From Graceful Retirement, she put up a very interesting link to an article called “My Personal Credit Crisis.” The meltdown of the Edmund Andrews, an economics reporter for the New York Times. He starts out by saying that he should have known better. He reported the how the economy was doing, what Alan Greenspan said, and even about the mortgage crisis, he himself was caught in.
This article is an excerpt from a book being published next month, I guess with more details about the author’s financial meltdown. And boy was it a meltdown.
Earlier this week I talked about how I felt being out of control of my finances. That this month of May 2009, I can’t seem to care. I know we have enough to pay all our bills, but I can’t seem to bring myself to track everything.
Well somehow this writer did the exact same thing. Except that he was spending $3k/month than he was bringing in. That he ran up $50k in credit card debt in less than 1 year! He made $120k/year but was paying 40% to child support and alimony and living on 30%. The rest I guess in taxes. And from that $3k/month to live on he got a mortgage for the entire amount of $3k/month!
Yep, so how was he to live? He was banking on his fiancee working. And when she got a job it appeared that they could manage. Problem? It wasn’t just that they could manage, it was that they were still living way beyond their means. They were still charging and living a lifestyle above what they could afford. Then he refinanced his mortgage to pay off his credit card debt. And then the meltdown. He hasn’t paid his mortgage in 8 months. He is waiting to see what the bank will renegotiate with him. He is waiting for the axe to fall.
I don’t know what to say. It’s so unfathomable. That this could happen to someone who was reporting on the credit crisis. Not only that, but that the downward spiral happened so quickly.
I have to question, was he always living high off the hog and above and beyond his means? Sure the crazy mortgage mess didn’t help, but was he always charging and living a lifestyle that was too expensive for his income?
I honestly believe this credit crisis didn’t occur overnight. Nor did people “Fall” into debt in a month or two to get behind on a mortgage. No, rather I think that people were already in financial difficulties. They were living precariously. That people were living lifestyles they couldn’t afford way before the mortgage crisis.
I just am not sure what we can really to do all these people now caught in the situation?
17 responses so far ↓
1 Meg // May 23, 2009 at 2:47 pm
Re: Edmund Andrews, there appears to be more to his story: http://www.bostongals.com/2009/05/well-well-well-looks-like-ny-times.html
However, I do understand how good meaning people can get deep in debt, especially with unemployment and medical expenses. We had some of those, but also denial and spending with unrealistic expectations.
My husband expected to find a great paying tech job right out of college because so many others with his degree had. Unfortunately, he graduated the December after 9/11 and the tech bubble bursting. The job market was awful for people in his field. He didn’t land a full-time job right away. And when he did land a full-time job, the company grossly underpaid him while leading him on with false promises of a raise that never came.
We kept thinking we were o.k. because we figured that he’d get the raise or he’d find a new job and then we’d pay off everything quickly. We were so sure that things would change and soon. Plus, we figured that once I graduated college I would also bring in money.
And we didn’t feel like we were spending all that much. We didn’t buy a lot of big ticket stuff (we used the t.v. I had since I was a kid). We went to bargain stores. Looking around, we didn’t feel like we had bought a lot of stuff — though we did eat out a lot, and it’s very easy to spend more than you realize when eating out.
In the meantime, though, we didn’t really add everything up. It’s amazing how small amounts like $5 here and there add up! And when we finally sat down together we were amazed at how much we owed — and especially me since I left our finances to him. We thought we were o.k. and we weren’t.
And yes, we wondered how two people as “smart” as we were could be so dumb. And we kicked ourselves for bad decisions like spending money before we had it, not keeping track of our expenses, being gullible enough to think that a company would keep its promises, not working harder to find good jobs, not communicating more about our finances, etc.
Fortunately, we learned from our mistakes. It’ll be a while before we’re out of debt, but we’ve found a good balance where we can make good progress but stay at it long term if need be without driving ourselves crazy. In fact, I don’t think we’d change much if we were out of debt. It’s been a great lifestyle change for us.
Importantly, we don’t blame anyone but ourselves and we certainly don’t expect others to pay for our mistakes. While I can see how people can get into debt, we know we made mistakes (there isn’t nearly enough space to list them all here). Sure, there were things we couldn’t control (again, the above is only part of the story) — but there were a lot more things we could have done differently and didn’t.
2 Len Penzo // May 23, 2009 at 8:47 pm
What a nightmare, but a great story with a valuable, but simple, lesson: Don’t spend more than you earn.
Reading this guy’s story, he makes it clear that he was living in denial — and still might be based upon some of his comments:
“It was unlike any other time in America.” (No, it wasn’t. The basic personal finance tenet of spend less than you earn never went away).
“American Home Mortgage was practically begging me to take the money.” (Oy vay!)
On the mortgage payment for his “liar’s” loan: “Despite the obvious red flags, I wasn’t paying that much money.” (How could somebody writing about economic conditions be so short-sighted?)
“(The mortgage on the liar’s loan) would get expensive but I could worry about that later.” (This is precisely the pretzel logic that got most Americans in trouble in the first place.)
Really good post, Jill!
My $0.02 (after taxes, of course)
Len
3 LAL // May 25, 2009 at 8:06 pm
Meg, I read she’s a serial debtor. BUT that just concludes that it wasn’t the house that drove them into debt.
It was everything else. They were living way beyond their means a long time before the mortgage mess. So with or without a house, it’s not to blame. Rather their spending habits.
Len, I agree, but it’s easier and neater to blame the house and the mortgage crisis, than say “we lived beyond our means, even without the house…”
4 JoeP // May 26, 2009 at 8:28 am
$460,000 for a house???? I know, hcola, but who the hell buys that much house, especially when the economy is as it is, and the mortgage industry is a mess?
This guy is obviously a moron, and put aside common sense…and he’s somewhat educated and mature! All for a freaking house, unbelievable. Now he’ll be one of those people who will have a mortgage until they’re 80.
5 LAL // May 26, 2009 at 9:07 am
JoeP, $460k for a house is MCOLA actually. HCOLA is more like $750k+. At least where I live.
And it’s affordable if you make $200k+ consistently. But I don’t think the house drove him to foreclosure. Rather spending $3k/month on clothes, eating out, etc all contributed.
This idea of lifestyle.
6 JoeP // May 26, 2009 at 1:55 pm
Even if I made that kind of money, there is still a lot of risk. If a $200k/yr job is lost, then trying to find another for that amount might not be so easy, so depending upon that income is (to me) risky. OTOH, the number of $50k/yr jobs out there is much more plentiful, and building a life around that is much safer to me.
This guy let emotion be his guide, and it sounded like his wife did not fully understand that this house would require changes in their spending habits.
I’m still put back a bit that a HOUSE — a place to live in — can cause this much stress, anguish, and financial ruin. But hey, if you *need* that quaint little brick house for $460k…
7 LAL // May 26, 2009 at 8:26 pm
JoeP, I think it depends. Are you making $200k but spending every penny? Making $200k and living on less? I don’t think that you can say that you would buy a home for $500k making $200k. Falls within the guidelines even the most conservative people give of 2-3x of income.
It depends on many things. Emergency Fund. Age. Kids, etc.
I think that it wasn’t really the house. The house was just a bigger symptom of the problem! Living beyond their means.
8 JoeP // May 27, 2009 at 8:15 am
If they didn’t sign up for that house, I doubt we’d be reading about this. They’d simply be lumped into the group of people who overspend.
9 LAL // May 27, 2009 at 9:35 am
I think they’d be categorized as serial BK filers. overspending on CC then discharging debt.
10 JoeP // May 27, 2009 at 11:05 am
Had economics been a required course in their education (like a foreign language is now), they might be better off financially and health-wise. What good is knowing French if you don’t understand the basics of amortization, compounding interest, the stock market, and the like? Separate issue, I know, but this is like many other cases where people simply don’t know enough about basic financial concepts, voluntarily get themselves in a financial mess, and end up spending years trying to clean it up. Hopefully, their marriage won’t suffer from all the stress.
Hey, but at least they know French…
11 Meg from FruWiki // May 27, 2009 at 12:34 pm
I dunno, Joe….
I DO believe that economics — as well as home & personal economics — should be required in school. But classes aren’t everything.
However, my husband has a degree in business and was a class away from an economics minor. Meanwhile, I have a degree in Latin and Spanish linguistics. Might seem reasonable that I’d trust just him with our finances as I did for many years, but now it seems that I have a much better feel for the numbers than he does despite him being a “math guy”. And I wish I had had more confidence in my own math & money talents a lot sooner! I don’t blame him for our money problems, we did that together, but things didn’t really turn around until I got A LOT more involved.
12 JoeP // May 27, 2009 at 2:51 pm
Agree: classes aren’t everything. Some people want to understand a subject better, regardless if they attended a course, and there are many resources out there to educate one’s self outside of a formal academic setting.
All I’m saying is that basic education in finances provides a good foundation for understanding concepts that seem to be tripping up millions of people today. What someone chooses to do with this knowledge is, of course, their own choice, but they will no longer be able to blame ignorance for poor financial decisions.
Meg: maybe such an education earlier on would have given you that confidence!
13 LAL // May 28, 2009 at 10:10 am
JoeP, just because you know numbers doesn’t mean you know spending, self-control, and behavior! It’s not about the money.
For example people who overspend on credit cards aren’t doing so for money. Rather the emotion they feel from spending.
14 JoeP // May 28, 2009 at 11:41 am
And if they had the knowledge about money and how credit cards work, at least they couldn’t use the “I didn’t know” defense.
15 LAL // May 28, 2009 at 12:11 pm
They’d use it anyway! After all know one knows that if you have a mortgage for more than you make a month it’s reasonable and common sense to assume you couldn’t make it? But they still didn’t know that you can’t live on negative?
That your mortgage was more than your take home pay?
16 JoeP // May 28, 2009 at 3:29 pm
Bottom line: they are idiots for taking on more expenses than income, and for their spending habits. I have zero sympathy for them, but have hope that if we equip our youth with knowledge of financial concepts, we can reduce some life-altering money mistakes.
17 LAL // May 28, 2009 at 7:29 pm
JoeP, you have more faith than me. I still think that people will say they didn’t know.
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