Why People Have Money Problems

I recently received a GREAT email from an FMF reader that went as follows:

For once a straight shooting article from the mainstream financial press. It basically says people have money problems because:

• They spend too much on housing
• They spend too much on cars
• They spend too much on college

There are other factors, of course, but I agree these are the big ones. The other two that I'd add that nobody wants to touch are:

• Having kids out of wedlock
• Divorce

I LOVE it!!!! :)

I mentioned several of these in my post on the ten worst money moves anyone can make: marrying the wrong person was #7, buying too much house was #5, and over-spending was #1.

The house, car, and college are especially dangerous because of the amounts involved. It's one thing to over-spend on comic books and quite another entirely to over-spend on a house.

A few more thoughts from me:

• Here's how to buy a house and pay it off in ten years.
• Here's how to save money on a new car (You can also buy used, as I'm sure some of you will point out.)
• As for college, the key is to make the payoff exceed the investment. In other words, it needs to be a "good deal." $50,000 invested in college for a job that pays $75,000 a year is a lot better investment than a $200,000 cost for a degree that gets you a $20,000 a year job.

Anyone else have thoughts?

Comments

[Carole]

I think that having children out of wedlock makes life a lot harder and more expensive than it needs to be. Especially if the parents live separately. The woman, who usually has custody, has to struggle with finding and affording baby sitting while getting her education and/or working. The man has to finance child support while a new partner resents the money going out on another woman's child. The poor child is the victim of these problems. These old taboos are rooted in common sense.

[Louisa]

But most people I know who have a child and aren't married ARE partners, live together and have their own child, not the circumstances you describe. They live together and are raising their own child. I wouldn't do it myself, and I understand that some people have an ethical problem with this, but I don't see a financial problem. Am I missing something?

[Boston85]

@Louisa I'm guessing it refers to single-parent families

Racial or ethnic group
Children in single-parent families

Asian Americans and Pacific Islanders
17 percent

Non-Hispanic whites
25 percent

Hispanics
42 percent

American Indian and Native Alaskans
53 percent

Non-Hispanic blacks
67 percent

Here's an article containing some stats.
http://www.politifact.com/truth-o-meter/statements/2013/jul/29/don-lemon/cnns-don-lemon-says-more-72-percent-african-americ/

[Matt]

I agree that the top three can be a large contributor to being broke. I also want to point out that the reason people have money problems is they just spend too much on everything. It is all in your priorities of what you want. As long as the monthly payment is reasonable and you think you can afford it then it is fine.

Just because you can, doesn't mean you should.

[Old Limey]

In my opinion a Divorce can be the most catastrophic event that affects your finances.

When I left England in 1956 at the age of 22 I had never, ever, heard of a couple that had gone through a divorce - that's how rare it was.

Sadly, each of our three children have gone through a divorce, one of them is on her third husband. Fortunately if you are young and have few assets it doesn't hit you financially too much. Our middle child, now 53, divorced her attorney husband 5 years ago and received a settlement of $2,000,000 and alimony of $20,000/month for 10 years. I manage her money for her and her $2M has now grown to $3M. She is also in a 5 year relationship with an engineering executive she met on eHarmony.com on her second date and they plan to marry when the alimony stops in a few years.

My wife and I celebrated our 58th. wedding anniversary last month.

[Millionaire #16]

This simple article really resonates with me. I continue to be astonished by the amount of debt the average consumer seems to be willing to digest. Personal finance and money management is really quite simple - even my 9-year old daughter understands it better than many of my friends.

Of course, she has one big thing going for her right now that many people don't - no debt! I started reading FMF about three years ago because I felt like a kindred spirit when I read about his lifestyle and priorities. I paid off my mortgage in 2013 (after 8 years, 3 months) and fewer things have given me more satisfaction in life other than my family. In my experience, they key to paying off the mortgage wasn't really that special. It was always planned from the start, beginning with the amount, and term (15 yrs) of the loan. I had a large down payment saved (about 30%) and knew what my ceiling was for a loan balance. Plus, I knew on day one that I would be paying extra against my mortgage.

So many people that are struggling with bills and debt do so because of their high, fixed costs - mortgage, credit card payments, school loans, auto loans, etc... It's not the unexpected $300 plumbing bill that's the problem - it's the $2,000 mortgage payment that makes the $300 added expense hurt.

While there is a benefit to budgeting and trimming variable costs, it's a real losing battle when 50 or 60% of ones cash flow is earmarked for debt service on the 1st day of every month. Lenders are doing people no favors by approving loans for way too much money. I thought there might be some serious changes after 2008, but I continue to see and hear about people getting new mortgages for 5% - or even zero - money down.....yikes!

The fatal flaw most consumers have is not accounting for the total cost of home ownership. On top of that, they don't budget for the unforeseen expenses when something comes up (and something ALWAYS comes up!). They get caught up making long term decisions about how much they can "swing" each month. Of course, the amount one can pay each month is variable for a lot of people, while the monthly commitments are not.

So from my perspective, the issue at hand is how to teach my children not to get into a "high fixed cost" predicament to begin with.

More and more, I see the optimal age to establish good habits to be somewhere between 8 and 12 - given that many youths will be making some mind-boggling decisions about taking on student loan debt by the time they are 17 to 18 years old. Graduating from high school and obtaining a college degree with little, or preferably, no debt, is probably the most likely indicator of long term financial independence. I would be interested in seeing financial literacy topics even at the elementary school level. This could be introduced through things such as fund-raisers or projects where students are included in the budgeting and planning process for school events such as Fall Festivals, etc...

[Ivy]

Interesting that they didn't list "they spend too much on child care" as one of the options. Day care/preschool costs more than public college in 30+ states, it's not exactly optional as college is, and according to this analysis, may be unaffordable for some single lower income parents (going to the wedlock and divorce points too)

http://www.huffingtonpost.com/2013/07/12/child-care-_n_3585752.html

We have 2 kids and last year they were both in day care and the cost for both in that year was $29K (in a moderately pricey NJ preschool) and if we add summer camps and occasional babysitter, comes to $35K. After that college is less scary:-)

[Limey Junior]

Divorce is probably #1. Just look at Robin Williams estate after his first two divorce proceedings.

Even OleLimey's statement about his daughter only getting married after the alimony ends (so that she can still fully collect the 20k). Well played.

[Mark]

The research has shown that unmarried partnerships are typically highly fragile and unstable. This from Isabel Sawhill, a researcher at the liberal leaning Brookings Institution:

".....Marriage is a commitment that cohabitation is not. Taking a vow before friends and family to support another person “until death do us part” signals a mutual sense of shared responsibility that cannot be lightly dismissed. Cohabitation is more fragile — cohabiting parents split up before their fifth anniversary at about twice the rate of married parents.  Often, this is because the father moves on, leaving the mother not just with less support but with fewer marriage prospects."

So I absolutely agree with Carole. The old (nearly non-existent today) taboos about not having kids out of wedlock are rooted in common sense.

[jim]

Ivy, I'd presume that your job makes it worth paying for childcare. If childcare is really too expensive to afford then you'd just quit your job and care for your kids. Childcare is then just an expense of your job and your job ought to increase your income. Childcare is also only a fairly temporary situation.

[M-19]

Spending above your means is the root of all financial problems. It really does not matter much WHAT it is spent on. The inverse is also true that the ability to save ( spent below your means) is the sole path to self funded financial freedom.

I would put overspending on fixed long term monthly obligations (cars, houses, loans) as much worse than an occasional large splurge.

Divorce is a killer too as it cuts your net worth in half ( assuming you have one).

[K D]

I think people also have a tendency to overspend on eating out/take-out, entertainment and just about everything else.

I know many people that send their kids to private schools, whether they can afford it or not (the same with taking pricey vacations (Ireland and Disney come to mind)).

Someone in my yoga class must have done a cash-out mortgage refinance to pay for their kitchen remodel because she said they'll be 90 when they pay off their 30 year mortgage. I was so shocked it took me a minute to process.

A good list FMF.

[Ivy]

@ jim "Childcare is then just an expense of your job and your job ought to increase your income. Childcare is also only a fairly temporary situation."

I was saying it's a very high spend item, quite possibly higher than college, and as temporary as college - 4 years or so each. People tend to overspend on this (I am sure we do, we did try for a bit and gave up on a small neighborhood place which was cheaper but didn't seem trustworthy enough), just like they overspend on college. So I think it should be on the list

Yes, you can trade income loss for spend by having a stay-at-home parent, but that's how you solve for it, not removing the need to solve for it. By a similar logic you can avoid college cost by not sending your kids to college or not paying for it.

[M9]

Having a child out of wedlock means one thing: one partner, or both, think they can do better. Sad, but true. Hard to believe that people have kids "by accident" in 2014. So many children, especially from lower socioeconomic groups, have parents who do not have the interest, time or money to devote to this task.

Childcare is part of the deal. If you haven't completed your education, and decide to have a child, you are lowering the bottom of your bucket. Not cool to bring a kid into the world outside of a stable relationship. And let's get real, younger unwed mothers never do complete their education or get a decent job. Once in awhile you hear a feel-good story, but there are plenty of programs like AFDC, EIC and welfare. In what other way could a 20 year-old girl get her own apartment, when a 25 year-old childless single girl with a good job would struggle with that? Many people plan their vacations with more care than the decision to have a child.

The number one common denominator for convicted felons is that there was no adult male present in the household in which they grew up.

@Louisa, my guess is you are a professional, college-educated, and associate with likeminded people. The 'identity trap' or 'cognitive egocentrism' is when you think that everyone is like you, thinks like you, and has the same values you do. But they don't. Glad to hear children raised by people you "know" have this advantage.

[Mark]

@M9. Spot on!!!

[JeffinWesternWA]

spending...............

[Kathy]

Each spring during college graduation season, I laugh at the people that the news media interview who say they can't find a job. Then, inevitably, the interviewer asks their major and the person says gender studies, or French literature, or art appreciation. What kind of a job did they expect with majors like that? And more importantly, why did their parents finance their education in a field that would not be likely to provide employment. Much better if they'd gone to some trade school as opposed to the courses they took in college.

[getagrip]

The true issue IMHO is that overspending has become too easy. When I was young, you had to have assets and a high paying job to get a credit card, it was a mark of being well off and financially sound. By the time I hit college all you needed was a pulse. Mortgage amounts became obscene in what they would lend you and claimed you qualified for, etc. Student loans were being handed out like candy. Even today, as soon as you get a job, you can get a credit card and start your path into debt.

I've said this elsewhere. For the vast majority of people it isn't as if the slide into debt is instantaneous and done in some orgy of spending. For most people the overspending is incremental. It starts small. You get a job, and you move out from Mom and Dad's, you can make your monthly bills. You become mentally used to thinking if you are able to afford your monthly bills you're are doing okay. After all, you are on your own dime. How is that not being responsible especially when you're first starting out?

Then the slide into debt will typically start with a credit card where most people don't max it out the first month. Heck, they may pay it off every month for half a year or more. But then the first big hit occurs, a major car repair, a spur of the moment big purchase, a temporary lack of employment, and as life happens the balance may yo-yo up and down, but generally keeps creeping up. Then the credit card company extends the balance because you've been such a good sucker, I mean payer, and you creep up to the next level, and they extend it again, and again. Meanwhile you get an auto loan, get married, buy a home, etc. and the balances rise and fall somewhat but through it all you are making the monthly payments, you aren't asking for help or even thinking you need it.

And so the debt slowly builds until you hit some point, maybe in your thirties or forties, and you get a serious scare that didn't destroy your finances (like a divorce). Maybe you or the spouse got laid off but got another job quick, maybe you were facing a big medical bill, etc. Then you realize that yes, you can still "make the payments", but if anything major comes along, you're sunk. You also see that you somehow have nothing extra to save for retirement, for college, or to get ahead, because the bulk of your money is making payments, on the house, the cars, all those payment plans, the credit cards, etc. I think then is when a number of people realize they'll be making payments until they die at the rate their going and start to try to reign it in. But for many the lifestyle momentum is too great to pull back. In a way, you don't want to pull back because that would be admitting that you somehow have failed. You've got the boat, the SUV, the quads, the McMansion, the time share, etc. and you frankly like the way you're living, despite the nagging worry that crops up in your quiet moments or when you've made another late payment because you had to wait for the paycheck to get deposited into the bank account.

At this point, you've spent too much on housing, vehicles, and likely college. It's water under the bridge and now you're expected to paddle upstream back to the bridge and get out and walk? That can be a tough pill to swallow and a lot of people go into denile or put in place a bunch of band aid patches instead. I feel there is a large majority of people in this position.

[Old Limey]

@getagrip
Your very well written reply is spot on and you have hit the nail right on the head. Congratulations!

I use three credit cards -
Costco AMEX
Fidelity AMEX
Fidelity Mastercard

I was just looking at my latest Fidelity AMEX statement. What you can end up paying is shocking if you miss a payment, incur late fees, penalties etc. I am such a tight wad that I have never paid a dime more than the balance due, or been late, in my whole life. For people like me credit cards are great, you get a free monthly loan as well as reward points and the huge convenience of not having to deal with cash. The most cash I keep in my wallet is $20.

I'm sure most of us have had home and auto loans at various times, especially when we were young, but I made a point of becoming debt free at the time I retired in 1992.

[Mark]

@getagrip. I think this is an excellent description of what happens for those in the middle & upper middle class (as measured by income). But for poorer folks, the scenario is different...it often starts with a relatively young marriage that ends in divorce a few years (and a few kids) later and/or having a kid out of wedlock...perhaps because being a product of such a relationship is how they grew up themselves...so it's their template for what's normal. It seems there's a trap for folks at every socioeconomic level.

[jim]

M9 & Louisia,

Most unmarried couples with kids are not living together jointly raising children. THere are only about 1.9M families with 2 unmarried parents in the nation versus about 12M single parent households.

But M9, no the people who are unmarried couples cohabitating and raising children are NOT typically college educated professionals. In fact the median family income for those 2 parent unmarried couples is under $30k. They're more likely to be poor than single family households. Incomes are likely to be higher in families with a single parent than in the families with two unmarried parents. The unmarried 2 parent families are more often below the poverty line than the single parent family. ONly about 22% of unmarried 2 parent families makes over $50k and 27% of single parent families earn that much.

[Old Limey]

Yesterday my wife and I watched a very interesting movie on NETFLIX called "Inequality for All"

The former U.S. labor secretary and current UC Berkeley professor Robert Reich makes a compelling case about the serious crisis the U.S. faces due to the widening economic gap. It clearly shows what kind of education and skills young people entering the workforce need if they are to have a long, successful, and rewarding career. A major part of the problem, along with the tremendous growth in automation is that we just aren't making nearly enough of the products that we used to. We invent and design them but have other countries make them for us. The growth rate of salaries for the people at the top is growing by leaps and bounds whereas they are stagnant for those that lack a good education and skill level.

[M9]

@jim, exactly my point. Louisa noted that "...most people (Louisa) know who have a child and aren't married ARE partners, live together and have their own child..." My note to her was that most people aren't like her, and don't think like her ("identity trap" and "cognitive egocentrism", these are the things that make people believe that "if we can only understand the terrorists" or "criminals have low self-esteem" or "politicians need to hear my plight") Only 27% of adults over 25 have a 4-year degree, anyway. Thanks.

[John Colbert]

Why did OleLimey`s Daughter get to collect all that money did she not have a career and made money, and think about it after giving her all that money I`m sure her ex can not live as good as he did.

[Old Limey]

John,
My daughter had a great job as manager of a high rise office building when she married an attorney that did business with the company. The attorney employs quite a few other attorneys and does a great business processing evictions. The first thing that happened after the marriage was that her husband insisted that she give up her job, that's a big reason why she received such a good settlement. I also negotiated the terms of her settlement with him. They stayed married for about 19 years and had 3 children, 2 boys and a girl. The girl was a future genius and I used to pick her up regularly from school and tutor her in Math & Science that was far beyond what she was doing at school. Unfortunately the father's family has some genetic problems that were passed on to two of the children, one being the girl. When she was 8 years old she was diagnosed with an incurable brain stem tumor and died within a year. Her death was a devastating blow to the marriage as the little girl was the primary source of happiness, and her death tore the family apart.

My other daughter was office manager for the same attorney and still telecommutes to handle all of his billing. He is not a happy man but he has such a large and profitable business that money has never been an issue. My daughter still has contact with him when one of their sons has frequent doctor visits for incurable mental issues that run in the family. The father is very weird but has a great ability to make money, he also has a photographic memory and an intelligence far above the norm.

[John]

Investing above your indicates is the main of all economical issues. It really does not issue much WHAT it is invested on. The inverse is also real that the capability to preserve ( invested below your means) is the only direction to self financed economical independence.

[Big-D]

If there were a "10 Commandments of Personal Finance", Number 1 would be "Spend less than you earn". It that simple. Life is what makes it hard. Cars, College, Houses, Toys, Child Care, etc. all make it easy to spend money, and if you are not careful, more than you make.

The divorce and out of wedlock children comments are true, however, lots of those things can be prevented with realistic analysis (or thought) and not emotion. People get married for all the wrong reasons, and divorce is just a byproduct of that. People keep children in bad situations, when there are so many who want to adopt.

My #2 commandment is simple, "Never let emotion demand how you spend your money."