Wikinvest Wire

Lots of Income, Little Common Sense

Monday, January 22, 2007

There would be much less cynicism around here if there were fewer people in the world like this couple who took time out of their busy day to write this note to LA Times personal finance columnist Liz Pulliam Weston.

Dear Liz: We recently realized we needed to stop our spending ways and would like to know the best way out of debt.

Our income, which has fluctuated between $190,000 to $250,000 a year, is being eaten up by payments on $68,000 in credit card debt, so we're not saving anything for retirement or our two kids' tuition.

We're thinking about refinancing our second mortgage or tapping our 401(k)s to pay off the debt. Additionally, we hold some company stock outside our retirement plans on which we could clear, after taxes, approximately $60,000.

What would be the best way to pay down all of this debt? We know we must tap into at least two sources.

Answer: Actually, you should tap into one source — selling the company stock — and avoid the two other sources as if your financial life depended on it. Because it probably does.

The problem with tapping home equity is that you're squandering a source of long-term wealth to pay off a bunch of short-term spending.

Most people who pay off credit cards with home equity loans wind up racking up more credit card debt because they don't fix the overspending that caused the debt in the first place.

Taking out 401(k) loans is also fraught with peril. If you lose your job, you typically have to pay the loan back quickly or risk having to pay taxes and penalties on the balance you owe.

You're extremely lucky to have an asset — the stock — that you can sell to pay off the vast majority of this debt. Then you can concentrate on paying the rest out of your substantial income.

That's a far better solution than putting any of your other, more important assets at risk through unwise, and unnecessary, loans.

Given your income and a concerted effort, you could eliminate this debt in a few months.

The discipline you'll use to do so will help you get the rest of your financial life in shape, and the money you'll free up by reducing your spending can be used to get your retirement savings started. Once you're on track there, you can start saving for your kids' future education.

People with far lower incomes have dug themselves out of bigger holes. There's no excuse for you not to take care of this debt — and fast.
It's tough to get by these days when your household income is only a quarter-million dollars.

Do you think their employers would have second thoughts about these two during their yearly performance reviews if they were to learn of this letter, "Geez, we're paying you over a hundred grand a year and you've got $68,000 in credit card debt in addition to a second mortgage...and you're writing to a newspaper because you've just now figured out that you have a problem?"

This is such a 21st century phenomenon.

Someone transported to the present from just a few decades ago would be astounded by this note - not so much by the dollar amounts (which really are a little mind-boggling) but by the casual nature of it all, "Hey honey, let's write a letter to Liz and see what she thinks we should do".

We really do live in an era where people have no fear of debt.

Since Ronald Reagan was in the White House an entire generation has become accustomed to and, in fact, embraced debt as a way of life at all levels - indivuals, business, and governement.

What could possibly go wrong when much of the Western World thinks this way?

It's hard not to be cynical.


Anonymous said...


When you say "... [it's] tough to get by these days when your household income is only a quarter-million dollars," I get a really mixed up sensation because in some ways it is actually true.

My wife and I are in a very similar situation to this couple in almost every respect, except the bottom line. The crucial difference appears to be that since the dotcom crash, we've been less optimistic about the future and as a result more careful with our spending. We sold our Bay Area home last spring, have zero debt and are waiting out the potential financial apocalypse with a portfolio of cash, PMs and energy stocks.

That said, however, I must relate the $250k/yr from two incomes does not go as far around here as some might think. After taxes, rent, day-care expenses for two, part-time nanny expenses, utilities, vehicle expenses, medical expenses, etc., we are left with close zero capacity for additional savings and zero time to spare. Long-term, this is no way to live. We are looking for a way out.

Anonymous said...

It's a good thing inflation is so low -- otherwise you'd really be gettin' creamed.

Anonymous said...

I am not sure you can make fun of their situation that easily. Racking up that much debt is less than wise, I agree. However, with AMT hitting you in the face, housing costs on the coasts sky high and the below the belt inflation punch courtesy of the Fed and the BLS, you have to sympathize with these two and others like them.

Anonymous said...

If these folks live in California they almost certainly owe a million on the house, and probably need to refinance anyway because they can't make fully amortizing payments. They really might not be able to pay anything on the credit card debt. The house might make any attempt at virtuous budgeting irrelevant because they didn't sell last year when they had the chance. And thus they probably won't learn anything from this unforeseeable tragic experience.

Anonymous said...

Inflation? Think of it like this. Suppose the supply of money were relatively constant. Then, the result of strong economic growth (more goods and services for the same amount of money) is ... strong deflation - has to be. Where did people ever get the idea that growth causes net inflation? Progress is less time, effort and expense to do the same thing, not more. The only beneficiaries of inflation are (1) the tax collector and (2) those with very, very large long-term debts. Don't (1) and (2) happen to be the same? Now really, will we ever see deflation in this currency? Seriously.

Anonymous said...

Of course they *could* just sell their two 30,000 SUVs....


Anonymous said...


forgot about the negative equity on those SUVs

Anonymous said...

I don't think that people were so much more virtuous in the past. People just didn't have the financial vehicles for getting into debt that they have today. We need to clamp down on both how much credit people are given, and the loan rates they are subject to (credit cards, payday loans, etc.)

Tim said...

The $250K income along with the $68K credit card debt was enough for me to pass judgment on this couple - that's just really dumb.

The mistake that many people make these days is borrowing as much as banks will lend them.

Anonymous said...

This is a pretty good example of why colleges (and, in fact, high schools) should require all students take a course in basic finance and money management. This couple is presumably earning somewhere between $10k and $12k per month after taxes and yet, due to questionable spending habits, they're up to their necks in debt. It's utterly ridiculous.

How did they allow themselves to get into this position? I'm genuinely curious as to where their money has been going. I doubt they simply woke up one day with a $68k credit card balance and no discretionary income to pay down that debt. Did they throw weekly $1000 cocktail parties? Do they have matching $60k vehicles? How many HDTVs do they own? What are their monthly entertainment expenses?

What was the purpose of their second mortgage and how much of their monthly income is being diverted towards mortgage payments? Was it to avoid paying PMI on their first mortgage? Whatever the excuse, red flags should have been raised as soon as they felt the need for that second mortgage.

The mind boggles...

Anonymous said...

They need some serious schooling in LBYM -- Live below your means. Sell the stupid house, rent a condo, do NOT trade-in the Benz for another Benz when the lease is up, etc etc. I'll bet they could whip that $68k in two years if they really buckled down. They'd eject their depreciating house from their "portfolio" as a side benefit.

Anonymous said...

anon January 22, 2007 1:22 PM:

Your spending is out of control.

Anonymous said...

I have an economics degree and a law degree and have done a pretty good job of running up the debt. I have to admit that it just suddenly creeps up on you. In my case, I had my credit cards reset my interest rates once things started going up. I suddenly realized I was paying 30% interest on some cards. That is with $250,000 in income in New York. Sorry. Prices have certainly gone up way more than anyone wants to admit. I am divorced with child support payments and my child in private school. Half of what I make goes to taxes so basically even if you make a million bucks you get $500,000. The ultimate insult is getting hit with the AMT for $6,000 this year whick is over a half a month take home pay. Sure....I am rich!!!!! It is nonsense. I am sorry but the only people who make decent moey work for investment banks and hedge funds. The rest of us are just cannon fodder.

Anonymous said...

It's really this simple:

One week's income is your house payment/rent. If you pay more, you'll never be able to save.

Anonymous said...

What a bunch of whiny six figure losers!

Have I slipped into some sort of bizzaro world where everyone in the world makes a six figure income and spends it all on crap and kids who probably know their nannies better than their parents? Not only that, but there are people earning that kind of money that actually boohoo about their utility bills? It's the Bay Area for krissake - not Maine or Las Vegas. You can put on a sweater or open the window and knock 40% off your bill.

It is unbelievable, but it looks like I live better and have more savings and less debt that most of these six figure 'tards and I've worked in the 40-50K range for the past 10 years! The first five in the Bay Area and the second five in So. Cal. Who making six figures has medical bills unless you have some sort of exotic condition or lots of elective surgery. Nannies AND daycare? Hope you're saving up for your kids future therapist as well. Any teacher will tell you that home school vs private school vs public school is irrelevant when the parents care more about their job than their kids.

BlueEventHorizon said...

I really have no sympathy for people like this, or all the ridiculous excuses offered on their behalf.

My wife and I earned about $800k over a 5 year period from our consulting business. We lived in downtown Philly at the time, center city. At the end of that period we had over $500k in savings.

Don't tell me you can't live on $250k a year.

Anonymous said...

OK, allow me to slip on the haz-mat suit and offer a brief reply to the disbelievers. Around here, Childcare for 2 very young kids good enough to allow you to spend the time needed to earn $250k goes for about $50k/yr. Rent for a place big enough and in an area close enough to both a decent daycare and work at the same time goes for >$40k/yr. Taxes run about $60k/yr. That leaves ~$100k/yr for 4 people to do the rest with. What % of $250k will you save out of that? Of course it can be done but that isn't the point. If you don't have very young children or have owned your home since before dotcom, the major constraints are removed and allow you some good options. Too much time working to pay for all this and not enough family time is precisely the reason it is not going to work and why we're getting out.

WoodenHorse said...

That leaves ~$100k/yr for 4 people to do the rest with.

boo-goddam-who. That's what you're taking home free and clear. What about a shmuck like me who grosses 65K??

There is simply no excuse for being "broke" on 250K. You're problem is that you are obviously living a 250+ lifestyle.

Anonymous said...

Some or may be a lot of people in America spend more than what they earn. Even they make over $1M, they still can be in credit card debt. So, budgeting and spending habit are the keys, not how much people make. Those people don't deserve any mercy who are in debts because they over spend.

Anonymous said...

Not broke WoodenHorse. It's just even with dual 6fig salaries, we can foresee it's not going to work - at least not in the Bay. Also, there isn't any long-term future in these jobs as they will eventually be outsourced overseas. The way things are going, the only way to get ahead is to have enough money put aside in the assets that will do well in a hyperinflation meltdown - and not need to tap into it until it is beyond critical mass. Yet another sign post on Hayek's Road to Serfdom.

Dr Housing Bubble said...

"Our income, which has fluctuated between $190,000 to $250,000 a year, is being eaten up by payments on $68,000 in credit card debt, so we're not saving anything for retirement or our two kids' tuition."

They are taking home between $9,000 and $12,000 a month depending on their deductions and yearly income. Either way, they are doing fine. Assuming they pay the lowest payment which normally is 2% of the balance, it would be $1,360 (or at the high end 4% which would be $2,720). Even if we use their lower bracket, $9,000 - $2,720 = $6,280. Where is all this remaining money going to? I live in Los Angeles and even though housing is expensive, their is no excuse for this family not to save.

Typical couple that spends every last cent. Reminiscent of the couples in the Millionaire Next Door. High income and low wealth. We need to develop a debt rehab center where folks can check in for a week and come out reformed.

Dr. Housing Bubble


  © Blogger template Newspaper by 2008

Back to TOP