The value of LBYM

[karen1972]

I'm a little shocked they qualified for that mortgage to begin with given all the other debt they were juggling.. ie not sure how all of that was less than the recommended 28% max.

Ive been exposed to many of these situations, especially in the 2004-2010 range. What I find is when these types of bad things happen to people, they just can't face the reality of it, they believe they will immediately get back on their feet and thus not willing to change (like they should). The depression then spurs unnecessary spending and the shame of it causes them to do things that confirm the lie they are telling everyone else.

I think facebook compounds it because well everyone only posts the very best part of their lives and every is super rich and totally happy all the time trying to out do each other. My cousin is going thru a bankruptcy which I would never have known from FB, but I happened to see the court case while searching for something else... if you see their facebook page they are moving by choice, everything is awesome, they are all setup at their campgrounds for the summer, etc.

I find it most telling when people have a medical emergency, several people in my home town had go-fund-mes and fundraisers for medical bills and I was like What?? How can they need a go-fund-me if they just went on that elaborate vacation and built that new house? Yes paying the out of pocket max is painful but it shouldn't be begging for money painful, not when they have good jobs and good insurance and obviously enough money to get nice things.

 

[ivinsfan]

The WP has an excellent personal finance columnist/ blogger..I always read her live chats. Last weeks live chat even had a mention of this board..

She had a nuclear fallout from something she wrote. Basically she said with Summer approaching if you have debt other then mortgage/car payments, you don't DESERVE a traveling big time getaway vacation. You might want it but you don't DESERVE it. She said people do deserve time away from work to recharge but stay home, go local, drive to visit family.

IOW if you book a vacay on your CC cards or have 100K in student debt you can't justify spending on a destination vacay. People went insane, called her every name in the book. To her credit she didn't back down and said I wouldn't be doing my job if I said anything different.

 

[aaronc879]

OP doesn't specify what kind of nurse the wife is but if she is an RN then she makes good money. Even at 32 hours a week she is making over $50K/yr and RNs can always get more hours. Add in his $33K+ from the call center job and they make a very solid middle class income especially for low cost Ohio. They should be fine if they spend a reasonable amount instead of the excessive amount they are used to.

 

[Mdlerth]

They are their own worst enemy

It sounds like the friends are not taking their situation seriously. But maybe I am missing something.

In the middle of trading up houses, the husband lost a well-paying job and is having difficulty picking up another one. They had been relying on his paycheck to qualify for the new mortgage and now are short some $2500 a month in household income. The wife works as a nurse, but voluntarily limits her hours to less than full time even though there is ample opportunity to sign up for more.

So, rather than have her pick up a couple extra shifts per week until he can find a new position comparable to his old one, they'd prefer to lose everything?

Sure, they appear to have a long-term problem of overspending, and that's serious. But they have an immediate crisis today - insufficient income - which threatens to crush them. If they aren't willing to address that, then forget about them ever dealing with their LBYM issue.

 

[wrigley]

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.

There's only stress involved if you actually care!

Mike

 

[Brianeboatman]

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.

But I'm sure he "deserves" the $60k vehicle. After all, he had to sell his dream home. I shake my head at friends nearly daily as they pull up to my house in their ultra-expensive rides.

I know I'm strange, but I love it when people chuckle at me for driving an electric scooter to work. I think to myself, "keep laughing funny boy. I'll see you in early retirement before you know it."

When faced with the prospect of a major purpose, I ask myself, "Do you want this widget more than you want to retire early?" The answer is most often "NO".

A good friend of mine recently purchased a new Toyota 4Runner. I LOVE 4Runners! He even let me take is for a spin around the block. Man, I would love to have one, but not to the tune of $650 per month in payments, or depleting $42k from my savings.

My friend actually said this to me, "You make good money. You should get one. My payments are ONLY $650 a month". I nearly fell out of my chair upon hearing this statement. I wanted to pull out my online investment calculator and show him what $650 a month would look like after 20 years at historical returns. Instead, I just said, "That seems like a lot for a car payment." He responded, "It's a lot less than my previous loan". SMH.

 

[ivinsfan]

Well 650... but for how many months, its almost loansharking the way they do car loans today 6 -7 years who cares as long as you can pay the monthly nut.

 

[Dtail]

I use to pay 900 monthly for my car. Sometimes decisions made when one is younger and doing well financially aren't always the wisest ones.

 

[Andre1969]

BA good friend of mine recently purchased a new Toyota 4Runner. I LOVE 4Runners! He even let me take is for a spin around the block. Man, I would love to have one, but not to the tune of $650 per month in payments, or depleting $42k from my savings.

My friend actually said this to me, "You make good money. You should get one. My payments are ONLY $650 a month". I nearly fell out of my chair upon hearing this statement. I wanted to pull out my online investment calculator and show him what $650 a month would look like after 20 years at historical returns. Instead, I just said, "That seems like a lot for a car payment." He responded, "It's a lot less than my previous loan". SMH.

OUCH! I remember looking at 4Runners, and other compact SUVs (although they weren't really calling them "SUV" yet, as I recall, and the concept of a midsized one wasn't really there yet...it was either compact or fulll-size) in the summer of 1993. I had just finished college, although graduation wasn't until December of 1993. I had landed what I thought was a good job, that was promising to go full-time soon. I figured I had it made, and thought about a Pathfinder, 4Runner, or something like that, to splurge on. Way back then, I remember the 4Runners running around $26-28K.


Adjusting for inflation, $26K would be around $45K today, so considering how much more advanced, safe, and feature-laden cars are today, $42K seems like a bit of a steal, I guess.


That $650/mo bothers me, though. But, I guess it's the range for something like that. The only two car loans I ever had were $347.66/mo ($20,389 for 60 months @0.9%, on a 2000 Intrepid) and $358.21/mo (~$19,400 for 60 months @3.99% on a 2012 Ram), so to me that sounds high. But, I guess if you're financing $35K or more, you're going to get those types of payments that, once upon a time, sounded like a mortgage.

 

[Andre1969]

Well 650... but for how many months, its almost loansharking the way they do car loans today 6 -7 years who cares as long as you can pay the monthly nut.

I got one of my friends a bit annoyed, a few month ago, when he was thinking about this kind of reasoning. I told him that nobody should really go over 60 months for a car loan, because then you're still making payments for something that's out of warranty, and quite possibly ready to break. I know some people say even 60 months is too long.


Well, is attitude was along the lines of "Unfortunately, some of us don't have any choice but to go longer, because that's the only way we can afford the car!" I told him "No, that means you look for a more modest car, rather than getting something you really can't afford."


I don't think he really liked my line of reasoning.

 

[brett]

It will always be this way. Human nature.

As long as there are monthly payment plans there will be people who live beyond their means. The banks depend on it. So does the stock market.

Where we live, the greatest percentage YoY growth in consumer debt is in the 55 plus demographic. Same for personal bankruptcies.

I have SIL/BIL who are in this group and are approaching the edge. FIxed income, mortage, reverse mortage, consumer debt. But they still drive two vehicles, two new iphones, eat out, buy any crap product for friends who happen to be selling the stuff, etc. Cannot do this all your working life and expect to retire in a comfortable fashion. It became habit with her right out of school. Bankrupt in her early 20's with a house full of new furniture...she apparently never looked back.

It comes down to basic math and understanding the differences between wants and needs. You can't fix stupid.

Would we help them. No....because that help would soon be replaced by more debt. It is as much a lifestyle challenge as it is a financial challenge.

 

[JustCurious]

I know I'm strange, but I love it when people chuckle at me for driving an electric scooter to work. I think to myself, "keep laughing funny boy. I'll see you in early retirement before you know it."

I'm strange too. Except for me it's not necessarily about early retirement, it's about being financially secure while working towards financial independence. I place a very high value on being debt free and having a financial cushion so that if and when the unexpected happens I can handle it without undue stress, and I can sleep at night in the meantime. It's much more important to me to be able to sleep well at night than to have a nicer bigger house or car. It seems to me that most other people don't think that way, they finance for today and don't think about tomorrow, and lots of debt does not seem to bother many people. To each his own.

 

[Music Lover]

I got one of my friends a bit annoyed, a few month ago, when he was thinking about this kind of reasoning. I told him that nobody should really go over 60 months for a car loan, because then you're still making payments for something that's out of warranty, and quite possibly ready to break. I know some people say even 60 months is too long.

But there are some exceptions. 10 or so years my brother was looking for a new vehicle with the full intention of buying it outright. Then he found a last year model, still new but in an ugly colour. It was priced way below retail and they offered him 72 months financing at 0% so he took the deal.

But I'd guess that most people who take financing for that long do so because they can't afford a shorter term. And I don't think anyone offers 0% financing any longer.

 

[Andre1969]

But there are some exceptions. 10 or so years my brother was looking for a new vehicle with the full intention of buying it outright. Then he found a last year model, still new but in an ugly colour. It was priced way below retail and they offered him 72 months financing at 0% so he took the deal.

But I'd guess that most people who take financing for that long do so because they can't afford a shorter term. And I don't think anyone offers 0% financing any longer.

Yeah, if the interest rate is low enough, you can make those work for you. I have a good friend who bought a 2007 Cadillac DTS, and got 0% for 60 months, I think. His rationale was that he could pay it down quickly if he wanted to but then if he ran into a rough patch, the payment would be lower than it would with a shorter term.


But, like you said, I think 0% is history. And these days they usually charge more for those longer terms.

 

[prose3589]

In my 20s I made horrible choices both in my finances and in choosing my husband. He was a horrible spender and avoided work at all cost. I was broke, and divorced with two small kids at 31. I decided then I would never live that way again. I avoid debt, put two kids through state college- debt free and thanks to an inheritance I am catching up on retirement. I hope they learn from their mistakes. Living like that is horrible.

 

[racy]

OP - Have them call Dave Ramsey for advice on getting out of debt (but, just ignore his investment advice!)
Call Dave at 888-TALK-BAK (888-825-5225)

 

[daylatedollarshort]

I know I'm strange, but I love it when people chuckle at me for driving an electric scooter to work. I think to myself, "keep laughing funny boy. I'll see you in early retirement before you know it."

It was weird when we retired as it seemed to upset some of our friends and neighbors. I took that to mean they could not retire themselves or else why would they care if people they weren't particularly close to retired early or worked until they dropped? We had friends retire early before us and we were happy for them, not resentful. If anything they were sources of good advice and inspiration.

 

[Vacation4us]

I am the opposite of Schadenfreude. When my sister told me how much she and DH owed on their house I couldn't sleep for 3 days.

I have found people don't really want financial advise, they prefer to live for today since tomorrow is sooo far away.

I once had a co worker RN who said to me will you be happy you saved all that money if you die before having a chance to spend it? My answer was Yes, at least my kids would have a head start. She was appalled. Same worker and I compared W2's and taxes since we were both single with house and kids. We made equal $$ but I saved 16k in my 401k while she paid an extra 10k to Uncle Sam. Her point of view was she had 6 k more than me throughput the year. Stuck on stupid

 

[Moemg]

Better to get a wake up call in your 30's than in your 50's .

 

[bobandsherry]

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.

Don't know if "good" is right term. Don't see how any of that could be "good". But agree in life lesson.

 

[Mdlerth]

Bless their hearts

I once had a co worker RN who said to me will you be happy you saved all that money if you die before having a chance to spend it? My answer was Yes, at least my kids would have a head start. She was appalled. Same worker and I compared W2's and taxes since we were both single with house and kids. We made equal $$ but I saved 16k in my 401k while she paid an extra 10k to Uncle Sam. Her point of view was she had 6 k more than me throughput the year. Stuck on stupid

+1

This is something I've never been able to wrap my head around. For decades I've been told that many of my fellow Megacorp employees did not participate in the company 401k.

It was a pretty good one, with a 50% match (it's since been doubled) on the first 6% saved and some decent investment options. Plus, you got a tax break. That seemed like a no-brainer: an instant 50% return, guaranteed. Who would turn down an investment like that? "Well," I thought, "maybe there will be the occasional malcontent who grumps about everything. But surely that's only a tiny fraction of the workforce, right?"

Wrong! Eventually I learned that it wasn't one or two percent of folks who didn't participate in the 401k. It was more like half of all employees didn't participate.

How was that possible? Was the program not explained clearly? Were the sign-up forms too complicated? Could there really be that many people so mathematically challenged they don't know how much a 50% return is? Or so blinded by mistrust they can't recognize free money when it's offered? It sounded too bizarre to be believed.

But I've seen data from multiple sources that confirmed it. Not just at my Megacorp; it was the same story at employer after employer. For a large segment of the population, the concept of saving just doesn't register. They don't understand it, and I don't understand them. Sigh...

 

[ivinsfan]

+1

This is something I've never been able to wrap my head around. For decades I've been told that many of my fellow Megacorp employees did not participate in the company 401k.

It was a pretty good one, with a 50% match (it's since been doubled) on the first 6% saved and some decent investment options. Plus, you got a tax break. That seemed like a no-brainer: an instant 50% return, guaranteed. Who would turn down an investment like that? "Well," I thought, "maybe there will be the occasional malcontent who grumps about everything. But surely that's only a tiny fraction of the workforce, right?"

Wrong! Eventually I learned that it wasn't one or two percent of folks who didn't participate in the 401k. It was more like half of all employees didn't participate.

How was that possible? Was the program not explained clearly? Were the sign-up forms too complicated? Could there really be that many people so mathematically challenged they don't know how much a 50% return is? Or so blinded by mistrust they can't recognize free money when it's offered? It sounded too bizarre to be believed.

But I've seen data from multiple sources that confirmed it. Not just at my Megacorp; it was the same story at employer after employer. For a large segment of the population, the concept of saving just doesn't register. They don't understand it, and I don't understand them. Sigh...

Work with that number and then add the people who contribute and then "borrow" the money back. More then a few of those change jobs or have other circumstances where that money never gets paid back in the 401K and they just pay the taxes and penalties. Add those two groups together and Houston we have a problem...

 

[REWahoo]

...I learned that it wasn't one or two percent of folks who didn't participate in the 401k. It was more like half of all employees didn't participate.

How was that possible? Was the program not explained clearly? Were the sign-up forms too complicated? Could there really be that many people so mathematically challenged they don't know how much a 50% return is? Or so blinded by mistrust they can't recognize free money when it's offered? It sounded too bizarre to be believed.

But I've seen data from multiple sources that confirmed it. Not just at my Megacorp; it was the same story at employer after employer. For a large segment of the population, the concept of saving just doesn't register. They don't understand it, and I don't understand them. Sigh...

^ Sad but true.

Many years ago I managed a mfg. plant with ~100 employees. A large percentage of them did not participate in the co. 401k plan even though the company matched dollar for dollar the first 3% and $0.50 per dollar on the next 3%. I talked to a number of them about why they weren't taking advantage of free money and got three basic responses:

1. I need every last cent I can get my hands on to live. (This was reinforced when we had a glitch in the payroll system resulting in a 24 hour delay in the auto-depositing of paychecks. Panic and a near riot ensued.)

2. I don't trust the company to keep their hands off any money I contribute to the plan. They might swipe all my savings.

3. I won't ever be able to retire so I don't need to save/invest for the future.

 

[brett]

We had exactly the same issue at my megacorp employer. About 40 percent of those in the matching DC plan did not participate. The percentage of those that did but NEVER re-vistited or changed their investment options was much higher. Closer to 80 percent.

Our DB plan, 100 percent funded by megacorp, had an optional matching component for contributions to cover items like early retirement, inflation, etc. Less than half of our DB participants took advantage of it.

Go figure. Every year we make a point of doing presentations to employees about the programs, the benefits, and urged ees to participate to the highest amounts offered. Alas, for many it fell on deaf ears. I took advantage of every offer.....after all it was part of my remuneration.

 

[JustCurious]

Many years ago I managed a mfg. plant with ~100 employees. A large percentage of them did not participate in the co. 401k plan even though the company matched dollar for dollar the first 3% and $0.50 per dollar on the next 3%.

So let's say someone made $60,000 per year, if they contributed at least 6% to the 401k, the company would match the first 3% ($1,800) plus half of the next 3% ($900) for a total match of $2,700? That works out to 4.5% of their total compensation. Is my math right? People would choose to leave 4.5% of their pay on the table and walk away because they would not or could not save 6% of their pay in a tax deferred plan?