Last week, I received a fascinating question from somebody I know back in Portland. Let's call her Aly. Aly and her husband have a great life, one that's built around their values. The trouble? This ideal life costs too much. They long for financial independence, but they're headed in the other direction. They're digging themselves into debt.
Here's what Aly wrote:
My husband and I both have jobs that we love that fit our values. He's teaching preschool full time and making a good wage. I'm working three days a week in an inpatient treatment program for people healing from mental illness and long psychiatric hospitalizations.
I'm somewhat underemployed (working at a job I am over-qualified for) but this was an intentional decision to keep balance in our home life and for me to maintain my own mental health. I anticipate over time I'll increase responsibilities as well as earnings in this job. I love the company I work for. They offer generous retirement and stock benefits. At this time I really want to stay put and so does my husband. It feels wise and healthy.
We love our home and have made every major improvement possible in the fifteen years we've lived here. Heck, you were part of that, helping us remove old shingles to get ready for the reroof! Our kids are in great schools and are thriving. We love our neighbors. We're not interested in renting a room or otherwise having other people live in our house as this is our biggest place of respite and again, a place to recharge and to nurture our children. We're one year in to a fifteen-year mortgage that we both feel thrilled about in terms of low interest and reasonable monthly amount.
In terms of cutting costs, we've consistently taken the angle of simplicity. I don't see any obvious new way that we can cut costs. We want our children to have important cultural experiences, so we pay for them to go to summer camps and for some after school activities. Our daughter will be going to Costa Rica with her science teacher this summer. These things aren't cheap, but we put careful thought into the ones we choose and again, make sure the mission of them fits our values. Additionally, we're paying for braces, but have done that though a flex spending account.
We have no car payment and are fine with the cars we have.
The bottom line is we keep ending up with debt that we can't cover and are building up a credit card balance that both of us feel bad about. This summer we anticipate some more expenses for a family reunion in Indiana that we go to every other summer. We'd hoped that we would have money saved up for this trip, but instead we find ourselves needing to fund this trip again on credit.
We anticipate getting a rather large inheritance within the next few years. I also anticipate earning considerably more as I get promotions and am able to work more hours when the kids are a bit older.
So, my idea to get out of this constant money stress is for us to get a home equity line of credit. The interest would be tax deductible and it would take some pressure off while we are in this window of time. It seems to be the one way we can benefit from the fact that our house is worth a ton. We really love it here, and really don't want to leave.
I'm sure I'm missing all sorts of important details. Doing the Money Boss net worth exercise was helpful. It forced me to get organized. I thought I was already pretty organized, but now I definitely have the information in clear accessible format!
I don't expect you to be our financial adviser, but as soon as my husband asked the “I wonder what J.D. would say?” I knew I wanted to write.
In many ways, Aly's story reminds me of the recent Atlantic article about “The Secret Shame of the Middle Class”. In that essay, New York writer Neal Gabler confesses that although his family enjoys a wonderful life, it's a life that keeps them on the knife edge of financial catastrophe. Like half of all Americans, he'd have a tough time of coming up with $400 to cope with an emergency.
It seems that my friend Aly is living the Portland-version of Gabler's life.
I'm not going to use this space to condemn Aly for the choices she's making. Instead, as I advocated earlier this week, I'll practice a little financial empathy.
On the plus side, Aly and her husband are making conscious decisions. They're not living reactively, doing things because that's how other people do them. Their choices are aligned with their purpose and values, which is awesome. But Aly needs to understand that all choices have consequences.
At the moment, Aly and her husband have elected to spend more than they earn. By doing so, they are deliberately sacrificing the option of having increased financial independence in the future. The tacit implication is that they consider today more important than tomorrow. If they're comfortable with that, fine.
But if tomorrow actually is important to them, then they need to make different choices. Their current situation won't fund the future, and there's no way it can.
If Aly's family chooses to save for the future, they'll need to give up stuff in the present. If they choose to live large today, they need to accept that they're sacrificing a richer tomorrow. To my mind, there's no right or wrong here. But Aly has to be willing to pay the price for whichever lifestyle she chooses.
Aly claims that there's nothing left for her family to cut. But there is, and I think she knows it. She mentions a trip to Indiana for a family reunion and sending her daughter to Costa Rica, for example. Yes, these are important events, but if Aly doesn't have the money to pay for them, maybe she should forego the expenses.
Aly's family has more than one car. Do they need more than one car? Could they sell one? They could use the proceeds to pay down debt (or to fund Indiana and/or Costa Rica). I don't know their exact situation, but based on where they live, using public transportation might help them cut costs at least a little.
Note: A couple of times in her email, Aly makes a common mistake: She looks forward to future sources of money. It's fine to anticipate a raise or inheritance, but never bank on it. Far too many people increase spending because they assume they'll get some windfall or new source of income — only to discover this jackpot never materializes. Seriously, I've heard many many stories from families who screw themselves over by counting their chickens before they've hatched. Don't do it.
What if Aly's family decides today is more important than tomorrow? What if elect to visit Indiana and send their daughter to Costa Rica?
You might be surprised to hear that I'm not opposed to a home-equity line of credit. A lot of money experts advise against debt consolidation via home-equity loans. I'm not one of them. Why not? Because I've personally used this path to help get my own life under control. It made a huge difference.
With a HELOC, I was able to soften the bite of my debt payments (by lowering them), which increased my monthly cash flow. This helped me climb out of the hole I'd created for myself. That said, a HELOC can be dangerous if it's simply a source of additional debt, a way to spend even more.
In short, a HELOC is a great way to get debt under control; it's a terrible idea if used to increase spending.
The bottom line is that Aly can't have everything she wants. With her family's current income, she's unable to fully fund the present, let alone build a better future. She needs to decide what's most important to her. No matter which choice she makes, she'll have to sacrifice something.
What do you think? If you were in Aly's shoes, what would you do? When you already have the ideal life but it costs a little too much, what's the solution? Do you just bite the bullet and live with the debt? Do you make compromises and sacrifices? If you were Aly, would you take out a home equity loan? Why or why not?
Author: J.D. Roth
In 2006, J.D. founded Get Rich Slowly to document his quest to get out of debt. Over time, he learned how to save and how to invest. Today, he's managed to reach early retirement! He wants to help you master your money — and your life. No scams. No gimmicks. Just smart money advice to help you reach your goals.