The value of LBYM

[Klubbie]

I just want to share something my wife and I have been watching happen to our friends in recent weeks. It has been eye opening and shows just how close one can be from financial disaster.

Our friends are a married couple with a young child they adopted (I only mention this because they have a loan they took out for the adoption which is pertinent to this). The wife is a nurse, and her husband worked in the auto industry, I believe for a supplier in some sort of role with production operations. He got laid off unexpectedly about a month ago as the primary breadwinner. They are both mid-30's like we are.

They were in the process of having a new home of approximately ~$300k built, and had sold the home they had been living in and were in the process of moving to an apartment for a short term 3 month lease while their new home finished being built. The home they had sold was a small home in an older neighborhood and I think it sold for around $115K or so (based on what they listed it at).

The husband reached out to me after he got laid off looking for financial advice, and in doing so laid out the details of their financial situation. I found myself very overwhelmed by the situation they were in. Here is a rundown:

- They took out a 25k loan from his 401k for a down payment on the house, which is now going to be treated as taxable income (plus penalty) since they can't repay the loan in 60 days after separating from employment

- They are currently juggling a loan they used to adopt their daughter, a student loan, a loan he cosigned for his niece, and a loan for a new car

- Today they told us that their lender won't approve them for their mortgage unless than can show proof of an additional $2500 income per month, or get a co-signer for the loan (they don't have one).

- In the month since losing his job he hasn't been able to get any interviews close to what he was making and accepted a job that is essentially a customer service job in a call center making $16/hour

I gave general advice on how to cut expenses and made some recommendations on paying off debt vs. holding extra cash until they were able to get back on their feet with him in a new job. I also gave some recommendations on how to network back into a job. I didn't ask to pry into their finances, but he offered it up.

It's terrifying to me how their life has fallen apart so quickly due to a job loss like this. There are obvious issues here with living above ones means (more on that in a minute), but I could see losing one's job while trying to get a mortgage and the whole thing falling apart even to someone who is financially responsible if there is an income disparity between the two spouses.

Now, here is the other piece of this that my wife and I have been observing and find ourselves frustrated with them:

-Over the past 4 or 5 years they have gone on numerous vacations (Vegas multiple times, Disney, etc)
- They upgraded their old house and put in a new patio, new kitchen, among other things
-Always going out to eat
- Since the job loss they have been posting multiple pictures on social media every weekend of themselves going out to eat and going to events around town that have parking costs associated with them, admissions costs, and then the cost of eating/drinking once at these events
- The wife works with my wife in the same department and has been putting her name on the "go home early" list at work despite the financial crunch, and hasn't been willing to pick up hours (she works 32 hours a week).


I feel bad for the turmoil they are experiencing now as they are our friends, but at the same time looking back at the financial decisions we've watched them make the past few years and seeing how they are now likely to lose their down payment on this house (among other things)they will no longer be able to afford is mind boggling to me.

Especially considering my wife and I have made the decision to forgo any vacations and other luxuries until we have paid off my student loans (over $100k, down to about 30k today).

My wife, who is easily the spender in our marriage, commented how this has been eye opening for her and how she wants to build up our savings after seeing what they are going through. We have about 4 to 5 months of expenses if I were to lose my job. Hearing her say she wants to build that up was music to my ears!

Anyways, I wanted to share. I never suspected our friends were so close to a financial disaster like this. Goes to show how close many people really are to the brink.

 

[SumDay]

Just thinking about their mess makes me queasy. Unbelievable how many people live like this. I'm trying to not strain my shoulder patting myself on the back. We worked hard, but luck and fate were kind to us too.

 

[aja8888]

Scary, but true. Lots of folks living on the edge. One thing they don't need is a new car loan, but they are probably underwater on it anyway.

Did they mention the credit card debt balances?

 

[38Chevy454]

Seems they are the poster children for the "two paychecks from being homeless"

 

[aja8888]

Forgot to mention....these situations, when they implode, sometimes end in divorce. Sad, but happens.

 

[RobbieB]

Loosing my job shortly after buying my first house was an eye opener. Taught me to not buy too much house.

 

[spirit]

I think they will lose that house and be living in an apartment for many years. Hard lesson for them to learn. So either they cut their spending or someone will do it for them.

 

[Klubbie]

I think they will lose that house and be living in an apartment for many years. Hard lesson for them to learn. So either they cut their spending or someone will do it for them.

This is what I suspect too. And the part where I feel for them most, even in spite of their poor financial choices, is going from a home they liked (probably loved), had zero issues affording, and had been in many years to likely being in an apartment for the foreseeable future.

That, to me, would be a very difficult pill to swallow.

 

[Klubbie]

Scary, but true. Lots of folks living on the edge. One thing they don't need is a new car loan, but they are probably underwater on it anyway.

Did they mention the credit card debt balances?

Sorry for the double post. I dont believe there were credit card balances, but I could be wrong. I didnt ask.

Adoption loan, student loans, car loan, and then now having to eat 25k of retirement savings are what they have shared.

 

[W2R]

Seems like the vast majority of people (except on this forum) are terrible at money management like the couple you describe. It's sad.

That said, they had an opportunity to learn enough arithmetic in school, to figure out what they can and cannot afford. All but the very wealthy have financial limitations to consider, and maybe even the very wealthy have their own to deal with. This couple was not desperately poor, from what you are saying. Yet apparently they just don't want to face their financial limitations, so whose fault is that? They were just fooling themselves and living in la-la land and hiding their heads from reality.

I should feel sorry for them but right now, I just don't.

 

[Moemg]

Does the term Schadentreude mean anything to you ?

 

[PartIrish]

If their home contract had a financing contingency, can they get back their $25K if they fail to get financing? That would at least allow them to pay back their 401K loan. Maybe renting a place for a couple of years would allow them to put themselves on firmer footing.

Your friends clearly got in over their heads, but the good news is they are young and maybe it is not too late to change their spending habits.

 

[NW-Bound]

... Since the job loss they have been posting multiple pictures on social media every weekend of themselves going out to eat and going to events around town that have parking costs associated with them, admissions costs, and then the cost of eating/drinking once at these events

- The wife works with my wife in the same department and has been putting her name on the "go home early" list at work despite the financial crunch, and hasn't been willing to pick up hours (she works 32 hours a week).

Sounds like they themselves are not worried of the predicament they are in.

How do you help?

 

[Cobra9777]

I never really thought of us as LBYM. That acronym always struck me as sort-of negative or even somewhat depressing. I always preferred the expression, "pay yourself first." I suppose they're just words. But DW and I maxed out two 401Ks for 25 years. We lived on whatever was left, which was slim pickens in the beginning with a mortgage, two car notes, and two young kids. We struggled with CC debt for a few years. But we were never out of control, per se. I always had a big-picture plan. And it came together very quickly as we carefully balanced lifestyle creep and income growth.

By contrast, we had friends that were like the couple described in the OP. I remember they did multiple cash-out refi's to pay off CC debt. There was an ill-timed, devastating layoff and they divorced around 40. They both struggle financially today. Neither has a good job nor any prospect for retirement in the conventional sense. They haven't had health insurance in decades. But they both brag about "stuff" they own... great deals on a motorcycle, or a trip to Germany, etc. I don't make value judgements. They just approach life differently than DW and myself.

In the grand scheme of things, all that matters is what makes you happy. We have a DIL with little-to-no responsible financial instincts. But DS keeps things reasonably in check. That balance is good for both of them. I think problems arise (such as the OP story) when both partners are like DIL, with no "voice of reason." Financially, things can spiral out of control quite quickly when no one has a big-picture plan for the future.

 

[daylatedollarshort]

Since the job loss they have been posting multiple pictures on social media every weekend of themselves going out to eat and going to events around town that have parking costs associated with them, admissions costs, and then the cost of eating/drinking once at these events

Conspicuous consumption? It is really important to some people that others think they are doing well no matter what the real story is at home. There's a thing now called Facebook depression. We noticed almost an inverse relationship to some friends and family who post often about glamorous trips or accomplishments on social media when really there has been a family tragedy brewing under the surface at home. As a result, DH and I decided to think twice and cut back on posting about any of our activities that might make others feel inferior or try to "one up"whatever we're doing.

Most of the frugal and ER type forums usually seem to have an excess of INTJ types - those who don't really care what other people think. Avoiding conspicuous consumption can be a real money saver. That was one of the repeating themes in The Millionaire Next Door series of books.

 

[FreeBear]

If their home contract had a financing contingency, can they get back their $25K if they fail to get financing? That would at least allow them to pay back their 401K loan. Maybe renting a place for a couple of years would allow them to put themselves on firmer footing.

Your friends clearly got in over their heads, but the good news is they are young and maybe it is not too late to change their spending habits.

I thought that a financing contingency clause is a standard boilerplate feature of real estate contracts. As buyers, they and their attorney should have reviewed the contract and insured that such safeguards were in place.

Other than having your friends check with their attorney (they have one, no??) re a financing contingency clause, you may not want to get too involved. In a sense, you know too much already and I fear the situation is ripe for your frustration. I think it's fair to say your peace and give advise once, then walk away emotionally.

Been down this road a few times. It can be hard on your sanity and the friendship. Some of our most fun and loving friends just don't seem to have any financial sense, or perhaps their financial values are just different. If someone is willing to let them buy whatever, then, these folks do. No self control.

 

[tb001]

My closest friend is a heartbeat away from this situation. Her and her husband are early 40s with two kids in jr high and in crazy debt. Just did a complete tear down and rebuild on their house--everything top of the line, down to the electrical outlets. It's beautiful, but if either of them loses their job it will all fall apart. They make good money but we make easily double their incomes and are regularly shocked at their spending. New macs, new iPhones, new high end cars, etc...

I think being closer to 50 something changes our view. That and having experienced a job loss in our 40s. Those big money years don't necessarily last forever. We are very focused on retirement vs striving for the 'norm'. I can't imagine going into that kind of debt at their age.

In their defense, I don't think they've ever actually gone through their spending in the way we do, so I imagine they don't have a feel for the level of excess. Instead, I think they look around and see others spending in similar ways, so it seems ok.

Her parents have considerable assets, which gives them a safety net, but also contributes to the bar of spend. My biggest worry is that she'll get bailed out with an inheritance and then blow through it because she still doesn't really understand the value of money.

 

[Totoro]

Over a quarter of american households I believe have absolutely no financial buffer, negative or near zero net worth. If you add in house-poor families, it's probably over half?


Can only imagine the stress that ensues when mishaps occur.

 

[robnplunder]

It's good that this happened when they are in their 30s. I'd consider it as a lesson learned to build a future on.

 

[brucethebroker]

It's good that this happened when they are in their 30s. I'd consider it as a lesson learned to build a future on.

+1.
My guess is that many over age 50 who post here can look back at a bad financial experience (or 2) they experienced when younger that convinced them to LBYM and possibly formed an ER strategy. One step backwards, two forward, etc.

Hope your friends learn and move forward with minimum long term damage. Good luck to them.

 

[Golden sunsets]

This is sad. My guess is the couple learned their financial habits from the way they were brought up. Those of us who were brought up by depression era parents, were given a great gift. I recall my parents drumming in to me, the need to never carry a balance on a credit card. They did have car loans, but kept their cars beyond the loan period. In short they were very frugal, made sure that I graduated from our State University debt free and expected that I would be self sufficient from that point on. I did live at home for about a year, but paid them rent (minimal) to cover food costs. They saved that rent money and gave it back to me when I married.

My DH had a similar upbringing. When I married and we were a two income family, we lived on one income only and banked the other, always contributed the max to our retirement accounts, first IRA's and then 401K's and essentially never bought anything we couldn't pay for with cash, other than our home. We refinanced that mortgage down to 15 years as soon as we could. I'd like to think that if a job loss had occurred, that we would have been OK, but luck was with us throughout our careers.

I think folks today start with a disadvantage if they haven't been brought up in homes with LBYM principals. They don't know any better. We struggled to make sure that our children didn't feel entitled due to more affluence and living amongst other above average income families. We drummed the same LBYM principles into them. So far so good, but it is a minefield out there.

 

[flintnational]

While the job loss made a bad situation worse, as you have suggested, that is not the root of the problem. It sounds like they overextend regardless of income. I disagree with Dave Ramsey's investment advice, but I think his LBYM advice is pretty sound. If they are interested in changing, you could direct them to his books or classes. Many here also do not agree with DR's credit card advice, but these are the exact folks he advises to cut up their cards. Not necessary for forum members, but a life saver for folks that are learning LBYM skills.

Sorry, your friends are in this situation. It is very upsetting to see those we care about struggle.

 

[EarlyBirdly]

Sounds like they themselves are not worried of the predicament they are in.

Like most in this situation they are fully aware of their predicament...However, that lovely little Defense Mechanism called "Denial" always plays a large part in these sort of peoples lives and finances. So, they post pictures of "how well we are doing" for all to see.

Their Credit Card balances? I'm quite sure they are hefty without even knowing the individual's finances.

I know TOO many people like them. I have watched friends with 300k + incomes go bankrupt and the formula is pretty cut-and-dried:

1) Place a large internal emphasis ( consciously or not ) on your perception of what others may think of you.

2) Buy material goods that give you immediate pleasure and that will (in your delusional thinking) impress those around you.

3) "Manage" finances in a manner that allows immediate gratification and pay for things later, with no actual plan or calculated numbers to do so.

4) Wake-up one day and face the cold hard fact (when forced to by circumstances) such as the couple in question...It's Official: You are now broke and feel very stupid.


I too have no sympathy for those who do this to themselves financially.

And, Yes...I am totally familiar with the term "Schadenfreude". I have no sympathy and yet, I take NO joy in seeing people do this to themselves. So,therefore, I do not qualify.

As someone said, they are young and maybe, just maybe, they will learn from this.


Statistically, probably not....

 

[Music Lover]

It's good that this happened when they are in their 30s. I'd consider it as a lesson learned to build a future on.

I wouldn't count on it. One of my friends built too much house for his income in his early 40's and after 10 years of barely making ends meet and finally realizing that he'd never pay it off and he'd be broke for the rest of his life, he sold the house and moved to an apartment.

You would think that he'd be happy to finally get his head above water but 3 months later he bought a $60k vehicle and the payments along with his rent consume 80% of his income.

 

[Andre1969]

+1.
My guess is that many over age 50 who post here can look back at a bad financial experience (or 2) they experienced when younger that convinced them to LBYM and possibly formed an ER strategy. One step backwards, two forward, etc.

Yep...I can look back on what a train wreck part of my 20's were. I bought a condo in December of 1994, but in retrospect should have waited a bit longer and saved up a bigger down payment. While I knew what the mortgage, condo fee, and taxes were going in, it seemed like the phone, electric, and cable were about twice as much as what I anticipated. I also didn't anticpate groceries costing as much as they did. And, I did a lot of running around, eating out, etc. Then, in the summer of '95, I got married, and that was a real mess.


By the time we split in 1996, I was about $30,000 in debt. I was working 2, sometimes even 3 jobs, to get that debt paid down. Moved in with my grandmother, so I could rent the condo out. Luckily, I never lost my primary job (or the secondary ones) in that timeframe.


I had the debt knocked out by November of 1998, and was able to move back into the condo in early 1999. By that summer, my credit was good enough that I could refinance to a lower rate, and in November 1999, I was able to qualify for 0.9% on a brand new 2000 Intrepid. So, thankfully, I bounced back pretty quickly.


I wonder about these younger generations, though. I have a few friends and acquaintances in their 20's and lower 30's, and honestly, none of them are doing particularly well. One of them just turned 27. But, he never even went to college, let alone graduated. Still lives with his parents. He worked mainly minimum wage jobs in fast food joints and such, but the last time I talked to him about work, he was driving for Uber...in a car his father gave him. Well, I saw some pics on Facebook of that car with front-end damage from a fresh accident, and it looked totaled to me. So, there went that. I guess this isn't a case of someone getting knocked down early in life though, so much as sort of a "failure to launch".


I do wonder what will happen to him as he gets older though. I'm sure that the older you get, the harder it is to go to college. Or trade school, if college is not an option. And, without some kind of serious training, he's probably determined to work low-wage jobs, or jobs that seem good on the surface, until you factor in the vehicle costs associated (pizza/food delivery, driving for Uber, etc).