Money story: I was a frugal jerk
This guest post from the Frugal Jerk is part of the “money stories” feature at Get Rich Slowly. 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 first half of his story about going from internet entrepreneur to busted and broke.
You might know me. I’m a blogger and entrepreneur. I've had tens of thousands of customers during the last decade, so it's very possible that you've purchased something from me in the past.
I've been read by millions of readers on my own sites and I’ve appeared as a guest writer on popular websites you’ve surely heard of. I've also been featured in New York Times bestselling books that may sit on your shelf. At my peak, my income was $300,000 per year. By many accounts I would be considered successful. But I’ve made many dumb mistakes with money.
We’re not going to bury the lede: At a certain point, because of a perfect storm of mistakes and problems, the smartest move was to foreclose my home. This move may have even saved my life. This is that story.
What's interesting about all of this is that I grew up fairly poor and conservative with money. If I couldn’t pay for something in cash then I didn’t buy it. I didn’t make stupid financial decisions. Those decisions were for idiots. I was no idiot! (Reality check: Everyone is an idiot sometimes.)
Buying the Hype
When I bought my home, everything was going great. In the run-up to the U.S. recession, houses wouldn't stay on the market for long. If you remember those days, you know that you could go to a first open house and the house would often be sold before you got there. It got to the point where houses were regularly selling for more than asking price. Bidding battles were not uncommon.
This should have been a warning. But I was young and dumb and flush with cash. I had a business generating almost $1,000 in profit per day. Mostly automated. All online. What to do with all that money? Home values always go up, right? It’s always smart to “Buy! Buy! Buy!” isn’t it? We all heard it daily. (You might still hear it regularly since the economy has improved lately.) Plus, it’s the alleged American Dream. Quite literally everybody around me told me to buy, particularly those who knew my income. Parents, friends, the echo chamber in the media. I didn’t hear a single dissenting opinion. (Besides my own, which I steadfastly ignored.)
So I bought a home.
Considering my income, I thought I was making a smart choice. I settled — and I do mean settled because I didn’t even like the home — on a $300,000 four-bedroom three-bath two-car-garage home. I was a young single guy with a huge family home. I know what you’re probably thinking. But it was “only” one year’s income and I put 20% down. What could possibly go wrong?
If you’ve been a working adult over the past decade, you know the answer.
Nearly everything went wrong.
The stock market tanked. The housing market tanked. And, most relevant to my eventual foreclosure decision, my income tanked. The year I bought my home, I made about $300,000. The year after, I made less than $50,000. The year after that? Less than $20,000.
It was a massive blow to not only my finances but also my ego.
In the Beginning
My beginnings probably aren't atypical of folks who read sites like Get Rich Slowly.
I started working and saving at around age 13. I had a checking account and kept it balanced all through high school. I graduated from a four-year university with a science degree and not a single dollar in debt. Actually, because of the business I started while in school I graduated college with over $50,000 in savings, including $10,000 in a Roth IRA. Who starts a Roth IRA in college? The Frugal Jerk, that’s who.
Even though I had all this savings, I still felt poor. What’s $50,000 when others folks are millionaires and billionaires? Some call this a scarcity mindset, and maybe it’s a result of growing up “not rich”. We always had electricity and food and went on the occasional vacation (often camping). But I was an LA Gear child with Nike Air tastes. Maybe you can relate?
Like many folks in similar situations, I was raised with a faulty money blueprint. I wasn’t taught the value of money or the thought process behind saving and spending. But I was taught that rich people were to be venerated and poor people disparaged. There was nothing worse than to be poor or in debt or to ask for help. (The ultimate sin was getting any help from the government.)
I was told things like, “No, too expensive. You’ll end up like one of those poor people.”
I was taught to buy the cheapest, even if the more expensive is in the budget, better quality, and more useful. (Now I know a simple cost-benefit analysis can go a long way to helping decide whether to buy something that’s cheap versus something more costly.) The point is that as I became an adult, even though I was debt free and had a significant savings account, I felt poor, was terrified of actually being poor, and I wanted a lot more. And I got it. For a while anyhow.
The positive side of growing up the way I did is that I was taught debt was generally bad (except for a mortgage or car note, for whatever reason). I wasn’t taught why debt was bad, but the lesson mostly stuck. I never — not once in my life — carried a credit card balance. I never paid my bills late. I bought everything in cash, including a luxury automobile.
Wait, what? Frugal with a luxury automobile?
Well, I quickly fell into the classic spending trap once I started earning big. What’s $60,000 for a car when you’re earning that much in just two months? I wrote a check and paid extra to have the specific vehicle I wanted driven cross country and delivered to my door. (In case you’re wondering, that costs over a thousand bucks.) I couldn’t wait to show it off. To whom? To all the poor unsuccessful suckers around me. “Ha! I’m so smart. I bought this expensive car for cash! All these other idiots are using financing. So dumb.”
See? I was already a jerk — but no longer frugal. Obviously.
Things Fall Apart
So, the recession was in full swing although many of us were in denial. Me? Well, as I said, my income tanked and my home’s value tanked. My Roth IRA was worth about what I put into it. My mortgage and home-related expenses were eating close to $25,000 per year, so I was spending more than I was making. (My income fell to below $20,000, remember?) Things were not going well for me.
I decided to try to sell my home.
I listed it below my purchase price. It wouldn’t sell. I set an arbitrary limit to the hit I was willing to take on the home; I was hoping I wouldn’t lose more than $30,000 (or ten percent). In retrospect, I should have done whatever it took to sell. But that’s the thing about hindsight: It’s too easy to look back and judge. I didn’t think things would keep getting worse and I was using emotion instead of logic to make my decisions.
Did I say Frugal Jerk? Frugal Idiot is more like it, right?
But we’re still not to the point of foreclosure. I hustled hard, got some of my income back, and was once again earning nearly $10,000 per month. Not anywhere near what I made before, but a great income nonetheless. I could replenish some of my savings and maybe not worry so much about expenses anymore.
Unfortunately, we still hadn’t seen the worst of the recession. At this point houses like mine were still sometimes — rarely — selling for over $200,000. It wasn’t the $300,000 I bought mine for but it also wasn’t the $120,000 or less they'd eventually sell for. I was uneasy. I didn’t want to take a $100,000 hit on my home (which would take out the majority of my savings), and I didn’t feel like I had many options besides sticking it out and hoping for the best.
Then my income tanked again. Hope wouldn’t — couldn’t — save it. Because, in case you’re unaware, hope is a terrible strategy in business and in life. (Particularly in finance.)
Maybe I’ve left out something important: During this time I was also dealing with suicidal depression and debilitating anxiety. Not the result of financial troubles, but certainly exacerbated by them.
Getting out of bed or going grocery shopping was unbearable (and, frankly, a rare occurrence). I often went weeks without speaking to another human being. If I had to, I'd do my grocery shopping at 3 a.m. so I could avoid other people. If you’ve read Darkness Visible by William Styron or even Allie Brosh’s more accessible book Hyperbole and a Half, then you might have some understanding of what this kind of depression feels like. It’s something I’ve dealt with since a young age. And by “dealt with” I mean I shut myself off from the world and kept it all in.
It’s no wonder my chosen career path was to sit in front of a computer and not speak to people on a day-to-day basis. Some might say that career path was more curse than blessing. While it's provided an interesting life, it hasn't been without consequences.
Living with the proverbial dark cloud of depression is difficult enough. Doing it while also dealing with income uncertainty and a crashing economy? Yikes! Clearly I’m still here, but it was almost too much to handle. Thankfully, humans are resilient creatures. Even jerks like me.
My foreclosure process was long and grueling. From the time I missed my first payment until the day the house was actually foreclosed upon took three years. But, believe it or not, the experience was one of the most positive things to happen to me as an adult. It forced me to re-evaluate my relationship with money and with life itself. I also learned how to start over with nothing, from the bottom of the heap with a broken credit score.
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.