Lessons from a Financial Train Wreck

An article on The WealthSimple.com website caught my eye. In their “Money Diaries,” they feature interesting people telling their financial life stories in their own words. 

This is the story of one couple who is a financial train wreck. They did just about everything wrong in their finances, and even acknowledge the mistakes they made, yet they refuse to change.

Their income is healthy by any standard. She makes $70,000, he makes $90,000 a year, additionally he earns $100- $250 per night a few times a week bartending at private events. Their total yearly salary is somewhere in the neighborhood of $170,000-$180.000. Yet they can’t make ends meet each month and they keep digging deeper and deeper into debt.

Spending whatever you earn without a thought to how you are spending it, or where it is going is a sure recipe for disaster.

The explanation for how they got into debt was, “I think education loans probably started us on this path. But credit cards got us in trouble.” Did you notice there was no acknowledgment of personal responsibility in those statements? No admission that THEY took out the student loans and THEY used the credit cards irresponsibly.

Not taking responsibility for financial problems also means they don’t have to take any responsibility for solving their problems. 

Sometimes you just have to look at yourself in the mirror and admit you were wrong and you need to do something to correct your mistakes. Facing up to mistakes is the only way to solve problems.

The wife has a law degree but has never practiced law. They think her student loan debt started at $90,000, but they aren’t sure of the current balance since the only time they check the student loan website is to request financial hardship status so they don’t have to make payments on the loan.

But the interest keeps building. With interest, the law school debt is now $120,000 to $140,000. That’s about $30,000-$50,000 or more they’ll pay in interest. 

They think they are escaping a problem by asking for deferrals on the loan, but all they are doing is pushing the problem into the future. The less they pay, the more interest adds on to the original loan amount, and the more they owe. That interest is building debt like a tsunami wave which will eventually crash down on them.

Like many people, this couple uses credit cards to sustain a lifestyle they can’t afford. They have a total of 10-15 credit cards, with 8 maxed out. Yet they freely accept more debt on the credit card and loan solicitations they get in the mail, even though they think the lenders are crazy for offering them more credit.

Maybe the banks just know a cash cow when they see one!

If you’re really serious about getting your finances straight, at some point you need to quit digging the hole deeper and deeper.

In addition to the student loan debt, they have no idea of their overall total debt. They think they have: $60,000 in credit card debt; $18,000 in a personal loan; $360,000 in a mortgage and a second mortgage, plus the unknown student loan amount. That’s close to $600,000 in debt!

The first way to control debt is to list it all. Every penny. Mortgage, car loans, credit cards, student loans, regular bills that are past due, and money borrowed from Uncle Fred. Then add up how much interest is charged each month. When people see how much money they waste every month by paying interest, it’s usually enough to get their attention and get serious about paying off debt. Yet they keep pushing it aside. 

They have 3 children who attend private school. The tuition is $32,000 a year per child or $96,000 total per year. But they declared a financial hardship and are only paying $15,000 total in tuition for the three children. But, of course, the $15,000 in school tuition is being charged to more credit cards. Another way they are digging the debt hole deeper and deeper.

They bought a house they couldn’t afford about 3 years ago. And they used both a first and second mortgage to buy the house. They have refinanced the first mortgage several times, which means more money down the drain in closing costs for refinancing. The house is worth $360,000, and that’s how much their mortgage debt is. If there is a need to sell, they will probably lose money.

They didn’t calculate the cost of the mortgage payment along with the other housing costs (repairs, maintenance, utilities, etc.) to ensure housing costs total no more that 40% of their monthly budget —mostly because they can’t even comprehend the thought of a budget.

Like many people in the same situation, they were looking for a quick fix. They cashed out his 401(k), which was around $70,000. They paid down the balances on three credit cards with the $70,000 and also paid off a $12,000 loan. Because there was some financial relief, they “Had a really good Christmas that year.”

But they didn’t fully understand the cost of the tax penalties in cashing in a 401K account, and they ended up owing $18,000 to the IRS and $2,000 to the state in penalties. Because cashing in the 401(k) didn’t work in eradicating their debt, they went to her parents and borrowed $40,000 to continue funding an unaffordable lifestyle.

If you want to escape from the trap of debt, there really isn’t a quick fix. Changing your financial life is like a diet. You can go on a starvation diet and lose lots of weight really fast. But you can’t keep it off. In a similar way, you can use easy money to pay off debt but if you have not changed your life style, debt is going to creep back up. 

In the article, it stated they shop at Goodwill for clothes because they can’t afford to pay full price, which is great. But when it came time to rent a tuxedo so their son could go to prom, they didn’t have enough cash to rent a tux, so they bought their son a tuxedo using their non-maxed out store credit card. They grow veggies in the back yard, but one of the kids likes to snack on sushi and a smoothie, which adds up to a $15-$20 snack!

The unfortunate thing is that they are not teaching their kids any financial responsibility. The kids are learning to be just as irresponsible with money as mom and dad are.

The really sad thing about this whole situation is the way they are destroying their marriage because they cannot handle their finances like responsible adults.

They closed the interview by admitting that one of them will probably have a heart attack and die from stress due to their financial situation. So, the solution is that the surviving spouse can use the life insurance proceeds to pay off debt. But that won’t solve anything if the surviving spouse continues to be irresponsible with money.

I don’t know if these people are Catholic, or Christian or if they even go to church. They never mention faith in the interview. 

The big piece they are missing is the joy of living as a steward of all the blessings God’s given them. That can change everything.

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