Wrong Path?

This post I decided to dedicate to the topic of people in my life making poor financial decisions.

Situation 1

One of my friends recently moved from out of state to the DFW area. She has been looking for work for the past few months. Thanks to her connections, she will likely be getting a well paying job within the next few months. The couple took out a 401(k) loan that they plan to pay back over the next few months. Without the 401(k) money as a resource they would be on seriously shaky financial ground. Flash forward to today, they just moved into a luxury apartment for the rent is $1300 dollars per month (my apt is a comparable size, in a slightly less desirable location but still 5 minutes away and $773). Eventually they plan on purchasing a house, but today she doesn’t have a job and for all intents and purposes he doesn’t have a job.

A few years ago they owned a home in another state that went through a short sale because of the downturn in the real estate market. For as long as I’ve known them the husband has not had a full-time job to help support his wife, instead he chose to pursue his passion for theology which doesn’t really pay well and he earns nothing from. I think most people would have a come to Jesus moment where they would work a job that is not ideal but helps their family hit their financial goals. This has not been the case.

The wife is also providing financial assistance to her parents and brother. My guess is this has amounted to over $100k over the past decade. It’s very noble that she’s cares so much about her family, but I don’t think she is concerned enough about herself.

It’s not my place to cast judgment on my friends, but I wish I was able to impart wisdom on them. They haven’t realized it now but I think they’re setting themselves up for financial failure in the long run. looking at the power of compounding, the importance of having a sizable nest egg and not living beyond your means, They’re failing on multiple counts. On the bright side I think she will be back on target in the next 2-3 years. I have tried to help the husband with finding a job but haven’t been so successful at that. He doesn’t seem very motivated and I can’t force someone to be driven. Sure I believe in the power of faith but also that god allows us to help ourselves.

Situation 2

One of my other friends recently confided in me she has over $120,000 dollars in student loan debt. At what interest rates you might ask? Between 5-9%. Currently she is on the income-based repayment plan, commonly referred to as IBR. She quit her stressful corporate job and instead works as a babysitter. Although she’s well paid for what she does, she’s making minimum payments on her loans while interest accrues. Combined she and her husband grossed over $100k last year. Gross vs net though, two very different things.

Let’s look at a compounding. Starting out with a $120k balance and paying $300/mo. I don’t know exactly how much she pays but it’s probably less than that. I used this calculator so no idea how accurate the numbers really are.
Year 1 : $127,505
Year 2 : $135,713
Year 3 : $144,692
Year 4 : $154,512
Year 5 : $165,254
Year 6 : $177,004
Year 7 : $189,856
Year 8 : $203,914
Year 9 : $219,290
Year 10 : $236,109

Luckily in her case she is set to inherit 2 houses in the US and another in another country. Down to road she could sell those and be student free. Not everyone has this luxury and what does that leave her with? An underfunded retirement plan, no real estate and probably some hefty tax bills. She’s given up hope and is just paying what she can for now.

My father died with serious debt. Over $50k as I recall, mostly from medical expenses. I wasn’t blessed with a silver spoon in my mouth. I’m not perfect. I love my friends and family and wish the best for them. Seeing my father poor from the age of 2 up until I was 20 left a lasting impression on me. He didn’t have any much control over his situation, due to his renal failure. As long as I am able to I’m gonna fight damn hard to learn from all of this. To do otherwise would just be plain ignorant Life is more than money, but a few poor decisions can haunt us for a lifetime.

Why We’re Buying a Townhouse

In my last post, I mentioned my partner and I are in the process of buying a townhouse.  We don’t have a whole lot of money saved for a down payment, but needed to have the deal closed before July 2012.

Why the heck would someone in over 40,000 in debt be a coborrower on a mortgage for a townhouse?

  • Closing Cost Benefit – Since we moved, as part of our relocation package my partner’s company will pay for closing costs provided we close by a certain date.  Value: $2500.
  • FHA Qualification – We did an FHA loan, which only requires 3.5% down by closing and before April 1st only required 1% of the value.  20% down would be ideal, but with our incomes / rent I don’t think it’s realistic.
  • Rent – We live in a nice apartment, but it is $1300/mo.  Round up to 16000/yr just for rent with no equity.  Our mortgage will be under 150k.  In 10 years at what we pay now, the bulk of our townhouse would be paid off.  We also pay for gas each month, for our hot water heater and a fireplace we never use, adding about $40/mo to our bill.
  • Utilities – Our electricity bill in the summer time is between 200 and 300 per month for July and August.  One of the downsides to living in a 3rd floor apartment with lots of sunlight / poor insulation.  This townhouse has a new HVAC unit, energy efficient appliances and lots of shade.
  • Space – The 1300 sq footage for our place is fine now, but 1800 is much better especially when friends or family come over.  It also has 3 bedrooms vs 2.
  • Housing Market – Sure it could get worse, but I don’t think it can go much lower than it is right now.  Our complex will likely try to raise our rent after this year is up by 100/mo.

The property has been fully inspected, passed with the exception of some electrical issues (not up to code, couple thousand to fix) the seller has agreed to fix before closing date and minor roof work we are going to have done for ~$200.  Like most properties in the area, it has had foundation work done recently.  In New York that might be a red flag, but in Texas it’s business as usual.

I believe our mortgage payment will slightly lower than our rent right now, including homeowners insurance, taxes, pmi and interest (~3.65% rate iirc).  My partner could afford to pay for it all on his salary, but we’re doing this together and are in it for the long haul.  I am definitely looking forward to buying a home.  Before we moved I never would’ve thought it was possible.  Definitely not on Long Island where property values and taxes are twice as high as Dallas….

On my way to work now, but will update more soon.