Ask the Readers: How to Face a Family Financial Crisis?
Published on - September 12th, 2009 (by J.D. Roth) With the arrival of the GRS staff writers, the semi-regular “ask the readers” column has a new home. Look for this feature most weekends. “Ask the readers” is your chance to get (and give) advice about real-life financial dilemmas.
An anonymous GRS reader submitted a question last week that hits close to home:
I have a family member that this past year has been in serious financial trouble. He is one of the most ambitious and intelligent people I know and I would have never imagined him getting in this kind of trouble. His ambition may have been his downfall as he keeps shooting for the stars and has fallen short on some of his business ideas, which may have put him in a more vulnerable position when the economy turned south.
He is now living in debt and struggling to put food on the table for his wife and four young boys. He has had to live on credit cards for several months and they are all maxed out. I have never seen first-hand anyone in this much trouble.
My question to you is, When faced with job loss and depleted savings, how can you avoid going into credit red? At what lengths would you go to to avoid living on credit cards and missing payments on just about everything? In the situation, is credit rating even worth anything?
As I say, this situation hits close to home. Last year, I wrote about my little brother, Tony. (I say “little brother”, but he’s 36 now.) Tony’s family got caught up in the mortgage mess, buying a home in Bend, Oregon at the height of the bubble — and before their home in Portland had sold. Six months earlier and things would have been fine. But things weren’t fine. They couldn’t sell either house. The market went to hell and they lost both homes to foreclosure.
Tony now faces circumstances similar to those described in the question above. He’s learning that there’s no easy solution to a family financial crisis. His father-in-law recommends “earning your way out of the problem”. That’s a fine theory, but not always practical. Tony and his wife work hard, but they’re only able to earn so much. I think that he — and people in similar situations — should also:
- Cut spending to the bare minimum. This can be difficult. It can be tough to shift from normal spending to frugality, especially if you’re accustomed to middle-class luxuries and a middle-class lifestyle. But when facing a financial crisis, it’s imperative to reduce spending as much as possible and as soon as possible. You must stop the bleeding before you can treat the wound, before it can heal.
- Consider drastic measures. Sometimes it’s not enough to stop the bleeding. To stretch the metaphor, sometimes you need to amputate. If you’re in a financial crisis, you may have to take drastic action, maybe even selling a car — or your home. Most people are unwilling to consider steps like these, which only leads them further into debt. These folks need to…
- Be brutally honest. It’s easy to say, “I’m in trouble now, but it’s only for a month or two. I’ll keep doing things as normal by using my credit cards.” If you find yourself in a financial crisis, try to take an objective look at your situation. Get outside advice from friends and family. Be willing to listen to what they tell you. Sometimes others are better able than we are to see the slack in our budgets.
- Avoid touching retirement savings. When faced with financial peril, it’s easy to look at the large sums sitting in your retirement accounts and think they’ll provide the life preserver you need. In nearly every instance, though, you’re merely postponing the pain. Your retirement savings are there to provide for you when you’re no longer able to provide for yourself. They’re not an emergency fund.
I’m sure that other Get Rich Slowly readers have family members in similar situations. Perhaps you’re even struggling yourself (or have done so in the past). Based on your experience, what advice can you offer other folks who are struggling in this economy? What can be done to avoid sinking deeper and deeper into debt?
And as an ancillary question, what can we do to help family members in need? What should we do? I’ve told Kris that if Tony and his family find themselves in danger of living on the street, we’ll make room for them in our house. But what about before that? At what point do I loan him money? (Or gift him money?) Or should I just be here to offer advice when he needs it?
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For the first question:
“”When faced with job loss and depleted savings, how can you avoid going into credit red?”"
The best offense is a good defense – the emergency fund. Also, one of the best ways to avoid credit card debt is to not have credit cards.
for the second:
“”What can be done to avoid sinking deeper and deeper into debt?”"
Get out and get to work. Work 3-4 jobs. Cut to the bone and sell, sell, sell. Something I see a distinct lack of these days is a ‘sense of urgency’. This is survival mode.
The answers to these questions aren’t tough. They’re just hard to do.
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I think going minimalist would help with being frugal. Sell or donate unnecessary possessions. Move to a smaller place, minimize use of your automobile, exercise at home and outside instead of paying monthly fees at a gym, don’t eat out.
I agree with Mr. Not the Jet Set. The best way is to avoid credit cards if possible altogether.
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My family is just pulling out of the debt we slipped into when my kids were born and we dropped down to one income. My guest post here earlier this week talked about the big changes we made – changing jobs, selling our house in the suburbs, going down to one car – but we also did a lot of very tedious things like:
- learning to track all our spending and become MUCH more frugal
- starting side gigs that bring extra income each month
- consolidating debt where possible to lower interest rates
- sell Stuff and use the proceeds to pay off debt
We’re not totally out of the hole yet, but I can finally see the light at the end of the debt tunnel.
Good luck to your family member! I don’t envy him that tough period. Hopefully when he does get back on his feet, he’ll have learned skills that will put much firmer ground underneath him.
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I wish I had an answer to this. My mother lost her job back in March. It really knocked her sideways, coming shortly after divorcing my dad. I don’t want to support her by sending her money when she spent 5 months not even looking for a job, plus her financial habits leave much to be desired (I’ve learned how to handle money by doing the opposite of her…), but at the same time… she’s my mother. *sigh*
If she lost her house, I would take her in, but not her boyfriend (major point of contention for us).
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I totally agree that a family has to drastically reduce spending, but many people don’t like to change their lifestyle of social activities or spending. Also making goals is important. I make sure that our family sets goals for what to pay and when… highest interest rate to lowest. I also look for better interest rates and shuffle money around . For example, we had a personal loan that was taken our for college and I moved it from Wells Fargo to our local credit union and got a 6% interest rate deduction. That’s going to save our family a lot in interest and we can pay it off sooner.
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I think the classic solution is to move back in with family. Sure, it may be harder for a family of 6, but really, what other option is there?
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I don’t understand the “Avoid touching retirement savings” comment.
So there’s what – a 10-20% penalty for taking some of your retirement money out early? Lets say you have several hundred thousand in retirement savings and you maxed out on credit cards. you might as well take what you need from retirement right? yes, you’ll need to live more frugually in your golden years depending more on social security, but overall I think it can make sense in some circumstances.
Depending on what your APR is on your credit cards it could even make more sense than maxing out credit cards you can’t pay.
I mean yes you’re postponing the pain – but i think in some cases you’ll experience less overall lifetime financial pain if you average it out over a lifetime rather than taking it all at once.
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#1 encouragement
#2 emotional support (call me to tell me you care about me, I’m not a leper, just unemployed!!)
#3 offer up anything you feel you can do to help(make a meal, babysitting so I can take out my spouse for some alone time, etc)
A Bit About Me:
about 9 months ago i lost my career long position of 15 years due to massive layoffs. i have spent countless hours looking for jobs, revising resumes, creating catchy cover letters, networking, and sobbing out of frustration. i feel fortunate, i had an eye opener about 4 years earlier, i narrowly avoided a layoff by taking a transfer and moving cross country. at that time we cut spending, no cable, cut expensive habits(tobacco, starve-bucks coffee, etc), and started saving everything we could. now, we have cushion, still stinks to be out of work, still wondering what to do about it, but at least we still eat, we are not in foreclosure, etc (not to say we are not stressed out about finding an income source).
an expanded answer to Q #1: How to keep from sinking deeper and deeper in debt: refuse to use credit cards, call creditors and explain your situation so you can try to negotiate a lower rate or get some assistance in the payoff process, seek assistance from any place that may be able to help (food, money, energy, phone bill, etc), sell your junk (it’s just stuff & you’ll buy more when you get back on your feet, hopefully not as much though), downsize your life(smaller car, smaller house or apartment, etc), be realistic about needs vs. wants.
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I think at that point, the second point is the only one that will make a difference. Sell a car. Sell the house. Move into a tiny apartment. Get unemployment. get food stamps. Whatever’s eating your savings, get rid of it. Am I wrong in thinking that people in that situation aren’t exactly having steak every night? Frugality will only get you so far. And extra income is especially hard to come by in tough economic times. You can work every hour of the day and still not make enough money. In fact, I find this piece of advice to be especially useless to those who’ve lost their jobs to a bad economy. When it’s down to not having enough money to feed your family, OF COURSE you’re saving every penny. Of course you’re working every job that will take you.
Let’s assume worst case scenario: you have no savings. You’ve got kids to support, either with a partner or by yourself. Would you really rather starve than use a credit card? I’m not telling people to use credit to fill in the gaps until a magical employer comes around and offers a generous salary, but there has to be something more helpful y’all can suggest other than “don’t spend more than you earn.”
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When (and how) do I help out a family member? Good question. I’d take a bullet for anyone in my family so this is something I’ve thought about too.
I think for me at least, it boils down to *why* they’ve gotten themselves in debt.
Is it because of a job loss or medical condition or something else outside their control OR is it just plain old stupidity and ignoring financial responsibility?
If someone has gotten themselves in deep debt by buying “stuff” with their credit cards, it’s not going to help if I bail them out with money. Money isn’t the problem, bad habits is.
However, if the situation has arisen because of something outside their control, I’d be more than willing to use my own emergency fund to bail them out from a serious situation.
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I would add that for all the comments about “get a job, get several”, for many people it is almost impossible. Someone who is an entrepreneur and “intelligent and ambitious” may even be more handicapped in this job market. I have applied for over 100 jobs and been on 2 interviews. I was hired for one, and worked 2 hours at minimum wage. Those were all the hours I got the first month of schedules. The other job had hundreds of people applying for one opening that was part-time and paid nothing. I used to work 7 days a week and overtime was standard. These days when everyone needs 2-3 jobs many entry level type jobs are limited part time but require 24/7 availability. I would love to work 2-3 jobs. My ideal situation would be a full time day job and a fulltime night job with perhaps a 3rd part time job on the weekends or off-hours. And I would be willing to do that for close to minimum wage. But everything hiring is “be available 24/7 but be scheduled variable hours from 0-whatever at minimum wage” making it difficult to even try to work 2 jobs or even get 1 full time job out of the deal. And forget about anything like “benefits.” “Benefits” means something like get a free uniform no one would pay for or competitive pay of $8/hr when minimum is $7.25. Then you have the places that run ads constantly but don’t appear to actually have openings.
Many jobs that require 5-7 years experience and a degree plus everything else and pay nothing.
Add to that if you are someone who has been self-employed for several years and/or a “thinker” and believe me, it will be a lot tougher. Even if you are willing to work hard 24/7 and do anything for minimum wage.
I cut back all I could but still ended up maxing out cards because I had to eat. now I beg for food pretty much. Extra cars, retirement,etc? Hah. Have none of that. Sold a car for 500 bucks and paid 1 bill last year. Was never an extravagant spender. Just when you do certain work out of necessity and barely getting by there aren’t many options, just trying to live.
FWIW, I take 100% responsibility for my situation. I would love if some suggested options existed, though.
The only thing I can do is cut as much as possible and then keep working for myself 18-20 hours a day and rededicate myself, making sure to invest as much time and little money as possible to get something turned around.
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If you decide to lend them money do not expect to get it back as this way you will keep the friendship that has been built up.
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Dan,
In response to your comment:
“I don’t understand the “Avoid touching retirement savings” comment.”
It NEVER makes sense to touch your retirement unless there is absolutely no other option. Not only do you lose the 10% – 20% penalty but you also lose the power of compounding over the number of years until you retire. Big mistake!
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i’m more in agreement w/ emmy. these day and ages of who read this blog – who hasn’t cut things to the bare bones? cut back the cell phone, the cable, not using credit cards, not eating out – etc. we’ve done all that and more. and still my husband is unemployed. no one has given any real solid answers beyond “oh, don’t end up here to begin with” — not very helpful indeed. as steve mentioned it’s a full time job looking for a job. my husband spends hours every day reinventing his resume for every job he applies for.
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Hey Anonymous GRS Reader,
First and foremost — this sort of situation isn’t as uncommon as we would like to think. People are commonly very discreet about their financial affairs, so a key point is to assure your family member that he is CERTAINLY not alone, nor does he have to face this dilemma entirely by himself.
I have the echo the sentiments of comment #1 wherein your family member MUST cut to the bare minimum — for when things get truly tough in life, you have to get TOUGHER.
Secondly, when it comes to not being able to provide food for his family, his credit rating will have to be the LEAST of his concerns for the time being. We’re now talking about basic human survival — credit ratings can be re-established within time, where as care for family and oneself comes first.
Getting back to basics, he’ll certainly have to downsize his lifestyle depending on how long he envisions this situations to last, as well as doing ANYTHING AND EVERYTHING to reduce his expenses and to raise his income — pride should no longer be an issue.
The situation may feel impossible for the time being, but being an intelligent, capable and ambitious guy, he has to allow his hope, determination and loving family to help him see things through. Everything comes around, and the light WILL shine again.
Take Care.
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The total amount of unemployment in this country, counting underemployment and discouraged workers, is up around 16%, so it’s not really possible for many to find 3-4 jobs. It’s often impossible to find one job.
The selling of assets, like a second car and possessions is definitely a way to earn extra money. Odd jobs, cleaning or babysitting could help as well.
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Exactly, Emmy. So you have six months of savings in your emergency fund. So you cut back all unnecessary spending. Hopefully that carries you through, but from what I’ve seen, that tends to be when your car falls apart and the furnace dies (in a cold snap) and your kid falls and breaks his wrist. And then after all of that, there’s a potential good job that you have to travel multiple times to interview for, but then in the end they go with another candidate. In other words, when things are bad, they can be *really* bad. It’s easy to think that you wouldn’t need to use your credit cards, but in practice, even if you’ve followed all of the typical suggestions (6 month living expenses, no debt, etc) for being prepared, you still can quickly find yourself in over your head. The only helpful advice I have is to be as creative and open as possible to ways to survive. Like, if you can’t find work, see if you can at least barter services (i.e. yard work) for things your family consumes.
As for helping out a family member in bad straits, I have to say that, from experience, I would be highly cautious about just throwing open the doors to my house and letting a family member move in. There are some relatives that I would do it in a heartbeat, as I know that they wouldn’t ask me unless they were absolutely desperate and that they would be working incredibly hard to get out of that situation. But other family members are the type of personality which would then want to take advantage of my generosity by expecting me to provide all of the food and using all of my entertainment options (computer/tv/etc) while not putting much energy into their job hunt. It’s so much harder to set healthy boundaries when someone is right there in your house. I’d much rather slightly piss off a family member by only offering limited help (i.e. helping them print out and send resumes) than end up completely despising each other because living together didn’t work out the right way.
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I recently came to a similar point where I was going to be homeless in about a month and a half. Recently divorced, I have been job hunting like crazy but the fact that I have been a stay at home mom for the last 17 years has been working against me. I was about at the end of my rope when I had the idea to move into an rv park. Altogether I save $475 a month now, enabling me to support myself on much less job, and that’s including a camper payment (0% interest til May and my only debt). In addition, because I bought an Airstream my new little house will probably appreciate in value so I can resell it later when times are better. I’m detailing the change over to a sustainable life on my blog, and it is turning out to be a pleasure rather then pain. When times get tough the tough get tighter! ^.^
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To flippantly suggest that all the guy needs to do is go out and get 3-4 jobs suggests that the commenter hass never faced financial straights.
However, I agree:
*stop spending. No cable, no netflix, none of that. There’s no shame in soup kitchens
*Move to a cheaper place if at all possible. Sell the house or move to a smaller apartment. The boys can sleep in bunk beds if need be.
*Get rid of as many cars as possible.
*If he CAN get 3-4 jobs, then great.
*If he needs to use credit cards to get interviews suits, go job hunting, put food on the table….if he HAS to, then thats what credit cards are for. If he really is as aggressive and ambitious as he seems, he’ll make money one day and should continue living frugally until he pays it off.
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The most important part of JD’s advice is to act quickly when the job loss occurs. My step-sister went through this when her husband lost his job during the dot com bust. They had about six month’s of expenses in savings and so weren’t too worried and continued to live the same way they always did, assuming that’s what the emergency fund was for. The problem was that it took 18 months for him to find a new job. They didn’t lose the house, but the debt they took on eventually led to losing the marriage.
In retrospect, they could have made a lot of changes much earlier that would have helped them. Jane was building a business that put her around very wealthy clients all day and she spent more than she could afford trying to be like them, justifying it as part of building the business. She should have examined her spending on Day One and figured out where she should save. Dick figured he’d find real work more quickly than he did and turned down part-time work that would have helped bridge the gap. They chose not to tell their teenaged kids and continued to pay for all the normal expenses their kids incurred. If they’d told the kids, they could have gotten jobs to pay for their own stuff or even contributed to the family. Eventually they took all of these steps, but only after they were maxed out on credit and were barely making minimum payments. Their behavior seems so irresponsible in hindsight, but at the time they just didn’t realize how drastic the circumstance was.
The lesson I took from their experience is that it’s important to act as though your new income is permanent, then to figure out how to make your savings last as long as possible through spending cuts. Once the savings are gone, you may end up having to use credit to feed your kids (and at that point the idea that a credit score could possibly matter is beyond my comprehension). The idea is just to delay it as long as possible.
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While I feel like everyone’s advice has been good from a personal finance standpoint, you have to recognize a point when your personal finances could soon fail and you may need public assistance. Especially for someone who has four kids, this is exactly what these programs are made for.
Proactively contact your social services (months before you think you’ll need help) and see what you could qualify for. They’ll tell you at what point of your emergency fund you can receive food stamps. (you don’t need to touch your retirement, 529, or HSA funds to qualify). With four kids you are most likely already qualified for emergency food stamp and mortgage assistance.
These agencies can put you in contact with non-profits that can provide further food and clothing assistance. You may not need this kind of help right now, but contacting your county will help you see the safety net they have available should you need it.
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I would say first, take whatever job is out there that will pay you anything. I think a lot of times people are unwilling to take certain jobs.
If faced with such a problem, I would wash dishes if I had to.
Work two jobs if you can. Once again–desperate times–desperate measures.
Cut, cut, cut. I think the first thing to go would be TV–I could easily live off of local channels if I had to.
Next, do anything you can to cut utilities–run AC or heat less, use less water, etc etc.
I owuld deplete my emergency fund.
I would sell anything and everything I could get my hands on to make a little money.
Hopefully, by the time I did all of this, something would have changed.
Great subject.
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My brother is in a similar situation. He lost his job last year but won’t take a job that is “beneath him”. No, I tell a lie, his WIFE won’t let him take a job that’s “beneath him”. He’s been offered opportunities out of state, but his WIFE won’t move. They are now relying on the food bank, which, his WIFE complains, gives out chunk lite tuna versus the solid white they’re used to. She used to be a corporate big shot, but she refuses to get even a part time job – even though their kids are tweens who could care for themselves for a few hours after school if necessary. She has a HUGE 401(k) account somewhere, but already made it clear early in the marriage that he will never see any of it. He would go to work at a gas station, McDonalds, anywhere that would pay him for a days work, but his WIFE won’t let him.
So, I’m also asking myself, as the only person in the family who is not a spendthrift or bankrupt, am I on deck to help them?
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Few people could have predicted the true magnitude of this crash. I know of a lot of people who have really cut down to bare-bones living just shy of moving into their 11 year old car. It does no good to tell someone how “stupid” and irresponsible they were. The situation is what it is…finger wagging doesn’t help at this stage of the game.
Personally, if all my “safety nets” failed, credit counseling failed and my MARRIAGE or the health and well-being of my SPOUSE and CHILDREN was on the line I’d bite the bullet, go BANKRUPT and start over.
I realize that this is a financial blog but sometimes there is more to life than maintaining a pretty FICO score, which is NOT more important than a marriage/family. Three or four jobs might be an option if you are single with no children. Would it worth it to bring your marriage and your health (with no insurance) to the brink and never see your children?
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It’s important to ask yourself why are you asking the question regarding your family member. If the reason is to truly help him/her out, then the answer is simple. Have an open conversation, write out all the liabilities and assets, and help that family member with a interest free loan up to your financial means.
It’s really that simple. If you want to help, you should help.
Best of luck!
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@Just Watching – Maybe he blames his wife, but he makes the choice whether to work those jobs. She’s a handy scapegoat to excuse his behavior to his family, especially if his family already dislikes her. As for her “huge” retirement account “somewhere,” how on earth is that any of your business, if it even exists? If she’s as image-driven as you describe there is every chance it’s fictional.
Your brother and his problems come with a wife you can’t respect, I get that. But when you decide whether to help him, decide based on who he is, right now, not who you think he might be without his wife.
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I only marked two “great comments” here, but I actually like the entire discussion. (I marked these two as great because they come from folks who are experiencing this.) This is a difficult issue, and it’s made more complicated by the emotional stuff that goes into it.
I’m one of those who agrees that the standard financial advice — cut spending, work an extra job, etc. — is great as far as it goes, but that it can be ineffective in the face of a crisis. The standard advice is good advice, but what happens when you’ve cut as far as you can? Or you can’t find a job? Or you’ve depleted your savings? Etc.
I don’t know.
I don’t know the answers to these questions, and so my advice is only theoretical. We’ve heard from a couple of commenters who are experiencing these crises now; I’d love to hear from somebody who has faced the situation and managed to overcome it.
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1: If you think that some jobs are beneath you, then you deserve to be broke.
2: If you think that your house and car makes you a bigger or better man then others, you deserve to be broke.
3: If you refuse to give up the boat, country club, golf, trips, four-wheelers or any other extras, you deserve to be broke.
4: If you have bank notes on anything other then your house and maybe one car then you are living beyond your means.
This is how I got out of my mess and it took five years to achieve this goal.If you think it will take a few months or a couple of years then you are living in a dream world.
1: Except for your house, sell everything that you own on or let it go back to the bank. Will this hurt your credit, you bet it will but bad credit will keep you from collecting more debt.
2: Here are the bare necessities that you need; one house, water, electricity and one phone – cell or land line don’t matter – and one used car. If you live in the city then walk or use public transportation to get to work.
3: If you can not pay cash for any extras then you can not afford it and trying to live beyond your means.
4: Show your kids how to live without video games and get a life outside of games, the phone and TV.
5: This could be a lesson for your kids to learn how not to live beyond their means later in life. Talk freely about the fact that you can not afford extras.
6: Work 16 hour days until you can afford to slow down. This is about you and your family not what family or friends will think about you working at a fast food or digging a ditch for food money. Work your self to death before you beg. Sometimes family and friends will cost you and your family money if you try to live up to their expectations.
7: Credit card is the same as borrowing money. Only one credit card that you pay off every month. Leave it at home, do not carry on your person for that easy purchase. If you don’t have the cash in the bank to pay for a credit card purchase then you can’t afford it.
How did this work for me? Will it was 1991 before I ever borrowed money to buy a decent used car and now I have one car payment for a 2009 Focus, its hard to look uppity in a focus but it sure does get good fuel mileage, I have a used 98 Ford paid off and a 97 pickup paid off. No boat or four-wheelers. I have enough money in the bank to live on for a year if I had too. I work two weeks and take a week off because my debt is low and I still put money in to savings every pay day. My house and car payment together is lower then what some of my neighbors pay for their house along. My kids keep their payments within reason and live a good life because they learned from my mistakes. I don’t live to make money or live beyond my means, I just live to enjoy live.
A few words of wisdom. Watch your penny’s and the dollars will take care of them self. If you have to borrow for extras then you can’t afford it but it will impress your family and friends until you go broke. Enjoy life while your family and friends work just to meet payments every month. Don’t let money control you but you control the money.
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If bankruptcy is looking like it might be an option, retirement funds are protected in many states, so it may make sense to NOT use those (and maybe to contribute even more to them if you can).
Frank
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The way I see it, if someone in your family is hurting financially you do everything that you can reasonably do to help them. This does not mean tapping your emergency savings to help them keep their house or car. It means letting them stay in your house for free (if you know they are not going to take advantage of you) or a for a stupidly low rent to make make up the difference in utilities and food. Also loaning your car so they can go to job interviews, saving coupons for them on items that they use, and purchasing extra food for them when its on sale for a good price (call them before you buy it if you expect to be paid back). Other options might be letting them use your internet/computer and giving them old furniture that they can sell on craigslist. If you hear about job opportunities that they may find interesting let them know. Also make sure to let friends know about what field your family member is currently seeking work in. I believe the main thing is to help them out as much as possible without it feeling like charity, and without leaving yourself in a venerable position.
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Most experts advise against lending money to family, but over the years I received loans and gifts from my family and loaned and gifted money back to family. My mom had a business that went south and she kept investing money into the business until she was basically broke. I helped her out (and the money I gave to her was from 0% credit card checks – dumb dumb dumb) but she was my mom and she needed the help. I think now, that I know a lot more, I would require a commitment to change from the family member, I would only lend cash money (not plastic money).
My mom finally gave up the business, she is happily retired with money in the bank.
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I would advise in some situations, the SAHM spouse should explore part-time job options. Not easy, I know, but it’s better than having one spouse get 2 jobs to support the family. Plus, if the wife is able to get a job, having 2 people with work skills is a better buffer against future lay-offs.
I know it’s not easy but I saw my mom do it, taking very menial jobs until she worked her way up to management many many years later. It was hard but do-able since us kids were a little older.
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If you do loan money to people who are struggling to get by, just picture taking the money and setting it on fire. Most likely the people will never truly be able to afford to pay you back and it will kill your relationship, so if you want to give money, then just let it go.
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I acknowledge that sometimes bare bones budgets aren’t enough to keep you from getting in a deeper hole, but “bare bones” is something people describe differently. To some people bare bones is cancelling the movie channels and eating sirloin steaks instead of fillet. It’s amazing what you can survive if it really means something to you.
I have watched a number of families get in over their heads. Usually it is a logical outcome of bad decisions, I know there is no going back once the bill collectors are at the door, but at the same time we need to acknowledge this fact.
I recently had a mini-version of this. We had renters declare bankruptcy and milk the system (and our ignorance) to live in the house for free for months. When you have to cover two house payments for eight months that can put a huge strain on your finances. I have layers of budgets written. In this case we didn’t have to go beyond the first layer: dropping our 401k contributions to the minimum and cutting all discretionary spending in half. But I have a budget written for more extreme cuts. In that case cable and phone go, food gets cut, daycare gets cut back (my mom is available to help but I don’t like to rely on her unless I have to).
When buying/selling stocks there you can set trigger points. I do the same with my savings. When specific situations happen I will do something. When my savings are down to $X I will sell my car. When I have been out of work for X months I will put my house on the market.
Husbands and wives need to talk about reasonable (and some unreasonable) scenarios of what to do if X happens so you’re not emotional if/when it does. DH and I discuss what to do if one of our parents die (going through their stuff, etc.), if one of us loses a job, and so forth. When something DOES happen we don’t do EXACTLY what we discussed, but we are on the same page.
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I am very fortunate to not be in this situation, but I think about it all the time. I am building up my emergency fund even further for just this reason.
My best friend and I have talked about worst-case scenarios. He owns a house, I own a condo. If things went horribly south for me, I could sell my condo (at a loss if needed) and move in with him. We’ve talked about options for him as well; luckily he has family here with room for him if needed. We’re very open with each other about what might happen, what we could do, how we could help each other. We know many people who have been laid off and are trying to help by providing job ideas, networking, and inviing everyone over for summer BBQs instead of going out for drinks and food.
Other ideas I’ll offer (just brainstorming)…instead of just cutting back on groceries, I would make sure to look around for discount grocers, cheap produce stands, or other “scratch and dent” food stores. I use a local produce stand that gets second-tier produce (delicious but not pretty) and it saves me more than 50% off grocery store prices.
If you don’t belong to Costco, find a friend who does, and stock up on things you know you’ll need (as long as they are really cheaper).
Be sure to use craigslist. Sell stuff, look for jobs, create your own work by listing yourself under the “services” section. You could walk dogs, clean houses, haul stuff (if you have a truck), do sewing/mending, anything you’re good at. Even people with jobs are looking to spend less on services so hiring through craigslist is appealing.
It might be difficult but I would make sure that your circle of friends and family know how serious your position is. Most people are more than willing to help, you just have to ask. I don’t mean that you need to ask for money, but if people know you’re in dire straits they could send you ideas for jobs, even hire you for something they need done; bring over food, babysit for you, proofread your resume, take you places by car if you need to sell your vehicle(s)…I know that personally I would be MORE than willing to help a friend who was going through a financial crisis…these days it could be any of us who might need a hand.
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Shara – Great plan. I’ve got mental versions of plans, but it reminds me that I need to sit down with my guy to discuss his mental plans to make sure we’ve got similar trigger points for making those kinds of changes. We usually do, but it’s dumb of me to assume we’re on the same page. Congrats on getting through this and having the plan in place to do so.
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I think there are two very important points JD made when faced with this situation:
1. Be brutally honest:
Don’t run from the problem, instead take it head on. If you were the cause, take responsibility and ask yourself, “What can I learn from this?” If it were out of your control, then mentally reframe the situation, ask yourself these questions: Has anyone been in a similar situation and come out stronger? What can I learn from this? What opportunities are hiding in this circumstance? Try to consciously maintain an internal locus of control… this isn’t an easy thing to do and takes constant practice.
2. Avoid touching retirement savings
Do not, do not, do not touch your retirement savings. These accounts, if set up correctly, are creditor protected meaning if you file bankruptcy your creditors can’t come after this money. The same applies to money in life insurance policies, do not cash out your policies, as this creditor protected also. For example, let’s say you have $35k in an IRA and you have $15k in a whole life policy. You have $60k in debt, maybe from a failed business. Say you cash out these so you have $15k from your life insurance and $24k from your retirement. ($35k x income tax of 25% x early withdrawal penalty of 10% = $23,625) So you pay off $39k of debt, are you out of debt yet? No. Are you still at risk of having to declare bankruptcy? Yes. Let’s say worst case scenario, you claim chapter 7 bankruptcy, so after the proceedings instead of having $50k for your retirement you know have $0k. You took protected money and by transferring it out made it vulnerable to creditors. Please don’t make this mistake.
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I know this doesn’t answer the question that was asked, but many people seem to be saying don’t help by lending to a family member. I think If you want to help out your family member then maybe instead of lending them money give them grocery or gas cards as gifts, or a family pass to the zoo so they can do something with their kids without having it be a stress on the family finances. Giving these things freely can show that you recognize that they are in a tough spot and are supporting them, without creating a tense money lending relationship. In the past we have given free rent to a friend for 5 months and assistance to a family member via grocery and gas money, knowing we were gifting these and not counting on anything in return. These things were all within our own budget and did not end up straining our relationships.
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It isn’t clear to me from the post whether or not the reader’s relative actually has a job or not. If he doesn’t have a job, then he needs to do whatever he can to find one. Make contacts. ASK people. I got my current job as well as my part-time job just by asking contacts if they had any positions open for me. My university degree of course helped show them I am qualified for my jobs, but without asking for the jobs they would not have just fallen into my lap. Be resourceful.
To avoid sinking deeper and deeper into debt, like JD said, some things that are tough to part with must go. If the car is being financed and relatively new, sell it for an older model. If public transport will do, take it, and get rid of the car altogether. Sell jewelery. Sell the house.
Be frugal. No more little luxuries. It’s amazing what you can live without. They say that it takes 2 weeks to break a habit. Try giving up things that you never thought you would, and you’ll be amazed how easy it is after only 2 weeks. In such a dire situation, I would recommend eliminating ALL wants, but typically it’s best to be frugal and allow yourself a small treat once in a while so you don’t go nuts.
Does his wife work or stay at home? Weigh the cost of childcare vs. her working and see if it costs more for her to be at work or at home.
I recommend that he immediately calls his credit card companies so that he can ask if the interest rates can be reduced. Even if the card rate itself can’t be reduced, he probably can switch to a cheaper card.
I am currently paying off debt I acquired while I went to school. A lot of it is stupid debt, and now that I am in the “real world” with bills and potential job loss (you never know!), I am doing pretty much everything I can to get out of debt quickly. I say pretty much because I allow myself little treats once in a while. Once I am out of debt I will save like crazy. I never EVER want to be in a position where I have to resort to credit cards for basic expenses. I lose sleep over my current finances… everything is ok as long as I am employed… but if something bad does happen, I am screwed basically. I am very happy that I will be out out debt in the next 6 months or so. I got my part-time job to speed up my debt repayment process.
I wish the reader’s relative good luck. It is scary to get into a bad financial situation… especially with 4 kids. Hopefully it’ll all work out though, and they will come out of it even stronger. When I’m in a bad situation I like to remember the phrase “this too shall pass”.
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I have a couple of friends who really struggle with the want-need continuum. Two, exactly. Both are struggling with relatively modest amounts of credit card debt ($5-6K, which for a working adult with no kids ought to be pretty easy to shake) and both know their way around Ikea in a way that I just don’t. They “need” things like organizers for magazine archives; coordinating kitchen hook thingies; more organizers. That is what I notice the most. There are parts of my home that I know would benefit from more thoughtful shelving (the CDs, mostly. I kind of do need real shelves for that teetering towering menace) but the expense seems a little overwhelming in the face of a real estate market where my husband and I can barely afford to buy a two bedroom condo. So that $40 has stayed in the bank.
If you’re living on credit, you’ve already failed to really ask “Can I afford it” (see “should I buy” flowchart …) and the question that you need to be asking is “Can I live with out this for the moment?” and you have to keep stretching that moment until you’re paying cash for everything you need.
I don’t know the right way to be a good friend to someone who is in over their heads, but I’m pretty sure it isn’t about financial assistance. You can help shift their social expectations, though. Invite them over or propose popcorn and a DVD or an afternoon at the park if you want to get together, instead of proposing activities that require an entrance fee.
Offer to take the kids for a day so the adults can have some time alone together — financial crises are hell on relationships. Especially if one end of the partnership was caught unawares by the family’s shifting financial picture..
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I don’t quite get panicked emails/questions like the one in this blog posting. The answer is really quite simple and obvious — slash spending and lifestyle and get as many extra, temporary jobs as it takes to stay afloat. There’s no fancy answer or magic bullet. Go get as many part-time jobs as it takes while you are looking for the career-type position. Retail, babysitting, mowing lawns, pizza delivery, whatever…these jobs or others like them are always available if you’re a competent applicant in any economy. In most cases, it’s possible to bring in enough cash to avoid credit card debt in the short-term through less-than-ideal jobs if you’re willing to work a ton, get creative and take jobs that are “beneath” you. And slash spending and lifestyle in small and big ways. I’m amazed by how few people consider selling homes, cars and other big items. It’s as if Americans think that once we obtain a certain standard of living, we are entitled to keep it no matter what. Downscale and shed items that you bought on credit.
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My sister-in-law, the child of immigrants, has a banking job. But she has said many times that she would “clean toilets” if she had to. I think she’s quite serious. And, if she did all she could, I would be happy to take her and her family in.
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If you are a family member consider your loan as a gift and write it off mentally. Sure, your family member in need may say they will pay it off, but mentally expect NOTHING back. Give it to them straight.
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To Dan #7, there are a couple of reasons not to use retirement savings.
First, it’s very expensive to use. You pay a 10% penalty plus taxes. If you’re in a 28% tax bracket, you’ll pay nearly 40%. So if you take out $100,000 out of your account you can only spend $62,000 of it.
Second, as someone already mentioned, if this person is in such dire straits, using retirement savings will likely only be delaying the inevitable bankruptcy. In bankrupty, retirement savings (in an IRA or 401k) cannot be touched. So they may well be spending their future unnecessarily.
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Re recommending selling the car…
Sometimes the only thing a person has to sell is a car; may not be able to sell it due to loan or lease requirements and/or acquire a cheaper car or can only acquire a car in questionable running condition compared to the currently held car.
If you live in a local with no public transportation (there are more places without transport than with, including USA cities), what sense does it make to sell your car? No car = no work. Carpooling is not necessarily an option for those people who transferred to keep a job that they ultimately lost. In today’s transient society, it is unrealistic to think that people will automatically have a support network that can help make up the gap.
So you sit at home waiting for the Sheriff to evict you from your rental?
At least you can live in a car if you have to.
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Dear Anon GRS reader who posted this question. I read your question again, and unless I have poor reading comprehension, why do you end asking how YOU can avoid going deep into debt, instead of asking JD and the readers how you should HELP your family member?
It’s like watching some reporter, reporting on poverty and starvation with a sick mother and child in the background. We’re not sure whether the report, cameraman and crew proceed to help out once the camera stops rolling.
Help your family member!
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Thanks Suzzane and Frank, that makes more sense now.
Yea if you’re going to go into bankruptcy either way, it doesn’t make sense.
I guess taking out Roth IRA money would still be ok though…
Here is the situation I was thinking about:
My uncle who is approaching retirement age (56) and has saved up a lot of retirement money in IRAs and 401Ks (over 1 million). However he’s been out of a job for awhile and is struggling with cash flow. It hasn’t come to this yet – but i have suggested to him if worse comes to worse he could take some retirement money out early instead of going into major credit card debt. I believe you take money out at 59.5, so he only has to last a few more years anyway. I’m no financial expert though, so there could be a better way…
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In the early 2000′s, my husband and I ran into a similiar situation. We were maxed out on our credit cards, I lost my job, my husband’s business wasn’t earning any income. We were in big trouble. We even got evicted in 2001, luckily, that came off my credit report this year!
We learned the hard way, which, sometimes, is the best way to learn. We never mentioned anything to our family members. I worked 2 jobs and we cut our costs. We royally screwed up our credit, but we are now in the process of fixing it. Luckily, we didn’t have children (and still don’t). I would have been panicking if we had children!
Hopefully, your brother will learn from his mistake, take on extra work, and cut costs. Obviously, if things get so bad that they haven’t a place to live, they will need to ask for help.
I truly feel people learn from their mistakes, they need some guidance on what to do, but not necessarily in the form of money, and spousal or family support.
Good luck-
Little House
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I’d like to throw in some advice about getting a job ‘that’s beneath you’, since I see a lot of folks that assume it’s easy to get a retail job.
Here’s the catch: If you’re a successful business who lost his/her job and are taking on a retail job in the interim to make ends meet to avoid going further in debt, you have to be VERY careful how you word your application and how you speak in the interview. If the retail employer knows your situation, it is unlikely you will be hired at all, because the manager knows you’ll jump ship the instant something better comes along. It’s called being ‘overqualified’, and I’ve seen plenty of my friends not be able to get work due to that and who had to modify the way they applied for jobs.
The best way to word things if you’re trying to get a retail job is to say “you mainly freelance” and “are just looking for some permanent retail work on the side to help make ends meet”. It makes retail employers feel slightly less apprehensive about you jumping ship when things do improve.
Also, don’t expect full-time retail work. It’s really hard to find. Everyone seems to want to hire part-time these days to cut costs, so you’ll most likely have to take on several part-time retail jobs, instead of 1 or 2 full time ones.
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“Avoid touching retirement savings…” ya, but if the world has fallen apart and the money is there you may have no choice. As it truly is an emergency fund; whether it’s for now or later..
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