Tuesday, August 21, 2007

Living like a king - when you're not one

Tricia over at bloggingawaydebt.com recently posted a link to an article in a Kansas newspaper about a couple deep in debt. This couple has 1 kid and a second on the way. They are only 24 and 26 and already in almost $100k of debt. Their total debt, including their mortgage, is $187k.

The question this couple has is

“How can we get caught up with our bills and get our expenses together to start saving?”
and the answer, apparently, is
“Reducing your big tax refunds will almost correct your negative cash flow. But cutting expenses and paying off credit cards will be critical for longer term success.”

What? What kind of useless advice is that? This couple is completely broke and in debt. Adjusting their withholding isn't going to help much. Worse, they sugar coat their situation by claiming a net worth of $24k. But when you look at their "assets", they include $55k of "stuff" and $150k in home value. Though we don't know how they calculated their home value, the market is tanked. And the stuff? I guarantee they could not liquidate everything in their house and raise $55k at a garage sale, unless they have some seriously valuable antiques or collectibles.

How much do you want to bet they have a big plasma screen TV? They have only $1k in actual cash and $1k held up in a retirement account. They have $23,000 in car loans with cars supposedly worth $25k.

I think this family has a problem with living beyond - way beyond their means (all this debt was accumulated before they were making $60k/yr, and she has yet to finish school). Sell the cars and buy small older ones, sell any expensive appliances or electronics, cut up the credit cards (and try to find lower interest balance transfers if their credit isn't already trashed), and forget about saving. You've got a small emergency fund, you have negative net worth, you're still young. Get those credit cards and the personal loan paid off, then start saving a tiny bit for retirement while you attack the student loan. Then save up for a car and buy one with cash. But most importantly, stop living like a king.

1 comment:

Jim said...

This only seems like a problem to you because you're comparing it to how you live. If you read the whole article, they expect 4k in a tax refund. By increasing withholding on their W2s they can better use that 4k in monthly income. They need to focus on paying off credit cards for success. I agree with the direction of the advice.

This couple is broke and has debt, which many people do. There's no sense in pointing that out to them either. I do however think their assets are way too inflated for their situation. Unless those cars are new, they have a bunch of new stuff worth 55k lying around, and their house is worth what they claim, I think selling some stuff is in order.

I caught somewhere in the article that they save too much. Still looking around for that savings I guess because it's not in cash or retirement. Even when getting out of debt, I still think it's important to set something aside in retirement while doing so. For their age, $1k in retirement does not do much in the grand scheme.

I agree with your solution for the most part. Sell some stuff off and focus on paying off the credit cards. The APR is high 28-30% so transfers are probably not an option. Applying bigger payments to their student loans will knock those out quicker after the credit card debt is gone. If the income goes up once she's done with school, which will help too.