Archive for the ‘Lesson of the Day’ Category

High Salary but Minimum Wage Struggles

In Lesson of the Day on October 20, 2012 at 8:30 pm


  Jeff and Brenda, a married couple from Florida, called in for help with their debt problems. The couple had a combined take-home income of $4,500 per month, which should have afforded them a comfortable, financially carefree lifestyle.  
  They weren’t rich of course, but they shouldn’t need to call up and talk to me. Yet they were struggling like crazy with their debts–a $1,800 mortgage payment, two car payments totaling $900, credit card payments of $300 and a $200 student loan payment, for a grand total of $3,200 in monthly debt payments. And the rest of their necessary living expenses–food, utilities, gasoline, etc., ate up the remaining money easily.  
  “Before we bought the house, we had fun,” she said. “We haven’t gone out to dinner in five months.”  
  Really, the house was not the problem. The problem was all those debt payments. If they’d not bought such an expensive house, or they hadn’t run the credit card balances up to $7,000, or not financed two new cars at the same time, they might still be enjoying life and their higher than average income.  
  “If you had only not taken on one or two of your debt payments, you guys would probably be eating out, getting money saved, and basically living a secure happy life,” I said. “For instance, if you’d gotten a house with a thousand dollar mortgage payment, and only bought one car brand new, you would have over a thousand dollars every month to do whatever you want with. Save it, spend it, you’d have a grand more than you do now. Every month.”  
  “That would be nice,” she said. 
  “On four thousand dollars a month you should be able to eat anywhere you want and have enough to leave a thirty percent tip,” I said.  
  Instead, they were struggling against all those interest rates, and all the hooks their creditors had in them. There definitely was no money to spend on eating out. They seemed to only be able to afford macaroni and cheese, even though they made enough to afford fillet mignon.  
  Life is about more than money and unexpected expenses. It’s also about enjoying yourself. Why shouldn’t you treat yourself if you can afford it? But if your monthly debt obligations eat up all your income, you won’t have money to spend on yourself, so you can’t, in reality, afford anything extra, just like with Jeff and Brenda. If that’s the case, you better really enjoy all those things you financed.  
  Together Jeff and Brenda’s gross yearly salary was about $80,000. According to the U.S. census data, the median household income is a little over $52,000. So here Jeff and Brenda were making thirty grand more than most people, and they were living with all the financial stress and struggle of a couple earning minimum wage. I talk to a lot of people with incomes even higher than Jeff and Brenda’s, and yet they go through the same kind of money problems that poor people endure. The same headaches. The same stress. The only difference is their TVs are bigger, and their cars are newer.


The Hangover from Excessive Borrowing

In Lesson of the Day on March 30, 2012 at 11:46 pm
The Hangover

The Hangover (Photo credit: Wikipedia)

One of the easiest financial mistakes a person can make is borrowing more money than they need. I see it all the time. The effect of borrowing more money than you need is like a hangover. You drink way too much, and then you wake up in a fog with a jackhammer in your head and a monkeywrench in your stomach. You borrow way too much, and it’s the same thing, only the monkeywrench is in your budget, and the jackhammer is those monthly payments. At least with the hangover from drinking, things are back to normal after a day.
This is what happened to two of my clients, Janet and Bob from New Mexico. Their debt hangover was as bad as what you’d get after a raging New Year’s Eve party hosted by Rick James.
Bob and Janet’s big borrowing hangover was the result of a bad decision about an equity loan. This couple had planned to take out an equity loan in order to consolidate their credit card debts and car loan. Pay it all back with a single payment and a low interest rate. Nice and simple, right? Well, what happened was this: As they were putting together the mortgage contract with their broker, he asked them multiple times if there wasn’t some other expense they had, or some need that could also be paid for using the additional equity in their home.
“First he asked if we didn’t have other debts, then he asked if we wanted to borrow extra to take a vacation,” Janet said.
The clincher came when the broker asked them if there weren’t some home repairs or maintenance that needed to be done. Janet and Bob had been talking about remodeling their kitchen, and they decided right there in the mortgage broker’s office that they would do it, adding the cost of the construction job right into the equity loan. Now that’s a good salesman, keep throwing that line in the water, and eventually something will nibble on your bait.
“We went in to borrow twelve thousand dollars and we ended up taking out twenty-five grand,” she cried.
“Then what happened?” I asked. “The payment was just more than you planned for?”
“It ended up costing more to redo the kitchen then we thought,” Janet said. “So on top of the loan payment which is way more than we planned for, we owe the contractor money, and we’re paying him.”
Because they let the broker talk them into accessing all the equity in their house, their original plan for a $12,000 loan with a payment of $200 was now costing them $500 per month, with what they were paying the contractor. And they’d had to pull money from their savings to ensure the remodeling job got finished.
“Hey, at least you’ve got a nice, new kitchen,” I said, trying to look at the bright side. “That’s something.”
“I don’t even like going into that kitchen, knowing what it’s costing us,” Janet said.

If the Income Drops, Save yourself Trouble, and Drop the Spending

In Lesson of the Day on February 27, 2011 at 6:34 pm


One of the best pieces of financial advice I can give is this: If your income drops– because of a cut in hours, a job change, why ever–the first thing to do is put together a budget to determine your new financial situation. If you need to cut some things out of your budget to save money, do it immediately.
So many people come to us for help with debts that they accumulated keeping up with their old spending habits even though they saw their income drop. This is another major cause of headaches that can sometimes be avoided.
Arthur and his wife Mary were one such couple. They had been planning a vacation to Hawaii for the past year. They’d always wanted to go, and finally they decided to do it. However, three months before their trip, Arthur got laid off. Mary was working but didn’t earn nearly much as him.
Arthur and Mary were faced with a dilemma. Should they keep their plans or cancel the trip to save money? They didn’t want to lose their deposit. They fretted about what to do. Many of their family and friends urged them to just go on their vacation and get away from it all, forget about money problems for a while. After all, their friends said, ‘You guys have earned it, working hard all these years.’
So they took their advice to just do it.
“We should never have listened to other people,” Mary said. “Art wanted to cancel the trip, and that’s what we should have done. He was right.”
“How much did the trip end up costing you?” I asked, preparing myself for the worst.
“Thousands!” she said. “It’s freaking Hawaii! That was so stupid of us. I never thought it would take as long as it did for him to find a job.”
“How much was the deposit you didn’t want to lose,” I asked.
“It was only five hundred bucks,” she said.
What those well meaning friends and family members probably didn’t know was that Art and Mary had only $5,000 in the bank. Five grand is a lot of money, but when you’re constantly picking at it to pay your major bills, it’s going to go fast. And that’s exactly what happened. By the time it came time to leave for Hawaii, it was half gone. Art was receiving unemployment by then, but it was barely enough to cover their bills even with the help of Mary’s salary.
So as they drove to the airport, instead of happily anticipating the vacation they’d been dreaming about for years, their thoughts of fun in the sun were distracted by the fact they had no money, no job prospects, and would very soon be facing enormous bills from the trip.
It took Art a total of 10 months to land a job that paid him more than the unemployment. By that time they were up to their eyeballs in credit card debt, and the harassing phone calls had begun. They even called Arthur at his new job. Just what he didn’t need.
“We didn’t even have a good time in Hawaii,” Mary cried. “Can you imagine that? We’re on vacation in Hawaii and we’re worrying about money. Everytime we had to swipe a credit card I got a pain in my stomach.”
I felt bad for Mary and Arthur. If they’d just canceled the trip, they might have come out of the job loss okay. Even if they lost their deposit, they wouldn’t have given themselves that huge bill to pay. The travel and lodging was $2,000 alone. And as Mary and Arthur discovered, everything in Hawaii’s touristy areas is quite expensive.
Of course, the cause for their money problems was Arthur’s sudden job loss. But his unemployment benefits, together with Mary’s income almost covered their monthly bills. Plus they had the five grand in the bank.
Mary and Art could have probably gotten through his job loss without all the stress and harassing collection calls they endured. Of course, they would have probably still used up all their savings even if they hadn’t gone to Hawaii. But they set themselves up with a $3,000 vacation tab to pay off with no job. And they already owed about $2,000 in credit card debt at the time. Barely paying their bills, they had no extra money to send to the credit cards, so the balances skyrocketed, along with the required payments.
As much a bummer as it is to cancel a vacation, the fact is, Hawaii isn’t going anywhere. Art and Mary could have rescheduled the trip after they’d regrouped from his job loss. Then, the trip would have been a celebration, a triumph for them over their adversity. Instead, they went to Hawaii and didn’t have fun. That is the real bummer.

Money worries give 36-yr-old man a heart attack

In Lesson of the Day on October 17, 2010 at 3:06 pm

Doctor advises he smoke to calm down 

  Doctors tell us that stress can be a leading cause of health problems. And we all know that money problems can be a leading cause of stress.
  I was reminded of this recently by a client who told me that he had recently suffered a heart attack. This man is only 36 years old.
  This client, Dave, took a cut in his work hours a year earlier, and he had fallen behind on his house payments because of it. Dave was worried sick about losing the house, understandably, as his mortgage company had been threatening to start foreclosure proceedings.
  After the heart attack, lying in his hospital bed, Dave’s doctors told him that they could find nothing physically wrong with him. They told him the only thing that could have caused his heart attack was the stress in his life.
  “My wife supports me, my kids are good kids, I don’t have any other problems,” he said. “I just made myself sick over the situation with the house. It never stops. You go to bed worrying about it, and you wake up worrying about it.
  “My doctor told me I’m in good health otherwise. No cholesterol problems. They said my organs are all good.”
  Dave, who smokes, told me that his doctor actually advised him to go ahead and smoke a few cigarettes a day if it helps him to keep calm. When does a doctor ever advise that? “He (the doctor) told me it would be better for me to smoke a little if it prevents another heart attack.”
  So keep this story in mind if money trouble has you lying awake at night. I know nobody thinks this when the creditors are constantly calling, and I know it sounds corny, but life and health are more precious than money.

Know what you CAN’T afford

In Lesson of the Day on September 8, 2010 at 9:23 pm

Banks still giving out mortgages that will never be paid back 

  Scott from Georgia called in because he was having to borrow money from his parents every month to make his house payment. Scott was 26 years old, and he brought home $1,800 per month in income. He had just bought this home a year earlier, and his monthly mortgage payments were $900. Half his income went right to the mortgage! Anybody is going to struggle when half their income goes right to a house payment. Plus you’ve got to pay utilitites, plus whatever it costs when something breaks.
 “I don’t know Scott, without a roommate or a big raise, it just doesn’t seem like you can afford this mortgage,” I said. “The house payment is half of your income. Did they know how much you made when you got the loan?”
 “Sure, I had to submit my pay stubs and tax returns,” he said. “I was pretty shocked when they said I qualified.”
“If it were thirty years ago, you probably wouldn’t have,” I said.
  As soon as he bought the house he began to have money problems. That’s because Scott’s salary simply didn’t afford him $900 a month for housing. He needed a house or rent payment that was closer to $600. And now his parents were getting tired of giving him hundreds of dollars every month to pay his bills.
 “Unless you can get more money coming in, you should probably talk to the bank about letting go of the house,” I said.
  Scott got his loan in the fall of 2008. By that time the default rate on mortgages had been climbing steadily and we were on the brink of economic meltdown. Maybe those bank executives whose bank lended Scott the money simply don’t read newspapers? Doubtful. More likely, the bank that loaned him the money turned around and immediately sold the debt for a profit, which is how the mortgage industry now functions.
  So keep that in mind if you are in the market for a mortgage. Don’t let some loan officer or broker tell you what you can afford. Know yourself what you can afford so that you don’t end up in a situation like Scott’s.

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