What a Financial Trainwreck Can Teach Us

What a Financial Trainwreck Can Teach Us: Six Mistakes to Learn From

By Donna Freedman

A married couple recently confessed to some horrifying money blunders in an interview on the WealthSimple website. In their mid-40s and the parents of three kids, the pseudonymous Kate and Tom bring in $160,000 a year through their day jobs in insurance, with additional funds whenever Tom moonlights as a bartender for private parties.

Yet they have always spent more than they earned, and cannot seem to learn from previous mistakes. A few examples:

After wiping out their credit card balances a decade ago, they charged them back up even higher.

They have postponed paying back Kate’s law-school loans, which are now up to either $120,000 or $140,000 (she isn’t sure – and incidentally, she has never practiced law).

They spend “insane amounts” of money on groceries at places like Whole Foods (where one of their kids likes to snack on $15 sushi).

They bought their son a tux at prom time, because they couldn’t afford the rental fee but hadn’t yet maxed out the Nordstrom card.

Clearly this couple is a financial trainwreck. But they have something to teach us, if we’re willing to listen.

It’s easy to scorn the protagonists as entitled or clueless. You’d never be that foolish. You’d never go into debt, get yourself out, and then go back in. You’d never borrow from family members, or cash in a 401(k), or use a credit card to put your kids in private school.

Maybe you wouldn’t. Or maybe scorning other people’s mistakes keeps you from having to look too hard at your own behaviors.

If you’ve absolutely got a lock on your dollars, good for you. But keep in mind that all across the country, otherwise intelligent and rational people are spending more than they earn.

Losing Sight of What Matters

Some debtors have little choice. For example, someone going through a serious health issue or a protracted divorce can’t just check out of the ICU early or stop paying for legal representation.

Others, like Kate and Tom, have simply lost sight of the big picture in favor of short-term gratification: sushi, private school, a big house in a nice neighborhood.

This skewed perspective happened in such a gradual, boiling-the-frog way that they didn’t notice they couldn’t really afford the lifestyle enjoyed by their wealthy neighbors and the parents of their children’s classmates.

They’ve postponed the day of reckoning thanks to the availability of credit, including taking out loans online vs. having to face a loan official at a local bank. “We ask them for it, and they give us money. It’s ridiculous,” Kate said.

All of these are terrible decisions. Terrible, human decisions. As a species, we’re superb at ignoring the things we don’t want to face.

What Kate and Tom Can Teach Us

Kate and Tom didn’t set out to ruin themselves financially. Their wedding vows didn’t include a promise to “spend ourselves to the brink of bankruptcy, racking up so much debt we can’t sleep at night or even think straight.” Yet that’s what happened.

They messed up big-time and they’re finally admitting it. Coming clean publicly (if anonymously) is a huge service to others, because financial trainwreck stories are a reminder to examine our own lives.

Debt can be like quicksand in that you don’t know you’re sinking until it’s really hard – or maybe impossible – to escape. Rather than make fun of the couple for their massive foul-ups, consider them an object lesson. Learn from their mistakes.

Specifically, be honest with yourself: Could you wind up making the same kinds of mistakes? Or are you making them already?

Mistake #1: Believing Debt Just Sort of Happens

Here’s how Tom described their situation: “I think education loans probably started us on this path. But credit cards got us in trouble.”

Notice the detachment: An external force got us going and then another external force did this to us. He doesn’t say, “We overspent on education – especially on the law degree that Kate doesn’t even use – and then we bought too many things on credit.”

To continue reading, please go to the original article here:

https://www.thesimpledollar.com/what-a-financial-train-wreck-can-teach-us/