This guest post from the Frugal Jerk is part of the “money stories” feature at Get Rich Slowly. This is a continuation of the story Frugal Jerk started last week. Some stories contain general advice; others are examples of how a GRS reader achieved financial success — or failure. These stories feature folks from all stages of financial maturity. Today, the Frugal Jerk — who has asked to remain anonymous for now — shares the second half of a story about going from internet entrepreneur to busted and broke.
Welcome back to the saga of Frugal Jerk. You might want to read the first part, if you haven't already.
Here's a quick a refresher:
- I'm a lifelong entrepreneur. In my best year I earned more than $300,000. In my worst year, I earned about $1000. On average, my income is above average but not extraordinary.
- I purchased a too-large home just before the peak of the economic meltdown a decade ago. I was “very smart” and put 20% down. (That's sarcasm.)
- About seven years ago, due to a combination of my home's value dropping by $200,00, my income falling into a prolonged funk, and me experiencing clinical depression, I decided to give up the house to foreclosure.
The decision to foreclose possibly saved my life; it definitely saved my balance sheet.
Some Quick Notes on Depression
When I left you last week, we'd just discussed depression. It's not something I want to dwell on, but it's something I want to explain due to lack of understanding in the world at large.
Depression is not sadness. Depression is not logical. You can't think your way out of depression. You can't “nature” your way out of depression. Depression doesn't hit only when times are bad. The reality is, in the words of Ben Goldacre, “I think you'll find it's a little more complicated than that.”
This is a financial blog so I'll move on in just a few seconds, but I thought it was important to address the stigma around this disease. It's okay to get help and it's okay to take medicine. I waited twenty years before getting professional help and that was twenty years too long. For me, a norepinephrine-dopamine re-uptake inhibitor (NDRI) helps significantly and the more commonly known selective serotonin reuptake inhibitor (SSRI) does not.
Don't feel bad about medication and don't feel bad if you need to take it for a long time.
J.D.'s note: I too suffer from depression. I can attest that there's neither rhyme nor reason to it. Even when my life is going great, I can be knocked on my ass by anxiety and a sense of impending doom. During my divorce, Kris asked me to see a counselor about my depression — so I did. It helped. I don't take prescription drugs for it, but I've been using things like St. John's wort and 5-HTP for over a decade to cope with the problem.
Why Things Went Wrong
So, how did this all happen? Why did my income fluctuate so wildly? Why did I make so many “right” decisions (a 20% down payment, for instance) that turned out to be so wrong?
My income fluctuated wildly because I wasn't building a business. I was building business projects. Perhaps that's a subtle distinction, but it's an important one.
A business is generally stable. You can make forecasts about next month's bills and revenue.
But business projects? Sometimes I'd make $5000 in one day and sometimes I'd lose $3000 the next. And then lose $5000 the next. And then $2000 the next. And then make $10,000 the next. Honestly, I was addicted to the thrill, much like stock traders or gamblers get addicted to their respective thrills. On the whole I was net positive, but it wasn't at all comfortable or predictable.
In those days, I mostly did two things for income: SEO arbitrag and Google Adwords arbitrage. I won't go into the details, because it's too “inside baseball”. But if you've ever been involved in either game, there's a smart way to build a business with arbitrage and there's a dumb way. I took the dumb route, living for the day instead of building for the future.
Combine those income fluctuations, a tanking economy, and clinical depression together and it makes for some difficult days and decisions.
Foreclosing on My Dreams
Foreclosure became the rational decision. I forced myself to take my emotions out of it. What kind of advice would I give a friend if she were in my situation?
This will probably get me a lot of flak (I can take it!), but I could actually still technically afford my home before (and after) getting the foreclosure process started. For me, it was purely a business decision.
At the time I decided on foreclosure, I was no longer living in the home and had no plans to ever move back. I had it rented out at a loss of $10,000 per year and I had $50,000 in the bank.
My income was no longer anywhere near $300,000/year as it had been in the heyday. It was, however, often somewhere between $20,000 and $100,000 per year. (There were two years with no income or negative income.) Not always good, but not always bad.
The problem, again, was that it was difficult to make forecasts about income when it fluctuated constantly. In the past, I would convince myself of the best case scenario. Now I decided to take the opposite route.
I asked myself some questions:
- Assuming, worst case, that I'd earn $20,000 per year would it be smart to keep a home that was costing me more than $10k,000 per year? That answer was easy. Of course not.
- What if I made $30,000 per year? No, still not smart to keep the home.
- $40,000 per year? Doable, but still not ideal.
- And on and on.
The rational business decision was to take the foreclosure, ruin my credit, lose my down payment, and save at least $70,000 by the time the foreclosure fell off my credit report. (It'd stay on my credit report for seven year — seven years where I'd lose $10,000 annually if I kept the home.)
In total, this home cost me well over $100,000 (down payment, opportunity costs, etc.) and today the home is “valued” at roughly 75% of what I paid for it over a decade ago. By most accounts, I made a smart decision.
I did try to work with the bank to avoid foreclosure, but the numbers didn't work. I even tried a deed in lieu but they didn't accept it. I probably could have figured something out, but once I'd made the foreclosure decision, I stopped caring. I accepted the consequences and moved on years before the foreclosure was completed. (As I mentioned last week, the foreclosure process took 3 years!)
Life after Foreclosure
What was life like with terrible credit and a foreclosure on my record? Good, actually.
I kept open two credit cards that didn't have annual fees. Those were never closed by the banks. I still paid my bills in full every month. Four years into the foreclosure, I opened a secured credit card because I couldn't get anything else and I thought it might help with my credit score. (It didn't.)
My credit is still bad. According to Capital One's CreditWise, I have a score of 720 and my FICO score is 654. (The foreclosure is still on my record for a few more months.) A FICO score of 654 is pretty poor. It's in the bottom third of all Americans.
But you know what? Your credit score doesn't mean as much as some people want you to believe. It's much better to have a high credit score than a low credit score, obviously, but life without a high score is just fine.
Paying for everything in cash (or with my low-limit credit cards) has made me more appreciate folks who are in worse situations than mine. Sometimes it's annoying (“Am I going to get approved for this apartment lease?”), but because I didn't wait until I was near bankrupt to foreclose, I've never had any real money issues again. Even in the lean years.
A Happy Ending?
My net worth would be well over a million dollars if I hadn't bought a home (and a luxury car and other silly stuff) but had put that cash into index funds instead. Regardless, my net worth is back into multiple six figures nowadays, and I'll still be able to retire early, if I want.
I still travel when I feel like it. I still buy things I need or want. (Which isn't much. My yearly spending is about $30,000.) I own a late-model used car (paid for with cash). I don't plan to buy a home again anytime soon, but I'm not completely against it at some point. (That said, I'm generally of the GoCurryCracker “renters for life” mindset.)
I never did learn my business lesson, though. My income still fluctuates wildly. I had a terrible 2016 but managed to earn $80,000 in 2017. I'm still addicted to the thrill, I guess. Maybe someday I'll learn.