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A reader of Debit versus Credit recently left a comment on The Worst Years of My Financial Life. She mentioned that she is glad she is not the only one facing bad financial times and proceeded to talk about a few of the things that were weighing heavy on her financial freedom. She has been without work since August, lives on unemployment and has over $17,000 dollars in credit card debt. She is a single mom with two children and is struggling to get by on her unemployment checks. Every single morning she has to face that number: the amount of credit card debt that she has. She asked in her comment if I could provide any advice for her.

I do want to start out by saying that I am not a licensed financial adviser; in fact I’m still just a kid trying to learn about the world (I’m only 24). Nothing I suggest on this site should be taken with the same level of confidence as if it were coming from a certified financial planner. However I do consider myself knowledgeable about the way the world of finance works, and I do have a background in banking which has really helped me to increase my knowledge on the ins and outs of the financial world.

What Would I Do? 

With that being said I’d like to voice my opinion on what I would do if I were in this womans’ position. I don’t have all of the facts and I have made efforts to contact the reader who left this comment, but have had no luck in so doing. If you are reading this post then if you could supply any additional information about your financial situation (e.g. monthly income, expenses, etc.) then that would be helpful.

If I were in this readers’ position then the first thing I would be doing is looking for ANY job that pays more than my unemployment does. Unemployment pays next to nothing as I’ve recently been made aware of, and even if I had to take a job which was far below my skill set to increase my monthly income I would do it. I would then take the difference between what I was earning on unemployment and what I am earning with this low-level job and apply it directly to my credit card debt. Meanwhile I would continue to look for a higher paying job, one which would further allow me to pay down this debt. If it came down to it and the credit card debt just could not be easily payed down every month I would consider contacting a non-profit debt management company such as Take Charge America. Of course lastly I would find creative ways to decrease my expenses. If I were paying for something that I could survive without then I would immediately drop it (for example a car if work were close enough to walk or bike to, or cable television, etc).

Facing That Number

Facing that number is never an easy thing to do. I know, I’ve been there. However it can be done. It can always be done. There are always ways to increase income and decrease expenses. No matter how desperate the situation is it is important to not lose faith and to continue moving forward. You’ve heard the old adage, “A penny saved is a penny earned.” In the case of credit card debt it is actually “A penny paid is two pennies saved.” Please do everything you can to apply extra payments to your principal. You will save yourself tremendous amounts of money on interest payments and eventually secure yourself a place in a world where you have no credit card debt. Hang in there.

Does anyone out there have any advice for our reader, or maybe any personal experience with this subject?

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You’ve all heard the phrase, “keeping up with the Joneses.” If you haven’t, it means to covet whatever latest gadget, toy or whatever it is that your neighbor, friend, associate, or family member recently purchased. Of course we all pretend to not be so shallow as to live by this “rule,” but in actuality I’m willing to bet that at one point in your life you have made a “they have it, I need it” purchase. I’ll be the first to admit that I’ve made purchases this way. I’m not proud of it, but there’s no way that I can deny it. Of course making purchases on such a misguided impulse is NOT the way to financial independence, freedom or whatever it is that you may call it.

Wealth is not built outwardly

I can’t speak for other nations since I’ve lived in the U.S. of A. my entire life, but a disturbing trend which I’ve observed here in this country is the need to publicly display one’s “wealth.” You know exactly what I’m talking about, and maybe you’re guilty of it yourself: fancy cars, ginormous houses, fancy electronics. Don’t get me wrong, I don’t have a problem with nice things or fun toys. I do have a problem however with what’s seemingly behind all of these luxuries in this country, namely nothing… or worse, debt. It all comes back to the Jones, and trying to keep up with them. Please don’t fall for this trap. Wealth is not something that can or should be built outwardly. You’ll never become rich if you play this game. I know that driving a Mercedes would be awesome and attract people’s attention, but is it really necessary? Probably not.

Let me break this down into some numbers for all of you. You’ll see what I mean by saying that wealth is not something that can be built outwardly. I’ll be comparing the Smith family with the Jones family, both of which are completely fictional.

The Smith Family: Financial Analysis

The Smith family is not your typical American family. The family consists of Mr. Smith, Mrs. Smith and their two daughters, Chloe and Bree. They live in a modest single-family home, which they purchased 5 years ago for $153,000 dollars. Mr. and Mrs. Smith both work for a local insurance company and their annual household income comes to about $65,000 before taxes. They have two cars (a Toyota and a Mazda), both purchased used but still in fantastic condition. The Toyota is paid for and they owe $6,000 on the Mazda. They do not have any credit card debt, as they pay off any balances owed monthly. They currently owe $144,000 on their home.

Mr. and Mrs. Smith have both worked for their current employer for 11 years. They met in training, as they both started on the same day. They each started to contribute to their 401(k) immediately upon being hired. Their employer matches 100% of the first 5% of their contributions. Mr. and Mrs. Smith both took advantage of this matching and have each contributed 5% of their income to their 401(k), with their employers matching making an even 10% contribution. Their 401(k)’s are now worth a total of approximately $43,000. Their home is worth $165,000 dollars. The Toyota is worth $7,000 and the Mazda is worth $11,000.

Let’s do some quick simple math…

The Smith family assets total $226,000 dollars. Their liabilities total $150,000 dollars. This would give the Smith family a net worth of approximately $76,000 dollars. Not bad. They are in their early thirties after all, with plenty of years until retirement. At the rate they are moving now they’ll have a net worth in excess of $1,000,000 dollars by the time they reach the age of 65. Most of this worth would be from their retirement accounts. Let’s take a look at the Jones family now.

The Jones Family: Financial Analysis

The Jones family consists of Mr. and Mrs. Jones. They don’t have any children, but do plan on adopting a little boy in a few years. Mr. Jones works for a large snack-food product corporation while Mrs. Jones works on her own as a beauty consultant. Mr. Jones brings in approximately $80,000 a year while Mrs. Jones makes about $35,000 a year. Together their annual income equals $115,000 dollars. They live in a large single-family home with plenty of upgrades, which they purchased 5 years ago in a much desired neighborhood for $410,000 dollars. Mr. Jones drives a new BMW which he owes $32,000 dollars on and Mrs. Jones drives a new Honda which she owes $15,000 dollars on. They also live a luxurious lifestyle, which leads to an average balance on their credit cards of roughly $7,500 dollars. They currently owe $401,000 dollars on their mortgage.

Mr. and Mrs. Jones have approximately $11,000 dollars saved in a 401(k) plan. They only recently (2 years ago) began contributing to this plan… and contribute just 2% each, with their employers matching in full their contributions. The BMW that Mr. Jones drives is worth $35,000 dollars while Mrs. Jones Honda is worth $20,000 dollars. Their home is worth $440,000 dollars.

Let’s do some quick simple math…

The Jones family assets total $506,000 dollars. Their liabilities total $455,500 dollars. This gives the Jones family a current net worth of $50,500 dollars. Not very much, considering how wealthy they appear to be, is it? Let us also consider that by the time they turn sixty five if they continue with their 2% contributions to a 401(k) their net worth will be just under $1,000,000 dollars. About half of their wealth would be from retirement accounts, and the other half would be from their home (assuming of course that it is paid for at this point).

Oh, America…

I love nice things as much as the next person, but when we let our money control us, instead of controlling our money… something has gone terribly wrong. Please don’t let yourself fall for the idea that having nice things makes you rich. Just look at the comparison I made between the Jones and the Smiths… the Smith’s have a greater net worth, even though they appear to be “just getting by” at best, while the Jones family appears to be wealthy, but in actuality has almost nothing to their names (net worth wise). If you are rich (or save appropriately) please do enjoy the wealth that you enjoy… but before you do anything you should be saving a portion of your money to allow for your financial independence. Don’t let the “Jones” family run your life and influence the way you spend your money.

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I also considered entitling this post, “An Opportunity Cost.” Therefore I believe it would be appropriate to subtitle it as such. Not that this of course is really relevant to the topic at hand, but it’s something that I thought I’d mention, because it might not include the topic of my post tonight but the topic of my post has EVERYTHING to do with decision making and more importantly Opportunity Costs.

I’ll be receiving my associates degree next month and transferring on to finish my bachelors program in Global Management and Leadership at Arizona State University. Thus far in my post-high-school education tuition has been relatively cheap all things considered, however my tuition costs are going to almost triple when I begin my junior year at ASU in the spring. I mentioned earlier in The Worst Years of My (Financial) Life how poor money management and low wages earned me a place in “debt hell” and that I had to use student loans to subsidize my poor income and massive levels of credit card debt. At that point in my life I had no other choice but to take out a loan to consolidate my debt and pay for my tuition expenses that I could not afford on top of my living expenses. Now I come to another point where I am facing student loans, but this time it is not something that must be done, but something that I am considering doing. Let me explain…

Deidre and I have managed to save up enough to pay for my tuition in cash and still manage to keep some money in an emergency fund. Some money is not much money though and I don’t know how comfortable I would be depleting my emergency fund to only a months worth of expenses when I can potentially take out a subsidized student loan and maintain a comfortable emergency fund of 4 to 6 months expenses. I’ll list out the pros and cons of taking out the subsidized loan and then I’d ask for you to share your comments and/or experiences about the subject.

Pros

• Interest is paid for by the government until I graduate, thus potentially giving me an interest-free loan if I pay it off at graduation.
• We would have more cash in our emergency savings to cover any necessary expenses while I’m still in school.
• Cash saved could earn us interest.

Cons

• Debt. I’d have more debt which could potentially negatively affect my credit and my net worth.
• After graduation I’d be responsible for repaying the loans, and any applicable interest which could be a significant amount depending on how much I take out in loans.

What are your opinions on the matter? I’m still a little unsure what I’ll do. Of course I also will be applying to scholarships and other forms of financial aid in the meantime, but I’ve only a month until tuition is due. At this point I’m leaning more towards taking out the student loan, but of course I would only go for this option if the loan was subsidized by the government. If you have any experience with this or an opinion I’d love to hear it. Please leave your comments!

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