I read this article
on the NY Times this morning. While I feel bad for people that are out of jobs and having trouble paying their mortgages like the lady in this article, there are some issues that stood out to me in this article, which could have prevented Ms. Ulery from being in the situation she is currently in.
Like tens of millions of other American homeowners, she added to her mortgage balance as the value of her condo swelled, at one point exceeding $200,000. She refinanced to pay off some credit cards and settle into a 30-year, fixed-rate loan. Later, she took out a home equity line of credit to buy a new Hyundai. She refinanced again in 2007, borrowing $20,000, mostly for a new roof.
Increasing your debt (mortgage) to pay off other debt, seems a little dumb to me. Especially credit card debt. The main reoccuring theme in these couple sentences is the fact that she didn’t try to pay cash for anything. Not even the new car. What’s wrong with a used car? (Dave Ramsey says, that the average car payment is $378 per month. If you take that money, and invest it in a growth stock mutual fund over 40 years, you will have $4 million. Hope you like that new car.) The debt snowballed, but in the wrong direction. We should be snowballing our payment to reduce debt, not snowballing our debt until we are on the verge of being in a deep hole.
But the equation broke down last year, when she lost her job in university budget cuts. Ms. Ulery received six months of severance. She arranged a monthly $1,500 Social Security check. But when the severance ran out in October, her mortgage finally exceeded her limited means.
With so many people out of work, and with her doctor counseling rest for a stress-related illness, she did not pursue another paycheck, negotiating to have her university pension begin earlier. She has been leaning on credit cards.
Another example that we cannot depend on Social Security. We should all have an emergency fund (3 to 6 months of expenses) to cover these types of situations. If Ms Ulery would have had an emergency fund saved up over time, she could have prevented some of the blow after losing her job, and wouldn’t have to “lean on credit cards” in her situation. When you lose your job or get into a financial ‘pinch’, the only (financial) thing you can lean on is cash.