This afternoon I struck up a conversation with a guy in a South Carolina cafe who had been there since 9 AM. It turns out his car had broken down and he was waiting for a tow truck. He said the last time it happened he had to replace his engine which cost him $5,000. Not only that, he still hasn’t gotten around to fixing his busted catalytic converter which would add another $450 to his woes. As he was talking I noticed that he was making sure his phone was charging but unlike the others there, he conspicuously had no computer. The reason for that was someone went into his RV and stole his new Apple laptop which was worth $1,900. He said Apple was able to shut it off remotely but he wasn’t able to track it down because he didn’t have a special app installed.
Despite his situation he said that he was still happy he had a part time job at Home Depot working as a forklift operator. He also felt blessed that his living situation was better than the people he met 20 years ago in Guatemala when he did missions work. After further prodding, I learned that my new found friend has seen better days. Up until 5 years ago he was the owner of a prosperous home construction company. During the housing boom he couldn’t build town homes fast enough. Even when the demand for construction died during the 2008 recession he was still able to continue due to a clever business move that I’ll tell you about at the end of this first testimony (a second testimony will follow).
What eventually did him in was his wife wanted a divorce and she got the house. The deed was turned over to her under the terms of the divorce agreement but still he had to keep paying the mortgage. The fact that her name was not on the mortgage due to bad credit worked in her favor. But after refinancing to get the house under her name she is now about to lose it because she can’t afford the monthly payments. Funny how a licensed teacher in Fort Mill, South Carolina is having trouble paying the bills despite having a masters degree in education.
By reading this post, it’s easy to see how a comfortable lifestyle can go awry bringing on painful credit implications. I really doubt that my friend will be able to live in a house in the foreseeable future and if he loses his job the game’s over. But perhaps it can be said that this story has a bright side. By understanding how cyclical problems can have a domino effect into every area of your life, you will be able to better plan. So I’ve put a small list of “to dos” below that can help you while you are young.
Takeaways from this 1st testimony
1) Always have a prenup signed before you get married.
2) Being close to God doesn’t insulate you from problems. In fact, you may even have more problems BECAUSE you are close to God. Be ready for them in and out of season.
3) Understand how vulnerable your finances are before you take out a mortgage. Maybe you’ve had some success in a certain industry but that industry may be a dying one.
4) Take on a major in college which has REAL earning potential.
5) Why anyone would by a $1900 Apple computer is beyond me. I paid $700 for Windows machine which is equally functional.
6) If you do decide to buy an Apple computer or an iPad, make sure that you have the right software installed so you can track down your investment should it be stolen.
7) The price of a new engine and catalytic converter is about $5,500. Instead of ditching his car, my friend chose to get the repairs done. Once I bought a used Honda Civic with 6000 miles for $6,000. Repairs were covered for 6 months under my state’s lemon laws.
8) Start a blog and keep working on it as you get older. The recurring revenue from advertisements will help you during rough economic times.
In the beginning of this post I promised to share what kept my friend afloat during the recession of 2008. Back then he almost had to declare bankruptcy but one day a hail storm hit. Immediately after that he went door to door and offered home improvement services for roofing and siding. Since everyone has home insurance, the insurance companies were forced to foot the bills. It’s crazy that had he lived 2 hours south in Colombia, South Carolina he would have been able to take advantage of the recent flooding disaster. Don’t forget that whenever there’s a crisis, there’s an opportunity. This rule holds true in all industries, especially in investment.
His Roth IRA saved him from bankruptcy
Another day I was talking to a man in his mid 40s who told me that a couple years ago he was at the brink of bankruptcy but was able to avoid it. Here’s a glimpse of the perfect storm that hit him. Five years ago he got married to a recent divorcee who had messed up credit. It turns out that her ex had gone on a spending spree with his credit cards and her name was on the accounts. My friend obviously didn’t know what kind of drama he was walking into when he said “I DO”. And unfortunately, the woman didn’t take care of her debts before the marriage.
During the marriage the debt collectors eventually started calling my friend because he was legally responsible for the debt. He and his new wife began to pitch and sway in perfect storm that had slowly been brewing for months. Then the unthinkable happened. He lost his job right after he had purchased an $8,000 HVAC system for his home. Can you imagine the pressure he had in trying to find a new job in order to save his marriage and avoid bankruptcy? He scrambled for a year in unemployment and the only reason why he didn’t fall over the brink was because he liquidated his Roth IRA. There was no penalty because according to him, all tax is paid before money enters an IRA, not after.
As for his wife’s debt problem, the collectors waited past the statute of limitations and were then unable to collect on it. Whether the complicated situation of a divorce and remarriage contributed to this I don’t know. But my friend says he wasn’t in the clear when the banks wrote off the total debt of $45,000. He had to reckon with the IRS because that total amount was considered profit. This, plus the fact that he lost his nest egg put him into grieving mode. However, he is now back on his feet and once again has a feeling of normalcy in his life.
Takeaways from this 2nd testimony
1) If you are about to get married, ask your future spouse deadpan questions about their finances so you know exactly what you are getting into.
2) Don’t buy luxury items even if there is a hint of a financial storm brewing. In my friend’s testimony, I’m sure an HVAC system was helpful, but not essential.
3) Start a Roth IRA and contribute to it whenever possible.
4) Before making any major financial decisions, understand the tax ramifications
5) One of the biggest factors that contributes to a divorce is financial instability. Make sure steps 1 to 4 are done and have a real career before you even consider getting married.