People get into all kinds of financial problems when they are unable to assess accurately what their incomes will allow them to buy. Examples of this are plentiful when you read forums dealing with saving money and personal finance.
In a recent forum thread, a young woman asked for advice about whether she and her husband should sell their home because they felt they were in over their heads. They have been in their new home for seven months and it dawned on them that they were having a hard time making ends meet.They explained their situation, including the current income and their living expenses
She stated that she and her husband were both gainfully employed with a combined income of $130K. She said that they had a decent income, but they felt “poor.” Their net income was $7K per month with $4,200 going towards their mortgage payment. Besides their mortgage payments, their debt was about $55K in both student loans and repayment of the loan money they borrowed to get into their home. They weren’t going into the hole every month, but they had no breathing room. They also have two very young children for whom they have to pay childcare while she works. Adding in their other expenses, the total expenses for the family is $6,770.00 per month, leaving very little room for savings or emergencies.
The important thing here is that their mortgage payment is 60% of their net monthly income. That is the main issue. The lender loaned money to them when they shouldn’t have. Somehow, we as consumers think that if a lending institution is willing to loan us the money we need, then why not do it? Even after December 2007 through June 2009, the worst recession in American history since The Great Depression, banks apparently are still loaning money to people when it is not in anyone’s best interest but the banks.
To get back to the savings forum thread, people advised the couple to cut back on spending and basically sell the house. The penny pinching that could be done by the couple is probably not worth the time or effort.
So how did this couple miss so many important economic lessons? First, somehow they felt “rich” because of their incomes. They really were erroneous in thinking that and should have gone to a good financial planner well before they started thinking about moving to their new home.
They should have been able to predict their monthly expenses prior to moving. Had they done that, they may have decided to do something different with their money. The big red flag that they missed was knowing that they had to borrow money for their down payment. That alone should have put the brakes on this home purchase.
What makes one rich is creating a strategic long term plan and then following through with it. Getting good financial advice about any purchase that will impact your for over four years is a good idea. Financial education is a life-long process and luckily we can learn from our own mistakes and benefit from the wisdom of others. What do you think this couple should have done?
