Monday, February 6, 2012

Goodbye, Middle Class

If one scans the headlines certain things of interest tend to jump out.  For some it is football scores, some diet tips, and for me it is personal finance stories. The headline above caught my eye so I wanted to know more. 
Next, I scanned the topical bold headings:

Previous pay: $110,000
Current pay: None
Where they live: Staying as guests in a friend's home

From six figures to the poverty line
Previous pay:
Current pay: $15,000
Where they live: Their foreclosed home, awaiting eviction

Previous pay: $40,000 to $50,000
Current pay: $12/hour
Where they live: Family shelter

These are the kinds of situations that I wrote the book for.  I went through this myself in a big way.  I totally sympathize with the struggle and frustration that these families are now going through.

But, do you see what I see?  Have you learned yet what I have learned?  At the risk of sounding harsh and offending some I will venture to make some comments after reading the story and watching the video at the bottom.

"We thought this could never happen to us."

And, that in a nutshell is where the source of most of our problem lies as individuals and as a nation as we go through these times.

Why not?

As I look at these salaries I can honestly say that I have never made even close to that much a year in my life.  And, to make this much money and then be broke and homeless there was much more going on then just a job loss.

It may be easy for me to see these things now because it is after the events.  There is an old saying "If I knew then what I know now things would be much different"  Of course they would.  Hindsight can give much good advise and instruction.  So speaking from that perspective let's look at some of the things we can easily spot and questions we could ask.  Our purpose is not to judge or find fault but to lay the cards on the table so when things get better we don't repeat the same mistakes.

OK.  I'm doing the tough one first just to get it out of the way. Here we go...

1.  Were their homes paid off?  We will assume the answer is no since the article states it and they are currently homeless, living with friends, or waiting for the sheriff to kick them out.

If they were making $130,000 a year what was your outstanding mortgage balance?  Was the house more than they could afford?  Just because we have a 30 year mortgage does not mean that we should take 30 years to pay off the home.  The longer we drag it out the more interest we pay.  Almost 5 times the purchase price if we go the entire length of the contract. 

This is definitely the biggest financial hurtle most of us face for obvious reasons.  I was ALMOST out of the woods on this one and then got sucked back in and have to fight that battle again.  My friend Paul, mentioned in the book, recounted the ONE time he had been in debt in his entire life.  He had family property and built a home on it.  He was able to pay for the home except for $7,000.  He told me that he could not stand having this debt and having his home be at risk.  He worked as much overtime as possible until the last payment was made.  Every available dollar went on the payment and he breathed a huge sigh of relief when it was done.  I'm sure my eyes were big and my mouth open while he told the story.  $7,000 total debt in his 70+ year life?!  And, he couldn't sleep at night?  Somewhere along the way we have lost perspective and think there is such a thing as "good debt".  Oh, maybe it's because the lenders tell us so.  Of course it is good for them, they make massive interest and hold the title to our homes.  Or, it's an appreciating asset.   Sounds good, but it will appreciate just as fast or even faster when it has no mortgage lien. 

Most of us cannot look at our mortgage and snap our fingers or put it on our annual goal list and get it done.  But, can we think like Paul and do more than what we are doing now?

2.  How much reserve fund were in place?  They mention six months to 2 years of unemployment so even if they had one it might not have been sufficient but helpful for as long as it lasted.  Did they have a food storage program for six months to a year?  I would think at that income it should be totally doable.

3.  When they became unemployed did they adopt an In The Trenches battle plan?  Did they go to the fox holes and cut back all unnecessary expenses within the first 90 days or did they just try and act like everything was normal and hope for the best?

4.   Investments.  The video mentioned 401K investments.  Although these can be helpful and worthwhile when the employer contributes matching funds we do need to be careful because some of the money goes into the stock market with no guarantee of a return.  I'm sure that many of you are more knowledgeable than I on these for I have not often had them available so don't keep up on them.  Just because the banks sell them and the government promotes them does not mean they are the best things for us.  We always have to remember who the funders are behind he politicians. Were the investments something that they could cash in if needed or provide additional income during the lean times?

5.  How much other debt was there?  Were cars, furniture, and who knows what also on credit?  These are like lead weights on the legs of a swimmer.  When you are in a boat they may not be noticeable but jump or get thrown out and they will quickly drag you under.

6.  What did the balance sheet look like?  Another way of asking some of the questions above and a summary of the results.

7.  How is middle class defined?  Is it the amount of money one makes? The net result of their balance sheet?  Or, income to debt ratio?  I know many who live very well on small amounts because they know how to manage well.   

In my opinion, $130,000 is a BIG annual income.  Yes, that speaks much about my perspective but basic math says that in less than 10 years over 1 million dollars will be made.  If you had a million dollars how would you manage it?  Just because it is given in annual or monthly increments does not make it any less.  Would you spend it every month and more?  If you make half of that you could still say that in 10 years time you would bring home 1/2 a million.  Not too shabby.  We all think we want to win the lotto and many already have just don't recognize it until it's gone. 

One of the things we were required to do when I was in banking in addition to making an annual budget was to project that budget out for 5 years.  But, wait a minute you may think, this is my personal finances, not a business.  True enough.  So at the end of five years you don't care if you break even, loose money, or make a profit?  At the end of five years it's okay that you are worse off or the same?  I think not.  So with that in mind why not project your current plan out for the additional time frame.  It may surprise you or give valuable information as to how you could do better. 

Above all we need to recognize that life DOES have it's ups and downs.  When we are up what would we do differently if we acknowledged there could be a down.  As they say "Hope for the best but plan for the worst".  As all farmers know, harvest time is the time to store up for winter.  Nature itself teaches us the basic things we need to know to do well and prosper if we would just listen.

The point of my comments is not to single these families out - that has already been done with the article.  It is not to fault find after the events - that has no purpose.  My comments are intended to focus on what we can do to rebuild our future in a better way.  I once heard that when a skyscraper is built the builders must drill the supporting beams into the ground almost to the depth of the height of the building we see above ground.  This is to prevent the building from toppling over with the weight when an earthquake or other events come to pass.  Not all situations can be prevented that is for sure.  But, we can and should learn from all.  I'm still working my own plan and have a ways to go.  Hope you are too.


robert said...

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Rosemary said...

Very Very good! Right on target! I am on SS & wonder how people can be so blind of managing their money. Thank you for all your articles. Look forward to them.

Carol Schultz said...

And thank you Rosemary. Managing on a fixed income can certainly bring out the creativity in a person.

Olivia said...

Every year we make up a family budget once my husband, (a pastor), knows what his salary will be. Every year is different depending on the church's financial state, so far no real reductions, but inflation is the wild card. How can someone project out five years without knowing the variables?

Carol Schultz said...

Hi Olivia, of course it is the Lord alone who knows what will come our way so ours is just a plan like a builder might make. So although we need to be flexible we can project based on what we know now.

Example: If one has a job their income is somewhat structured, so are their mortgage payments and other basic expenses. In the book there is a chapter called Critical Choices. Take a look at it and it will give an idea of what I am referring to and will try to spend more time on the topic in a later post.

Thanks for writing!

Practical Parsimony said...

I am debt-free but under-funded, so it is impossible to budget. I do, but am always rather short. No, I do not have TV. The internet is the only thing to cut unless I were to give up my car, not possible where I live.