financialcounselor

Posts Tagged ‘debt’

High Salary but Minimum Wage Struggles

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

   WHEN A CHAMPAGNE INCOME ONLY AFFORDS BEER

  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.

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Woman Refuses to Face her Own Personal Fiscal Cliff

In Uncategorized on September 3, 2012 at 8:24 pm
Some of the biggest financial predicaments come about because of poor planning. Or in many cases, because of absolutely no planning at all. Or as I like to call it, burying your head in the sand.
For example, I talk to many people who are in trouble because of a major change in their finances that they knew was coming but didn’t do anything to plan for it. You wouldn’t believe how many people risk losing everything they have, including their home, because of this exact scenario.
One of my clients, Liz, had her head buried so deep, she hadn’t seen daylight in a long time. What happened was Liz was receiving money from SSI for her daughter. She had gotten this money ever since her husband died five years earlier. She got $650 from SSI each month, but she knew that the money would stop coming when her daughter turned 18.
Well, Liz’s daughter turned 18, the money stopped coming in, and Liz found herself without enough income to afford her bills. She was behind on everything, including her mortgage.
Liz had even sold the few nice pieces of jewelry that her husband had given to her, including the diamond earrings that were a present for their 10th anniversary, as she tried to keep up with her expenses. But it was no use without that extra $650 coming in every month.
“What am I supposed to do now?” she cried.
The answer was to scramble frantically to make up the difference in the income she’d lost, which is exactly what she was doing. But there was no reason for the frantic scrambling. She knew for years exactly when that money would stop coming, yet Liz was completely dumbfounded when it did. It was like she had walked into her job one day and been handed a pink slip out of the blue. If she had accepted the fact that money would stop and planned for what to do, it might be a very different situation.
At this point, Liz would probably have to downsize, sell the house and rent an apartment. And maybe she’d have needed to do that anyway, but here’s the point: at least it would have been a nice smooth transition instead of the craziness and sleepless nights she was enduring.
And maybe she’d have been able to keep the jewelry her husband gave her.  

Why a High Income Alone won’t keep you out of Financial Hardship

In Uncategorized on June 11, 2012 at 11:21 pm

COUPLE EARNS $250,000 PER YEAR, BUT STILL CAN’T AFFORD TO HEAT THEIR HOME

A lotta my clients will say to me, ‘If only I made more money, I’d be OK.’
Whenever I am hear this from someone, I tell the story of a couple who were my clients and who were in very dire of financial straits. This couple had major problems. Yet their monthly income was $21,000. And that’s after taxes, in case any of you were wondering.
Now you might be thinking: “If I made twenty grand a month, I’d be set. I wouldn’t have a financial worry in the world, and my life would be great.” Well, maybe it would, and maybe it wouldn’t. I’m sure this couple thought that way at one point too.
What happened was these people had made a number of bad financial decisions. I mean, you couldn’t count them all on both hands, that’s how many bad choices they’d made to leave them in a position that $21,000 per month was not enough money for them.
See, the wife owned a business that did contract work for the government. And the government required her to maintain a good credit history, or else her business wouldn’t be given any more jobs, and that’d mean she would kiss her $200,000 a year salary good-bye for good.
This couple had taken on a lot of personal debt, and when the economy went into the toilet, both she and her husband saw their work slow down. They’d only lost a small fraction of their income, but this couple had such high debt payments, they couldn’t keep up after that. Even when they were making $25,000 a month, they were spending every dollar they made. So now, the wife is telling me how they can’t afford to go out and eat, or see a movie or anything. She’s saying the same things as people who make minimum wage.
Anyway, because she had to maintain good credit, they could not get rid of their debts, because doing so would have hurt her credit. They were stuck with the mansion, the Mercedes leases, the money-losing rental property, and everything else. They were between a rock and a boulder. They even had to dress in layers at home because their mansion cost too much to heat properly. Does this sound like people who make over a quarter million dollars a year?
So keep this in mind if you think a big income will keep you out of money problems. Only good financial decisions will do that.

Know where the Money Goes

In Uncategorized on May 15, 2012 at 10:11 pm

I’d say the most common question I get asked by my clients is this: “Do I really spend that much money?”
The answer is always yes, and it’s always a problem. The first thing I do when I sit down with a client is put together a list of their monthly spending. And when we add up the numbers, the total alot of times hits home like a ton of bricks.
This is when I hear the second most common question: “Are you sure you added that up right?” I haven’t caught my calculator taking a day off yet.
It’s so important to know how much money you spend and what it costs you to live. I don’t mean right down to the penny, but you have to know where the bulk of your money goes–how are you going to be in control of a situation if you don’t know what’s going on?
For example, one client named Sara was so disbelieving, she had to get a pen and add up the numbers herself. She was shocked to find that her monthly spending totaled more than her income.
“Sara, your debt payments alone are a thousand bucks,” I said. “And from what you told me about your Starbuck’s habit, that’s another hundred dollars a month just for coffee. And you said you spend seven or eight dollars a day eating lunch out. There’s another hundred and fifty.”
When we factored in the necessities–food, utility bills, transportation, and such–Sara’s entire income was spent easily. And that’s why her credit card balances had gotten so high.
So if you’re having money problems and you don’t know why, the first thing to do is add up all your spending. And make sure you’re sitting down when you hit ‘enter’ on the calculator.

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

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

2 + 2 CAN NEVER EQUAL 5

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.

Homeowners can’t Neglect the Taxes and Insurance

In Housing Horror Stories on November 15, 2010 at 1:40 am

After letting his homeowner’s insurance lapse, 85-yr-old sees his house payment jump 118%

One of the major costs in owning a home is the property taxes and homeowner’s insurance. You’ve got to make sure these are paid up, otherwise you could find yourself faced with expensive problems.
And I’m not even talking about the dangers of your house burning down during a lapse in your insurance coverage.
I’m talking about the needless costs a person can incur when their mortgage company finds out the taxes or insurance have not been paid. The bank that is owed your mortgage debt, and who has their stake in your home, can heavily penalize their borrowers for not paying these bills. I’ve seen it with my clients, and brother it is expensive.
Your house is their collateral, and they do not like to find out their collateral is not insured. Banks know the importance of insurance. And they really don’t like it when some taxing body puts a lien on their collateral.
I’ve never seen mortgage companies impose actual penalty fees in situations like this. But I have seen them pay the taxes or the homeowner’s insurance, and then extract huge sums of money from the borrower for reimbursement. When the bank has to pay your bills, its bottom line is violently disturbed. It’s like throwing a bucket of ice water on a hornet’s nest, and the reaction is similar.
When a mortgage company pays your tax or insurance bill, it will usually set up escrow accounts for these things to make sure they never go unpaid again. You will now have to fund these accounts every month as part of your monthly house payment. When this happens, the increase in the house payment can be huge. Because in addition to the current year’s taxes or insurance you have to pay toward each month, you must reimburse the bank for whatever it paid on your behalf. If you can’t handle this huge spike in your house payment, the effects can be disastrous.
Most recently, this happened to a client of mine named John. John is an 85 year old man who lives alone. He gets social security of $1,200 every month. That’s it. His mortgage payment was $500, and he paid the relatively small tax and insurance bills himself. The problem was that John had been short of money when his insurance bill came in, and he didn’t pay the bill until about five months later. By that time, his mortgage company had arranged for insurance coverage on the house, and set up an escrow account for John to pay into every month. John’s payment jumped from $500 to $1,089! That’s only $11 less than his monthly income. That was four months before he called us. He’d missed all four new payments, he owed the mortgage company a total of $7,000, and they had initiated foreclosure.
Now, if you noticed the numbers, you might be asking why John owed $7,000 if he only missed 4 payments at $1,089 apiece, which equals only $4,356.
That’s because the insurance policy put in place by the mortgage company cost $1,600 for only five months of coverage! (John’s policy cost only $1,100 for the entire year.) In a situation like this, a mortgage company will often get a “sight/unseen” insurance policy. This means the insurance company has not inspected the property, so they charge more because they don’t know what they are insuring. Also, these policies usually carry no deductible, which also drives up the cost for coverage.
John had about $50,000 in equity in his house and he stood to lose it all if the foreclosure went through. To stop the foreclosure, John would need to come up with the entire seven grand, or file for bankruptcy. And the mortgage company told us–in no uncertain terms–that the escrow account would be there for the life of the loan. There was no chance in hell of cancelling them and letting John pay the insurance himself. These were some angry hornets indeed. So even after the arrears were paid back, John’s monthly payment would be significantly higher. All because he didn’t pay an $1,100 insurance bill.
“John do your kids know what’s going on with the house?” I asked him.
“No,” he said.
“I think you’re going to have to tell them.”

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.

Do you know who you work for? Aurora Loan Servicing doesn’t

In Housing Horror Stories on August 26, 2010 at 8:20 pm

Customer service rep swears they have no idea who owns their borrower’s loan

  If someone asked you who you work for, can you imagine their reaction if you told them you didn’t know? They’d probably think you were a spy or something.
  Apparently, Aurora Loan Servicing literally doesn’t know who they work for. The function of a mortgage servicing company like Aurora is to collect mortgage payments from homeowners for the investor to whom the mortgage debt is actually owed. And the servicer gets a fee for performing this function.
  Today I tried to facilitate some kind of workout option between Aurora and a borrower who was in default on his mortgage, due to being laid off from work for four months. Unfortunately, we didn’t have any luck, though we did have a remarkable conversation.
  The representative who answered our phone call told us that there was something about this particular mortgage that precluded it from any kind of repayment plan or workout agreement.
  We asked what it was about the mortgage, or what the investor’s guidelines were. She said she did not know. That was when the borrower asked who the investor of his mortgage was. That was when it got weird.
  “We don’t know who owns it,” the representative said.
  “Wait a second. How can you not know who owns this mortgage?” I asked. “You just collect this man’s payment and you give it to the owner of the debt. You work for the owner of this debt. Are you telling me you don’t know who you work for and who you give his money to?”
  “We don’t know who owns it,” she repeated.
  “Look, if you’re not authorized to disclose the owner of the mortgage, that’s fine, just say it. But you have to know who you’re collecting money for.”
  “We don’t know who owns it,” she repeated for about the fifth time.

Who says Student Loans are just for Tuition?

In Uncategorized on August 11, 2010 at 2:12 pm

Couple uses student loans to finance a CEO lifestyle

  I speak to a lot of people burdened with high student loan payments, the cause of which is overborrowing while in school. It is not true that student loans can only be applied to tuition. I talk to many people in my job, and I know many people personally who used student loans to pay for lots of expenses other than education.  
  Deanna and her husband Richard are one such example of people living on student loan debt. Deanna’s husband was going to school to get his PhD. They had two young children and an interest-only mortgage they could not afford. We put together their household budget, and their monthly expenses were double their income.  
  They were borrowing about $20,000 every year just to help pay for their cost of living. That didn’t include the $20,000 they borrowed each year to pay for Richard’s schooling. He did not work and Deanna only brought home about $2,000 a month.  
  “I’m sure your husband will be making great money,” I said. “But right now he’s not making any money, and you guys have big expenses, way beyond your income. Can’t you move into student housing? You guys are students, but you have the lifestyle of a CEO.”  
  “I love my house,” she said. “I’m not moving into student housing.”  
  “But you’re borrowing tens of thousands of dollars to pay on this house. And the debt isn’t getting any smaller because you’re only paying the interest. You’re borrowing to pay other debt, and that’s a bad idea. You’re essentially paying interest twice for the same house. And the amount you owe isn’t getting any smaller! When you finally start paying on the principal your payments will be a lot higher than they are now.”  
  “Actually, we have the option of paying less than the interest owed, and sometimes we have to do that. So we actually owe more on it than when we bought it.”  
  With every sentence, the decisions got worse and worse. They were borrowing money at 4 percent interest, to pay on their mortgage debt, which carried a 6 percent interest rate. This was a financial disaster.  
  “Deanna, you need to realize and understand exactly what you’re doing,” I said. “You’re paying interest twice for the same house. And the debt is getting bigger. What you’re doing will end up costing you a fortune.”  
  “But Richard will be making a lot of money,” she said again.  
  “Fine, so once he’s making a lot of money you’ll have the higher house payment, and you’ll have high student loan payments! For all his work getting that degree, your standard of living will be the same it is now.”  
  Deanna and her husband were sacrificing their future happiness for immediate gratification. Their kids were age 1 and 3. If they got rid of the new car and big house, and just got a little apartment until Richard finished school, they wouldn’t need to borrow so much. And that means they would have more of Richard’s high income to enjoy when he finally got it. Instead, once he got the big income, it would all just go toward debt payments.  
  “But we really like this house, I think we’ll be okay,” Deanna said.  
  “I hope he makes a fortune,” I said.

Stay away from Debt Settlement Companies

In Scams, Uncategorized on August 9, 2010 at 1:44 pm
Credit card

Image via Wikipedia

Outrageous fees are the norm with these companies

  Many people who get into credit card debt will sign up with a debt settlement company for representation in negotiating a settlement of the debts. Here is how a debt settlement company works: They instruct you to stop making your credit card payments, and instead, to send all that money you would have sent to the credit card company to them.
  Their promise is that the money you send them will build up in a savings account, and when it reaches a certain amount, they will use that money and their expert negotiating skills to settle your debts for pennies on the dollar.
  That’s the plan anyway.
  But it’s a scam. They extract such high administrative fees out of the money you send them, there is little to go into the savings account that is supposed to be building up. And after you go a few months without making any payment to the credit cards, those credit cards will sue you for non-payment. They’ll seek to garnish your wages or take the money from a bank  account. Do not fall for this scam.
  The following is a conversation I had just last week with a client who had signed on with one of these debt settlement companies.

  “My credit card is suing me,” said Alex from Hawaii. “I tried a debt settlement company but it didn’t work.”
  “How much did you end up paying them in fees?” I asked.
  “Tons! You wouldn’t believe what they took!”
  “And the credit card company sued you after you’d stopped making the payments, right?”
  “That’s exactly what happened,” Alex said.

   I hate to generalize, and there may actually be some debt settlement companies out there who do not rip off their clients.

  But remember, if you want to negotiate a settlement on your credit card debts, just call up and negotiate it yourself. No company, no law firm, is going to say anything that you can’t say yourself.