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What a Financial Trainwreck Can Teach Us: Six Mistakes to Learn From
A married couple recently confessed to some horrifying money blunders in an interview on the WealthSimple website. In their mid-40s and the parents of three kids, the pseudonymous Kate and Tom bring in $160,000 a year through their day jobs in insurance, with additional funds whenever Tom moonlights as a bartender for private parties.
Yet they have always spent more than they earned, and cannot seem to learn from previous mistakes. A few examples:
- After wiping out their credit card balances a decade ago, they charged them back up even higher.
- They have postponed paying back Kate’s law-school loans, which are now up to either $120,000 or $140,000 (she isn’t sure – and incidentally, she has never practiced law).
- They spend “insane amounts” of money on groceries at places like Whole Foods (where one of their kids likes to snack on $15 sushi).
- They bought their son a tux at prom time, because they couldn’t afford the rental fee but hadn’t yet maxed out the Nordstrom card.
Clearly this couple is a financial trainwreck. But they have something to teach us, if we’re willing to listen.
It’s easy to scorn the protagonists as entitled or clueless. You’d never be that foolish. You’d never go into debt, get yourself out, and then go back in. You’d never borrow from family members, or cash in a 401(k), or use a credit card to put your kids in private school.
Maybe you wouldn’t. Or maybe scorning other people’s mistakes keeps you from having to look too hard at your own behaviors.
If you’ve absolutely got a lock on your dollars, good for you. But keep in mind that all across the country, otherwise intelligent and rational people are spending more than they earn.
Losing Sight of What Matters
Some debtors have little choice. For example, someone going through a serious health issue or a protracted divorce can’t just check out of the ICU early or stop paying for legal representation.
Others, like Kate and Tom, have simply lost sight of the big picture in favor of short-term gratification: sushi, private school, a big house in a nice neighborhood.
This skewed perspective happened in such a gradual, boiling-the-frog way that they didn’t notice they couldn’t really afford the lifestyle enjoyed by their wealthy neighbors and the parents of their children’s classmates.
They’ve postponed the day of reckoning thanks to the availability of credit, including taking out loans online vs. having to face a loan official at a local bank. “We ask them for it, and they give us money. It’s ridiculous,” Kate said.
All of these are terrible decisions. Terrible, human decisions. As a species, we’re superb at ignoring the things we don’t want to face.
What Kate and Tom Can Teach Us
Kate and Tom didn’t set out to ruin themselves financially. Their wedding vows didn’t include a promise to “spend ourselves to the brink of bankruptcy, racking up so much debt we can’t sleep at night or even think straight.” Yet that’s what happened.
They messed up big-time and they’re finally admitting it. Coming clean publicly (if anonymously) is a huge service to others, because financial trainwreck stories are a reminder to examine our own lives.
Debt can be like quicksand in that you don’t know you’re sinking until it’s really hard – or maybe impossible – to escape. Rather than make fun of the couple for their massive foul-ups, consider them an object lesson. Learn from their mistakes.
Specifically, be honest with yourself: Could you wind up making the same kinds of mistakes? Or are you making them already?
Mistake #1: Believing Debt Just Sort of Happens
Here’s how Tom described their situation: “I think education loans probably started us on this path. But credit cards got us in trouble.”
Notice the detachment: An external force got us going and then another external force did this to us. He doesn’t say, “We overspent on education – especially on the law degree that Kate doesn’t even use – and then we bought too many things on credit.”
Ever hear yourself say stuff like, “A lot of 10-year-olds have smartphones these days – we can’t let our child feel left out,” or, “Someone in my line of work should drive a high-end car?” If so, take a hard look at your life and your values. You’re in charge — don’t let other people make decisions about your money.
- Read more: What You Can Control
Mistake #2: Minimizing Your Actions
Although deeply in debt, the couple adopted two dogs. Later, when one needed to be euthanized, they couldn’t afford to pay the vet; like so many other expenses, it went on a credit card.
In 2007, while expecting their third child, the couple had a $360,000 house built with two mortgages (since refinanced). After 11 years, they still owe $360,000. “I knew from the beginning it was a stretch,” Tom says. “It was the freewheeling times and so they would do anything to get you into a house.” (There’s that passive, “we’re not to blame” voice again.)
Kate says they shop at Goodwill and garden for vegetables. Yet she also shops for organic and vegan items at expensive specialty stores. “It would not kill our kids to eat a sleeve of ramen noodles every once in a while,” she said. “It’s kind of crazy that we haven’t reeled this in.”
You don’t say.
If you find yourself making lame excuses for poor decisions, stop. Just stop. Even if it’s late in the game – your kid loves that $15 sushi and expects it every time you shop – you must start making choices that reflect not just your values, but also your financial reality.
Yeah, it’s hard to put an end to the good times. Do it anyway.
And yeah, a little ramen won’t hurt anybody, especially if you add some of those veggies from the garden.
Mistake #3: Minimizing Your Inaction
Kate doesn’t know how many credit cards they have. Tom thinks it’s “10 or 11.” Picture that for a moment: They don’t know how much plastic they use.
However, Tom does know that eight of the cards are maxed out.
They have no plan in place to pay them off, but they know they can get more credit if necessary because new offers arrive all the time.
They have no plan to stop the merry-go-round of unaffordable house and lifestyle, either, although Kate does suggest that “what we probably should’ve done is move.”
You can’t go back in time and make smarter decisions. But you can start making decisions now. If your own financial situation is too paycheck-to-paycheck for your liking, talk to someone at the National Foundation for Credit Counseling (help is provided on a sliding scale, and no one can be turned away for inability to pay).
If you bought too much car, look into selling it in favor of a reliable used car. Look for a side hustle. Get ruthless about your grocery bills, since food is the budget category with the most wiggle room; in fact, get ruthless about all unnecessary spending.
It’s unlikely that any single action will fix your budget woes entirely. Aim for a gradual lifestyle shift, and remember that the things you do – or don’t do – will have a major impact not just now, but in the future. The longer we put off our own days of reckoning, the greater the impact on our long-term money goals.
- Read more: The Gap Between Your Goals and Your Actions
Mistake #4: Rationalizing
Just about everyone is guilty of this from time to time, but Tom has turned rationalizing into an art form.
Thanks to their huge debt burden, they get “a good deal” on the $32,000-a-year private school. Yet they have to take out annual loans to pay the tuition.
“We try to save money wherever we can,” he says, citing the example of trading a $405-a-month minivan lease for a $208-a-month car. However, Tom neglects to add up the amount they’ve spent on multiple years of leasing.
Two years back, he cashed in his 401(k) thinking that it could be “the answer to all our problems.” He paid off three cards and – get this – a $12,000 loan he’d taken out using the 401(k) itself as collateral. Then he used the rest of the cash to have “a pretty good Christmas that year.”
But wait! There’s more! Tom underestimated the tax penalties, and wound up owing $20,000 to the state and federal governments. While the IRS will create payment plans, “it was impossible to make a payment plan with the state,” Kate says. So she paid the state tax bill by – you guessed it – opening up yet another credit card.
Rationalization is a fancy word for “coming up with a reason to do something I know I probably shouldn’t be doing.” Listen to the words that might come from your own mouth. Would you call shenanigans on your brother or your best friend if they said stuff like:
- “Yes, I eat lunch out every day but it’s always takeout so I don’t have to tip.”
- “Sure, I spend a lot on clothes every year but in my profession you need to look sharp.”
- “I work hard – I deserve this [whatever-it-is].”
Note: If you can budget for these things and still meet other financial goals (emergency fund, retirement planning, and such), more power to you. If not, call yourself out on your own self-delusion as needed. And if you can’t, ask bro or BFF to do it for you.
Mistake #5: Magical Thinking
Previous solutions – borrowing from relatives, cashing in that retirement account, working with a shady-sounding credit counseling agency – were poorly planned and did not lead to any lasting change. Yet the couple keeps believing that a debt escape plan exists, and keeps on spending.
Toward the end of the interview the two quip bitterly about how the solution could be life insurance. If one of them drops dead from the stress, the other partner will use it to clear the slate. You get the feeling that they aren’t kidding.
Reading between the lines of the entire interview, it’s easy to infer that Kate and Tom really, truly don’t know how this got out of control. After all, they were living the way everyone else does. Since things seem to work out fine for everyone else, maybe it will for them, too.
The one thing that actually might make sense – talking with a bankruptcy attorney – is something Tom utterly refuses to do. His reasoning is that if he ever needs to change careers, the job application might ask if he’s ever filed for bankruptcy.
Don’t be like Kate and Tom. Don’t delude yourself. If your spending feels out of control, put on the brakes (hard!) and revisit both your budget and your life goals. Should it turn out you’re in the hole, stop digging – and start planning ways to pull yourself back out.
Don’t wait, like Tom did. If he’d talked to a financial counselor 10 years ago and was told to declare bankruptcy, he and Kate would still have his 401(k) to help them later on. As it is, they will likely have to file anyway – and the retirement money is long gone.
- Read more: Personal Finance and Magical Thinking
Mistake #6: A Privileged Attitude
Six years ago Tom leased a Toyota Corolla, which at some point sustained a broken mirror. He wasn’t sure what they’d charge him for returning it even slightly damaged, so he just kept the car after the lease – at a “huge” interest rate.
“This is the kind of thing poor people do,” he said. “And I’d consider myself that.”
That statement carries a strong scent of both arrogance and self-pity: “Poor” people do dumb things – but waaahhhh, now I have to think of MYSELF as poor!
As though poor people are somehow less valuable as human beings. And as though his own behaviors had nothing to do with the fact that he’s broke.
In addition, Kate and Tom seem to believe they deserve the good life – expensive food, fancy home, private schools, lots of nice clothes – even if they can’t pay for them. They seem to think that their near-bankruptcy is due to bad luck rather than bad decisions.
At the risk of sounding like your dad: The world doesn’t owe you a living. We get what we need (and want) by working, planning, and, yes, sometimes going without until we can afford them.
Sometimes we can’t get what we want right away (or maybe at all) because of issues that come out of nowhere, such as unemployment or serious illness. That’s why financial experts recommend tactics like building a robust emergency fund, getting an early start on retirement planning, driving a car until the wheels fall off, cooking from scratch, keeping gift-giving to a minimum and, most of all, knowing the difference between wants and needs. When tough times come, you’ll be better positioned to handle them.
You are not entitled to anything in this world, but you can improve your chances by making careful life choices. If you aren’t doing that already, The Simple Dollar archive is full of articles that can help.
And if you think you’re already doing everything right? Stay humble, friend. Never assume that you’re way too smart to make mistakes like Kate and Tom did. Otherwise you might end up in the same kind of financial quicksand, wondering how things went so wrong.
Award-winning journalist and veteran personal finance writer Donna Freedman is the author of “Your Playbook for Tough Times: Living Large on Small Change, for the Short Term or the Long Haul” and “Your Playbook for Tough Times, Vol. 2: Needs AND Wants Edition.”
More by Donna Freedman: