8 mouths to feed. 1 big financial challenge

(Money Magazine) -- Nathan Schenkel is only four, but he already has a nickname: Spawn of Satan. And that's what his mother calls him. Teasingly, of course.

Because he runs next door in his underwear to steal cookies; activates the garage opener and then grabs the door handle so it hoists him eight feet in the air; and scampers wildly through the house letting out an ear-piercing shriek, looking for action.

With so many mouths to feed, Chris and Kelli Schenkel have been able to amass only $23,000 in retirement funds. And then there's the debt.

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And there's always plenty of action at the Schenkel house. Nathan has three sisters - Kelli, 5, Katie, 8, and Bret, 10 - and an older brother, Christopher, 12. Their half-brother Terry, 21, from their mother's first marriage, also drops in regularly.

At the center of this swirling chaos of kids sharing a big house in Dryden Township, Mich., an hour north of Detroit, are Christopher Schenkel, 36, and his wife Kelli, 38.

On a typical weekday evening, Chris and Kelli bring four of the kids home from gymnastics classes at 9:30, then try to maintain order as Nate runs rampant, Katie and Bret forage for food in the kitchen, Chris Jr. spreads his math homework on the living room floor, Terry absently flips through channels on the big-screen TV, and little Kelli asks her dad to snuggle up with her in a chair.

Kelli had always dreamed of having a big family. She does have her moments, usually while she's picking up toys or wrestling with the two loads of laundry she does a day, when she wonders, "What were we thinking?" But for the most part, the Schenkels would not trade this jumble of childhood magic for anything.

What they'd never considered deeply is how they would pay for such a grand enterprise. At first the additional costs were small. "One extra box of macaroni and cheese didn't seem like a big deal," Kelli says. And their income seemed healthy enough, rising to a peak of $150,000 from the four hair salons that Chris partly owns and manages, plus Kelli's part-time job teaching gymnastics.

But as the children grew, so did the Schenkels' expenses. When their small 3½-bedroom home became a squeeze, they built a bigger one for $325,000, raising their mortgage payments to $2,500 a month. As the four kids inherited Kelli's passion for gymnastics, the couple began spending $1,000 a month for classes and travel to competitions. And they couldn't resist buying extras like the 50cc Suzuki motorcycle that Nate rides around on (predictably crashing into the deck and gashing an eyebrow shortly after learning to ride).

While the Schenkels have been pretty good about keeping track of their six lively children, they haven't been as vigilant about tracking their cash flow. The price of neglect became clear when Jay Berger, an adviser with Integrated Wealth Management in Traverse City, Mich., recently met with the Schenkels (at Money's request) for a financial planning session.

Sitting at their kitchen table, the couple were aghast to discover that they're spending nearly $9,000 a year more than they earn and have drained most of their $112,000 home-equity line of credit. Plus, they have almost no savings - only $23,000 in retirement funds and no college funds at all for the kids.

"Painful" is how Kelli describes the meeting. She immediately canceled their subscriptions to the Golf Channel and HBO. But such tweaks are hardly enough. "The Schenkels are in dire straits," says Berger. "They seemed to believe they could pile on the debt and deal with it 'down the road.' Well, down the road is now."

Chris and Kelli were close friends at Dryden High School, where Kelli was a cheerleader. She married young, had a child (Terry) and divorced her husband, but she and Chris remained friends throughout. "I'd always been attracted to Kelli," he says. But Chris never wanted to risk ruining their great friendship.

Then, in October 1989, when he found himself the best man at a wedding where Kelli was the maid of honor, fate seemed to be giving them a hard nudge. By the following summer they were married.

Kelli's love of big families came from her father, one of 10 children. She delighted in the happy anarchy at her grandmother's house at Christmas and decided that one day she would have six children of her own. But a few years after Terry was born, an operation for cervical cancer made conception difficult. When her insurance company did not cover most of the $30,000 cost of fertility treatments, her parents rushed in to help.

Finally, after three years of trying, Kelli became pregnant with Chris Jr. in 1994. That's when Chris Sr., with some trepidation, decided to give up his job in construction and accept an invitation from Kelli's father to join the family business - a chain of 55 beauty salons, called Grondin's Hair Centers, scattered across Michigan.

"I was used to swinging a hammer, not putting in perm rods and curlers," Chris says. But the career change worked out well, as did Kelli's fertility treatments: Bret was born 19 months after Chris Jr., and Katie followed two years later. By then Chris had purchased a 49 percent interest in a Grondin's salon in Flint for $20,000, secured with a second mortgage on their small house.

With four children at home, including Terry, Chris began to have doubts about whether they could afford a bigger family. "Everyone was telling me I was crazy to have so many kids," he says. "And I'm thinking, how are we going to send them all to college? How are we going to do this? Kelli kept saying, 'Don't worry.'" Kelli prevailed. Three years later, little Kelli was born, followed by Nate in 2002.

But squeezing six children and two adults into their 1,400-square-foot house was tough. Terry had his own room, the two older girls shared a bedroom, and Chris Jr.'s room was the size of a large closet. Kelli and Nathan slept in a crib and bassinet in Mom and Dad's room. With so little space for the kids to play or to store the toys, says Kelli, "the place was always a mess." There was only one tiny bathroom, making traffic jams the norm.

The Schenkels decided enough was enough. They bought a four-acre plot in Dryden and by 2003 had finished building a 3,700-square-foot, six-bedroom, three-bath house. The new digs seemed affordable since Chris had recently become part owner of three more salons - one financed with a $20,000 business loan and the others in partnership with his father-in-law and brother-in-law - which pushed his income to more than $100,000 a year.

But the Schenkels became overly ambitious during the construction process, seduced by extras like marble countertops and a hot tub on the deck. When their original mortgage of $275,000 proved insufficient, they did a cash-back refinancing to draw out another $50,000. That still wasn't enough, so they took out an equity line of credit for $112,000 and spent some of it on new furniture like a sofa and love seat for the sitting room ($1,200) and a new bedroom set ($3,700).

Meanwhile, Chris and Kelli were discovering how much more older kids cost to raise than younger ones. In some ways the couple are thrifty, relying on hand-me-downs rather than buying new clothes. But at Christmas, a $15 Barbie doll no longer satisfied a nine-year-old girl with her eye on a $150 new iPod. And whatever one got, of course, the others wanted too. So when little Kelli saw a cute bathing suit she liked, her mom found herself spending more than a hundred dollars on five bathing suits.

For the Schenkels, life in a big family is a constant process of negotiation. How do you tell Bret that the rent-to-buy French horn he yearns for is too expensive at $78 a month when Chris Jr. already has a $550 drum kit (now gathering dust in his bedroom)? In this case, they reached a compromise on a used horn for $20 a month.

But sometimes the begging and pleading is too much to resist. That's why Kelli usually finds it impossible to quickly duck into the grocery store for $20 worth of milk and bread. Once the kids have each picked out their favorite kind of cereal, cookies and chips, those trips never cost less than $150.

Making matters worse, the Schenkels' income has dropped over the past two years as layoffs in the Detroit auto industry slowed business at the salons. But even as their income plunged from $150,000 in 2004 to around $114,000 this year, the Schenkels didn't curb their spending.

In fact, their bills went up as they struggled to finish the house and indulged in extras like a $3,000 golf cart to ride around their property and a 2004 Harley Davidson ($23,000) for Chris Sr. "I think we knew we were spending too much," says Chris, "but we didn't want to admit it."

Today the family is clearly in trouble. They have only $17,000 left on their home-equity credit line, which they'll soon use up at their current rate of spending. And they owe another $5,000 on their credit cards, with no cash reserves to fall back on.

All of this makes long-range planning for college and retirement impossible for now - and the college issue is hitting the Schenkels especially hard. Kelli doesn't want to give up on helping to pay for the children's education, even if the kids have to contribute as well with jobs or scholarships. "I feel like it's our responsibility since we're the ones who decided to have five kids," she says. "It's not their fault they were born into a big family."

As for their own retirement, Kelli and Chris deflect the issue with jokes about hoping their kids become successful enough to support them in their old age. But they're clearly concerned about that too; they have no idea where the money will come from. Kelli's parents have come to their financial rescue before. But the Schenkels know that their problems can't be solved with a quick fix or a grand gesture and are determined to stand on their own.

Their resolve is an encouraging sign, says Berger, the financial planner. Here are his suggestions for how the Schenkels can bring themselves back from the brink.

Stop the bleeding The Schenkels need to face the severity of their crisis head on. They can start by scheduling a few hours a week to sit down together, track their income and expenses, create a budget and work on a realistic plan for getting out of debt. In other words, says Berger, "they need to start thinking about running their household like a business, just as Chris does with his hair salons."

The planner calculates the Schenkels will have to cut spending by $750 a month just to break even.

Step No. 1: Use only cash for purchases like food and entertainment, and stop using credit cards completely. In addition to ensuring the family won't run up further debts, this exercise typically has the effect of making people automatically rein in spending, since paying cash makes purchases seem more real - and prices more painful.

Next, look for places to cut back. The Schenkels think they can chip away at their $1,000-a-month gymnastics bill by driving home after in-state competitions rather than staying in hotels and by bringing food from home instead of letting the kids hit the snack bar.

Berger says flatly that such small economies aren't enough. He urges them to look for additional cutbacks. One way they could raise cash to help pay down debt is to sell such nonessentials as the golf cart. Likely proceeds: $4,000.

Unfortunately, selling Chris' motorcycle or trading in their 2004 Dodge Durango for a cheaper model wouldn't really help because both have depreciated so much that the Schenkels wouldn't make enough money to pay off their outstanding vehicle loans.

Suspend retirement savings Financial planners don't normally advise clients to stop contributing to their retirement fund. But Berger says the Schenkels just can't afford the $200 a month that they're putting in Chris' 401(k).

"This is an extreme situation, and they have more critical needs right now," he says. Once they're out of the woods - having reduced their debt by, say, at least half - Chris can resume saving, with a goal of eventually contributing the max.

Give income a boost Chris doesn't want Kelli to work more hours because she has so many responsibilities running their big household. But she is considering adding a few hours by teaching preschool kids at her gym in the mornings. And in two years, when her two youngest are in school full time, she could take a job at one of her family's salons to bring in extra income.

One easy way to boost cash flow: Adjust Chris's withholding, instead of getting a refund at tax time. That should put an extra $250 a month in their pockets.

Build a rainy-day fund The goal of all these moves is for the Schenkels to pay down their debt by $20,000 a year, Berger says. In two years, once they've whittled the amount they owe, he suggests the couple redirect $5,000 of the money earmarked to pay off loans toward building an emergency fund that should eventually reach three months of living expenses.

Get the kids involved Berger sympathizes with Kelli's desire to save money for the children's future tuition costs. But he says the Schenkels should not put even a penny into college funds until they've cut their debt substantially, created an emergency fund and maxed out 401(k) contributions. That's not likely to happen anytime soon.

But there's an important lesson they can give their kids right now, and it won't cost anything but time: Talk to the children about the family's financial challenges and involve them in the decision-making process. What the kids learn might help them avoid making the same mistakes when they grow up.

After the meeting with Berger, Kelli pulled the credit cards out of her wallet and Chris started keeping track of his daily spending. How their kids react to all these changes remains to be seen. When Katie recently got $60 for her birthday, she had big plans for blowing it all on clothes at the mall.

Her parents hope she and the others will instead follow the example of Chris Jr., already a legendary whiz with money. He did something remarkable with the $750 he had amassed from cash gifts and doing chores around the house: He put it in the bank.

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