Jason sent me a question yesterday that neatly encapsulates a lot of the mail I receive, as well as rounding up some of the topics we’ve been discussing this week regarding life after school. “I’m living on credit,” he wrote. Here’s his story:
I graduated a year ago with a useless degree but what I thought was a good job. I had recently purchased a new car, but only had $8800 in student loans and around $3000 in credit card debt. I had planned to pay off my debt and keep my cost of living low, but my job slowed down until the hours were near nothing. Being naive I kept thinking things would pick up until I just had to quit and get a couple of temporary jobs.
I’m currently working at a great job with a great rate of pay, but it’s only 20 hours per week. I am in the middle of my clinicals to become a nurse’s aide and fully expect to be working in a hospital full-time by the middle of June with a pay rate high enough to allow me to aggressively destroy my debt. My question is, what should I do in the meantime?
I have looked at my budget and with all my necessary payments and only $100/month in food (absolutely no entertainment or extras) I am still in the red. I probably should have asked long before now but I can at least hope this question may help others, if you decide to post it on your website.
Jason’s concerns are not unique. After my presentation on Tuesday night, I spent some time talking with a young man from Alaska. He’s spent his last few summers working on fishing boats to earn enough cash to pay for school — he hasn’t had to take out any loans. However, he hasn’t earned enough to also pay for his living expenses, so he’s been buying the things he needs on credit.
“It’s hard to do some of the things you suggest,” he told me. “I was sitting next to two girls who were reading your handout. They thought the ‘spend less than you earn’ advice was funny. They don’t earn anything, so that’s impossible. They can’t avoid debt.”
And neither can Jason right now, it appears. Or can he? What would you do if you were in his situation? What do you do when your income is so low that debt is unavoidable? When is it okay to deficit spend?
This article is about Ask the Readers, Choices, Debt
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Chicago Gal: Why live with parents? Why not move into a crappy apartment with roommates and work any job you can until you can “get through that transition”. My parents told me flat out I would have no guaranteed support after my fourth year of college – well, I ended up two classes short of my degree. (Disclaimer: my father did buy me a junker car so I would have some transportation to search for a job. I was responsible for insurance and all maintenance, however.) I searched desperately until I got a job (one month after classes ended); I used my savings to pay the first two months’ worth of rent. I made enough that first summer (working full time) to pay all my expenses AND to save up enough to pay out-of-pocket for my last two classes in the fall. I continued to work part-time for the fall semester (making just enough to pay rent and eat); thankfully, the company hired me on full-time after the semester ended. But if they hadn’t, I would have been out there pounding the street and looking for a job, even if it meant working at a gas station to pay my bills.
Other than that, I agree with what you say. Especially “When you don’t earn anything you shouldn’t spend anything”.
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For one thing, he shouldn’t be repaying those student loans yet. He should get a financial hardship deferment; interest will accrue, but it shouldn’t be too bad over the course of a year.
And then all those other things people said.
@margaret — tuition was also 1000% lower in the seventies. Today it would be damn hard to do at a state school, and impossible at a private school, you have to admit.
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Spend less than you earn makes sense if you’re earning. But perhaps the idea should be rephrased as – Earn. Then spend less than that.
It is far easier to put effort into making money (as long as you are willing to work) than to figure out ways to cut a non-existing budget. The girls didn’t need a talk about how to spend less than they earn and they probably knew that. They needed a talk about how to earn.
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@ Ryan: I don’t know if advising this guy to use “leverage” or to open derivatives accounts is the best advice. Maybe someone with your sophistication can benefit greatly, but I think the other (simpler) ideas would go further and without nearly the risk.
But kudos to your investments, it’s a great testament to your intelligence. Don’t work hard, work smart!
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Getting a $500 car is really bad advice. Such cars and unreliable and how will Jason finance the inevitable repairs? Cars have to pass inspections and such.
I drive a beater myself, but it cost $5500, not $500 and I still have repair bills. I can imagine how much it would be to repair a $500 vehicle. Money. Pit.
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Not all $500 cars are lemons.
Even if he has to pay for a $1,000 repair bill, the car then only cost him $1,500 versus the price of a new one. He can pay for that by using the monthly payments he’s currently putting towards the new one.
That’s still the better buy, unless he constantly has to put forth very large repair bills.
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I agree that it would be a good idea to figure out how to earn more — even if requires doing something crappy for a while. Or get help from family. I have a hard time asking for help, but the couple of times I did ask my family for help, it worked out. And I felt even better when I paid them back!
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mamacita – I was only talking about expenses outside of tuition – rent, food, books, transportation, entertainment, clothes. There’s no way 30 hrs a week of minimum wages would pay tuition at a private college even in the 70s!
I do think it is harder now (and honest I don’t really think of myself as heroic; I have happy memories). I don’t know the whole story for those two girls, but I think they need to get jobs. I’d be curious to know what exactly they were expecting to get from a personal finance seminar.
And props to JD to talking to college students about this stuff. It is so important, and if your parents don’t teach you it is really hard to get it straight.
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@Ryan
I’m sorry if this sounds harsh but you’re either the smartest dumb person or the dumbest smart person.
“(Yes, I have three professional degrees – MD/JD/MBA). ”
“The funny thing about all of this is that I never ended up practicing law or medicine.”
So you went through an estimated decade of post secondary schooling and debt and aren’t using 2/3 degrees.
What were you trying to do? Run and operate in a doctor’s office where you can represent yourself in malpractice suits.
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All this advice about $500 cars? Who sells a car for $500? You could sell any car for parts for more than $500. The person who’s selling a running car, even if it needs repairs, for $500 bucks is a fool and needs financial advice even more than Jason does. You could donate a car that doesn’t run to a charity and get more than a $500 tax break as a result.
Come on, honestly, how many $500 cars do you think there are on the market? I just traded in a car that needed several thousand dollars worth of repairs done and got two grand for it. If someone is selling a car for $500 when they could get the same kind of deal I got, they’ve got problems. The dealership even towed my car away.
But besides that point, a used car isn’t practical for everyone either. Besides the out of pocket cost of repairs, break downs usually mean missed work, which means missed pay. So say he has 1000 worth of repairs (which, I might add, is hardly enough to replace a clutch, let alone take care of any major repairs), but he also misses a day of work, you’re acutally looking at a loss of 1200 dollars or so (thats how much it would be for me to miss a day of work). But car repairs usually take longer than a day, and too much missed work can put a persons job in jeopardy, so you don’t want to be dealing with repairs too often.
Why not instruct him not to get a car at all, and try for a carpool or for public transportation? Thats WAY cheaper than a car is, and its probably just as reliable as the cheapest used cars, if not more so.
Honestly, I think he’d be better off spending $500 on a really good bike and biking to work than he would be buying even a $1000 car. The bike won’t need repairs, wont have fuel costs, and riding it will make him healthier, so it will save him on health care.
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I second Jessica’s suggestion of getting a bike in lieu of a beater car. It may or may not be practical for Jason (we don’t have enough detail to determine that) but on the whole it’s an excellent suggestion for young (and not-so-young) folks to supplement (or even replace) a regular car. If you do still need a car, driving a lot less is a huge money saver – especially with rising gas costs. Getting around on bikes and public transportation can also be a great opportunity to exercises your discipline, creativity and planning. Very good skills to have in life.
And even if you’re bike does need repairs (blown tire or whatever) they’re going to cost much less than typical maintenance and repairs for a car.
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I am dealing with two rather different ‘earning less than you spend’ scenarios. I should mention at this point that the rent is absolutely rock-bottom, the car is paid for and has 100,000 miles, and we don’t eat out.
1) My partner has a seasonal job, and work has dried up. He has applied at every bottom-of-the-barrel, floor-mopping, burger-flipping job he can think of, but nobody’s hiring. He’s learned the hard way that he needs a BA to get by, but he can’t go back to school until the fall. Any suggestions for jobs underneath the barrel that he could look into?
2) I have a chronic, episodic illness. I was in a PhD program that offered me a monthly stipend, but I am too ill to participate right now, so I have no income. I am also too ill to work (because most jobs do require that you show up on a regular basis). Disability takes a minimum of six months, IF you get it, and I plan to be in better health by then. Besides begging support from family, is there anything I can do to fill the gap until I’ve recovered enough to get a job?
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I’m the Jason of the story and really appreciate the suggestions. I have been planning on selling plasma (I got a tattoo one year ago this month), and I wasn’t even aware I could get a deferment for financial hardships, or whatever it’s called. I’ll look into that.
To shorten my life story, I haven’t been able to get more than 20hrs/wk since October because of a number of extenuating circumstances. I could go into them but they’re boring and unnecessary. That is changing Monday and I appreciate the suggestions, esp pizza delivery. I did think student loans were horrible and if I’d have known I was going to accrue credit card debt I would’ve taken out more student loans, but one always hopes they won’t. I am living with 2 other roommates, going back home isn’t an option. It’s a 30 miles roundtrip to work and a 20 mile roundtrip to clinicals, so I do think I have an excuse to not bike. The public transportation in my city is almost non-existant, so that’s not an option. The only things that can change in my budget is 1) my car 2) my cell phone 3)PT job as of next week 4)selling plasma as of next week. I’m in the process of phasing out my cell phone and exclusively using Skype, I will be looking for a PT job soon and will be selling plasma soon. I could sell my car now and buy a junker, fix it up, and later buy a better one when I can “afford” it, but doing that would throw away what I have thusfar invested in my car, and I hope to be able to afford my current car in a few months. I think selling it would be a waste at this point. I absolutely agree I should not have bought it when I did, but things where different then and I thought things were going to turn out different. I’ve learned a lesson to never count your chickens until they hatched, and even then, don’t count your chickens. However, I am counting on being able to afford my car payments in the coming months, so perhaps I didn’t learn a lesson, or perhaps I learned a better one?
Here’s some advice for those in college to avoid my situation: spend lightly. We all know it’s difficult to make real money in college, though a lucky few do. It is possible, however, to spend lightly. If you still don’t want to do that then take out student loans, and when you graduate make those payments tiny so you can actually afford them. Double and triple the payments when you can, but they need to be at the bottom of your priority list. Get a job (or at least a conditional contract) early in your final semester. The fast and easy way to establish credit is to get a credit card, and you need credit to rent an apt, but cut it up after you have established credit. That was my problem, after I established credit I kept using them. And don’t buy anything big unless you can afford it at that very moment (not in a month or two), and systematically reduce your wants. The best way to reduce your want is to reduce your TV watching. I’ve thrown mine out entirely, which saves me one more bill and keeps me from wanting to see the newest movie or whatever. It can be life-changing, it has been for me, and I will never watch TV again. As one person above said, eating well is not something you should sacrifice to the god of the budget. Learn to eat well and eat cheaply. And learn to cook, it’s cheaper and better for you.
Again, thanks to all the advice and good luck to those who are in my situation, or find themselves heading that way. Honestly, it ain’t so bad, but it could be better, much better.
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I would say definitely sell the newish car. There will be plenty of time for those later. Perhaps even consider using public transportation for a time just to tighten the belt, since not having a car means you can cancel the auto insurance policy, too. Especially if you just have to get through June. There will be plenty of time for the new car later.
In the meantime, put the word out among family and friends for a good used car, even a junker. Better to drive a junker now and get the debt paid off faster, than to have a newer car, and have debt hanging over your head for years to come.
In the meantime, I’d suggest getting another job part-time job. Trying to get out of that much debt is going to require sacrifices somewhere…sleep, social life, Cable, magazine or newspaper subscritptions. Cut out every possible thing that is not absolutely essential to your survival, and put that money directly towards those debts. It sounds extreme, but it serves to cause you to stick to it with the goal in sight.
My husband and I still drive junker cars and only just got cell phones a couple of years ago (we’re in our 30′s), because we couldn’t justify the expense when we had lots of credit and student loan debt hanging over us. Now that our debt is finally getting paid off, we’re seeing that light at the end of the tunnel. And it’s a great feeling.
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I’m really surprised at the viciousness of some of the comments. Dude knows he’s in trouble and is asking for advice–not a bailout.
As several have said, this appears to be a short-term situation and will likely work itself out as long as he stays focused once he has his nursing degree in hand.
One thing I would recommend is looking into student loan deferment while he’s in school. If he’s taking classes through an accredited institution, depending on the loan, he could be able to move back into non-payment status and quite possibly not accrue interest. Also, if he can convince them of the financial hardship, he could put the student loan into a grace period where he won’t be required to make payments, but the loan will accrue interest.
Just a suggestion to help minimize the damage before he’s on solid footing again.
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I agree with the bike idea, but I stand by my point that buying a junk car is an absolutely horrible idea. Everything that Jessica said about that is correct.
My hubby bought a $2300 car. Worst decision ever! We’ve spent way too much on repairs. Enough to buy a better $5500 car.
I’m a big fan of cheap cars and no car payment, but you have to buy something with some quality to it. My $5500 Toyota comes with repair bills, but is generally reliable.
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Sara , you probably qualify for food stamps and perhaps a small welfare check depending on where you live.
Also there might be unemployment payments attached to your job if you are laid off due to health you might find that you are covered.
You have worked and paid taxes and these services are there for people in a bind.
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Bear in mind that the young man had a decent paying job that dried up beneath him, leaving him high and dry with the new car payment. Should he sell the car now, probably losing significant value of the car, probably the good warranty and new car reliability instead of deficit spending now for a month or two (presumably)? The car payments may seem like a millstone around his neck right now, but I think he should suck it up for a couple months, deficit spend in a controlled fashion knowing he’s going to take some lumps short term, and make paying down the resultant debt his first priority once he finds the nursing job. If he decides to deficit spend, do so with the lowest rate CC he has available, and make sure he doesn’t miss a payment or pay late.
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actually, if geography permits, get a cheap 3 speed bike , park the car and cancel the insurance for a couple of months. That has to save you a couple of hundred or three.
Selling the car would be a big waste.
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I think a lot of people on this blog don’t understand how new cars work, or they wouldn’t be suggesting he sell his new car.
You see, the minute you drive off the lot, the value of the car goes down, and continues to go down every day you own it, even if you don’t drive it. But you still owe what the car was worth when it was still on the lot. That means you can’t sell it for the amount you owe on it. If Jason were to sell his car, he would still owe money on a car that he no longer owns, probably several thousand dollars. He is upside down on his car. Selling it would not only be a horrible idea, but it would probably be impossible.
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I’d be interested in seeing the rest of Jason’s budget… if he’s working a part time job with a “great rate of pay” and only plans to spend $100 a month on food (way to be frugal there), how could he be using up his entire income? How much is a “great rate of pay?” $40 an hour? $50? How much is rent? Can he move to a cheaper place?
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AJ – The government doesn’t pay out if you’re not working. My partner lost his food stamp benefits when he dropped below 20 hrs/week. And I don’t get unemployment because I wasn’t laid off, and I had only been in the PhD program a few months before I fell ill. But thanks for the suggestions, they’re worth looking into for others in similar situations.
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I think you should keep the borrowing to a minimum, know its _temporary_, and just let yourself off the hook. You are investing in your future income by getting educated, and if your living expenses have to be borrowed, think of that as part of your student loan.
The stress and beating yourself up won’t help. When you work full-time, you’ll be well-practiced at living frugally, and you can pay down your debt quickly.
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we’re also hanging on until the job thing becomes possible… except we have almost a year to go before that happens.
we slashed unnecessary expenses. cable tv went, the cell phone plan was decreased (we are rarely together and use our phones like walkie talkies), diet was cheapened, internet plan decreased (need for school), etc.
if we’re hit with an expense above and beyond our plans for the month (pets get ill, etc) we’re stuck using credit for now. i hate it, but that’s how it has to work for now.
the goal for us is not to remain debt free, but to maintain our status and not collect more debt between now and the day we get jobs. i cut any expense i had to cut, to make that work for our recurring monthly expenses. the irregulars… sadly we have no other way to pay right now. i just try my best to avoid those.
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It’s okay to deficit spend (get into debt) in the short term like for education or living expenses as long as it leads to a long term strategy to increase our income and thereby pay off our debt. Basically you are using leverage (debt) to maximize your future potential.
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