Recently I had lunch with a friend who makes six figures per year. Here in the Midwest that is a fabulous salary. He has a comfortable desk job that is inside a nice, air-conditioned building. He and his wife drive new cars and he has an in-ground swimming pool. He must love life, right? He must be a happy camper, right? Most of the world would kill for this kind of luxury. Now, let me share some more details about his story.
He filed for bankruptcy eight years ago and apparently has not learned any lessons from that ordeal. Filing for bankruptcy is very similar to debt consolidation. You are basically using your Get Out Jail Free card with little consequence or learning involved. It’s like a grownup’s version of a “do over” from childhood. With no pain involved what’s from stopping it from happening again?
On a more day-to-day note, he lives paycheck to paycheck. Actually he does not quite make it to the next paycheck. Once he told me how he writes himself a check for cash the day before payday. He found an ATM that surprisingly allows funds to be withdrawn immediately after a deposit. When money runs tight, he’ll withdraw the funds from this “deposit” to make ends meet before payday. It gives him the much-needed cash infusion before he gets his paycheck. Some of you might have heard another term for this act: kiting checks. It is classified as check fraud and playing the “float” between the time of the check being cashed and the deposit of the check itself is illegal. In some instances, he did not make it in time and had to pay overdraft fees. He was on the phone complaining with the bank so many times they almost knew him on a first-name basis. If he just built up an emergency fund none of these cash shortages would have come into play.
Next, I’ll discuss his car purchase fiasco. He went to buy a minivan for around $20,000. Unlike most car purchase stories, negotiating with the dealer does not even come into play here. When he went to trade-in his old car, he learned that he was $5,000 in over his head on that one. The dealer also somehow managed to tack on $8,000 more in an extended warranty, underbody rust protection and a bunch of other junk. Bottom line: he paid $33,000 for a $20,000 minivan. This is quite remarkable. Just on that deal alone he came out $13,000 more in the hole than needed.
If he woke up today and decided to fix his money problems where would he start?
- Make some big lifestyles changes quickly. Sell both cars and pay cash for very cheap cars. Or live with one car. Driving a junker car is only temporary to get him back on the saddle.
- Cease to use credit cards – permanently.
- At each job change or pay raise, bank that money. Do not change the lifestyle.
- Recognize that these changes today will make for a much happier tomorrow
I’ve oversimplified the remedy for his issues but the above items are great starting points for my friend to begin to enjoy that six-figure salary.