy attorney. They invited me to dinner at their home, and after dinner we dove in to their monthly cash outflow. Bob pulled out their check register, and we began compiling a list of required and desired expenditures.

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It quickly became apparent that this family had sufficient income to cover all of their required expenses, but they would have to make some significant cuts in discretionary areas to make ends meet. They needed to come up with at least $800 per month in permanent budget cuts.

The first discretionary item was Sally's mobile phone, at a cost of about $90 per month. It was not required for her employment, and she really only needed it in the event of an emergency. She canceled that plan and secured a phone that cost just $10 per month that would be used only for emergencies.

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The family also had cable service at a cost of nearly $130 per month. I suggested they cancel their cable service and install a digital 360-degree antenna. The antenna runs about $100, but there is no ongoing cost for commercial television and PBS. They added an $8-per-month streaming Netflix subscription.

Without a major change in quality of life, we had cut $200 from their monthly budget with these two changes; however, we still had $600 or more to go.

John Verner | E+ | Getty Images

When I first met Sally, she cooked all the time. During the campaigns, the family found little time to eat together, let alone prepare meals. One glance in Sally's pantry explained a lot. It's understandable that, at times, our lives get busy and we grab a quick meal on the go. However, convenience food, even at cheap fast-food restaurants, is substantially more expensive than preparing a meal using whole foods.

Bob and Sally had been spending more than $700 per month on groceries and dining out. With the campaigns behind them and a significant monthly cash-flow shortfall, Sally returned to cooking from scratch. They easily cut another $400 off their monthly outflow.

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However, that was still not enough. For many years, the family had tithed to their church. When they'd cut back to $250 per month, which was their charitable contribution at the time of our discussion, they felt terrible.

"Shifting priorities, working up a plan and remaining disciplined helped avoid bankruptcy and the public and personal shame this financial collapse would have caused."

We discussed the concept of stewardship in a broad sense: Contributions of time and talents can be as valuable, or more valuable, than cash. Anyone can write a check, but not everyone has the time and/or skills to be a service to their charitable causes.

Bob and Sally now had the time, and they'd always had many skills to contribute. They pledged to donate a minimum of two days per month each in service to their church community in exchange for discontinuing their current financial support.

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In fewer than two hours together, we identified, discussed and agreed to make lasting changes in these four areas—telephone, television, food and tithing—which resulted in eliminating their monthly cash-flow shortfall.

Shifting priorities, working up a plan and remaining disciplined to avoid bankruptcy helped this family to avoid the public and personal shame this financial collapse would have caused.

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