personal Finance Story

My younger brother works in retail. Even though he is a technically a manager it does not pay astonishingly well. That alone shouldn’t be a budget killer. To his benefit, he does live in a low cost of living area within Virginia. His troubles come, ironically enough, the same way it comes for me, having to say “No” to family members in need.

In trouble with debt

My sister called me one day and demanded $1500. After much anguish and heart ache I said No. So she went to my younger brother. Against his better judgment, he said yes.

The worst part of it is, he didn’t have $1500. Not by a long shot. But since she had promised him that he would get his money back when their tax return came in, he rationalized using a cash advance on his credit card. The tax return money never materialized for one reason or another. Excuses piled up and my Brother was left holding the bag at an atrocious interest rate.

Unfortunately, this was not the only debt my Brother had gotten into. He already had a good chunk of money on that card. He was a sucker for a good deal. He used his employee discount to purchase all kinds of stuff and his credit card balance showed it.

Cleaning House

I looked through a few months of bank and credit card records to see just how deep the rabbit hole went. Besides the overall balance, I found some astonishing things.

First, he was spending at an alarming rate. Well more than he was bringing in. Some of it can be excused. He just graduated college and got an apartment. He needed a bed to sleep in and the standard accessories that every home needs. But then there was more. Lots more. He was regularly spending several hundred dollars past what was reasonable.

And then there were the services. He had been signed up for at least three credit monitoring/credit protection plans that were pinging his bank account for $5 to $20 each and every month. I have no doubt that predatory or malicious means were used to get my Brother on these programs. But shame on him for not even checking his accounts for suspicious activity. He had a head in the sand attitude when it came to his finances. This just had to stop. He was in trouble as it was and these just added to the bleeding.

Making a budget

We needed a plan. On paper on purpose as Dave Ramsey likes to say. I took my own budget and blanked out the data. I worked with my Brother, parsing through payroll stubs and bills to come up with a realistic view of what was ahead of him.

My Brother is very lucky to have parents like ours. They are still taking care of his car insurance and car payment. But even with these advantages, I estimate that it will take until October to rid himself of his debt. And that assumes he is an absolute saint when it comes to his money. No eating out, no movies, no games, nothing. No frills, no entertainment, nothing.

It could have been worse. I hear about people climbing their way out of debt for years. A few months of sacrifice seems to me to be a pittance.

Following Through

I call my Brother every few weeks to chat about life. I always try to casually sneak in a question or two about his progress. I’m not about to hover over him like a hawk to make sure he fixes his finances. He is a grown man and should be accountable for his own actions. If anything, I hope that I have guided him along a better path. His biggest problem was in actually acknowledging his own money. He preferred not to know how bad it really was.

Some recent developments should help him along. He expects a tax return around $500 or so. Add to that the $600 he expects from the economic stimulus rebate in May and he should be able to get clear from his debt sometime in the late summer.

I’ll continue to check in and see how things are going.  My hopes are high.

Now freshly engaged my fiance and I have already started to receive “Newly Wed” type advertisements.

The latest to hit our mailbox was a copy of a magazine called [The Nest]. It’s a magazine filled with advice on decorating, entertaining, cooking, and all things material.

It was almost 50% advertisements and perhaps a bit more when you read the content closely. I can just about pick out all of the placed products disguised inside the articles. It was fun to read through. It is a bit of comedy for someone who lives a frugal life.

So far so good. Now interestingly, they managed to include three pages near the back about debt. Finally a bit of sanity in a world of consumer driven chaos! Lets examine their advice.

1. cut your credit card habit

Three cheers for immediately getting to the source of the issue. Debt is about behavior first and foremost. You can’t improve your situation until you address the underlying cause of your overspending.

2. pay as much as you can

They provide the typical scary math to point out the absurdity of minimum payments.

3. prepare to make some sacrifices

I love it. Its tough love for those drowning in debt. All the usual suspects are here; ditch the premium cable, downgrade to dial-up, stop eating out, etc.

4. lower your interest rates

More common sense advice so far. They are batting four for four thus far.

5. transfer your balances to a better card

This could have been rolled up into number four but I won’t hold it against them.

6. never forget to make a payment

If you have gotten this far, I’m not sure this needs to be said but it can’t hurt.

7. don’t go overboard

Ok sure, you should never sacrifice your dinner just to shave a few dollars off your VISA bill. Just when they are about to wrap up the article they go a bit overboard themselves. They mention the benefits of 401(k)s and  company matching dollars.

So, provided you’re making all the minimum payments on your cards, allocate any extra money to your 401(k) before all else.

I’m sorry but this just doesn’t wash with me. I know a 401(k) match is free money and you should take advantage of it if you can. However, I do not agree with their delivery of the concept. If you are drowning in debt you need to be doing far more than minimum payments to have a prayer of getting yourself out. More often then not their advice is good but for others it may be a financial poison pill.

They continue onto the subject of home ownership.

A house appreciates in value, often at a faster rate than what you’re paying on the loan. So, if you’re looking to put down roots, don’t let your debt struggles discourage you from buying a home.

And off the cliff they go. Debt struggles are a perfect reason NOT to buy a home. Doing so is a one way ticket to foreclosure.

Saying that a house will appreciate faster than debt is a dangerous statement. That may have been the case in the boom years, but not in todays market.

Assuming you have loads of debt then I also assume you do not have money for a proper down payment.  Can you say creative financing? There are very few situations where a couple should buy a house over paying off high interest debt. Very few indeed.  You need to be in a position in life to grow your wealth.  Getting bogged down with a mortgage AND debt is harmful advice in this day and age.