Financial Ruin, It’s Your Fault.

I don’t consider myself a genius when it comes to financial situations, more of a technician. You see the great thing about financial matters is that nearly all of them are neatly modelled by equations which fall under the typical engineer’s umbrella of expertise. For the most part however grasping the simple rules that govern your finances seems to elude most people and as such they get themselves into all manner of crazy financial situations. In the last few weeks I’ve come across two articles based around people I’d expect to have some financial sense about them but for one reason or another they’ve managed to push themselves to the brink of ruin:

SILVER SPRING, Md. — Paul Joegriner hasn’t worked since March 2008, when he was laid off from his $200,000-a-year job as chief executive officer of a small bank. But you wouldn’t know it by appearances.

His wife, Marzena, shuttles their two young children to private school every morning. The family recently vacationed in Virginia Beach, Va., and likes to dine on Porterhouse steaks. Since losing his job, Mr. Joegriner, 44 years old, has had several offers. He’s turned each down in hopes of landing a position comparable to what he held before.
When Severance Falls Short

The family’s lifestyle over the past year and a half has been propped up by a $200,000 severance package and another $100,000 in savings — funds the family has burned through rapidly. By Mr. Joegriner’s own calculations, the family will be out of money in six months if he doesn’t find work.

Or more infuriatingly, actively deluding themselves:

If there was anybody who should have avoided the mortgage catastrophe, it was I. As an economics reporter for The New York Times, I have been the paper’s chief eyes and ears on the Federal Reserve for the past six years. I watched Alan Greenspan and his successor, Ben S. Bernanke, at close range. I wrote several early-warning articles in 2004 about the spike in go-go mortgages. Before that, I had a hand in covering the Asian financial crisis of 1997, the Russia meltdown in 1998 and the dot-com collapse in 2000. I know a lot about the curveballs that the economy can throw at us.

But in 2004, I joined millions of otherwise-sane Americans in what we now know was a catastrophic binge on overpriced real estate and reckless mortgages. Nobody duped or hypnotized me. Like so many others — borrowers, lenders and the Wall Street dealmakers behind them — I just thought I could beat the odds. We all had our reasons. The brokers and dealmakers were scoring huge commissions. Ordinary homebuyers were stretching to get into first houses, or bigger houses, or better neighborhoods. Some were greedy, some were desperate and some were deceived.

It’s unfortunate that I see this exact same behaviour in so many people who then pine about how they can’t afford something or how life would be better if they were earning a lot more money. Truth is that unless you change your outlook on your expenditures as your income increases so will your spending and you’ll end up right back where you started. So while I can appreciate that some people’s financial situation may have been made harder by the global financial crisis I’ll go out on a limb here and say that the majority of them could have avoided any hardship had they taken a more keen interest in their finances.

Now probably the most important lessons I learnt about finances was from my parents. We weren’t poor by any stretch of the imagination, but we weren’t that well off either. Once I was older and my interests shifted to the more expensive world of computer hardware my parents decided that they couldn’t fuel my addiction any longer. I can still remember the words clearly: “We’re not letting you spend any more of our money”. So I asked, how can I get the things I want? 2 months later I was employed at Dick Smith Electronics and everything I wanted had to come out of my own pocket.

The problem with us Gen-Y folk is that we’re not used to waiting for the things we want. Subsequently the majority of us have racked up extremely expensive debt on depreciating lifestyle items. This then violates one of the rules of avoiding financial ruin: don’t spend more than you earn. Even with the GFC still working some of its magic on the credit market financial institutions are more than happy to extend you ludicrous amounts of credit on a whim. You may think this is just hyperbole but when I can apply for a credit card online and get instantly approved for a $15,000 limit (there was no verification of my income after the fact either) I know that there are still people out there who are taking the first steps to financial ruin. The easiest way to think of it is if you can’t afford it without having credit, you probably can’t afford it at all.

The other all too common trap people fall into is the one of keeping up appearances or keeping up with the Joneses. I used to lament the fact that I hadn’t travelled overseas as much as some of my friends or that I was still driving a 20 year old car but had I attempted to emulate their behaviour I’d be in serious financial trouble. It’s even harder for us Gen-Ys to resist the temptation to keep up with the latest trends as that’s what we’ve become accustomed to. This is then exaserbated by the fact that many of us would not have had a proper job until our early 20s instead relying on our parent’s income. Once that link is severed many will find it hard to keep up their lifestyle and turn to easy credit to bridge the gap.

I know every piece on financial planning ends up in the same conclusion and you’ll forgive me for driving this point home: do a budget. If you lay out all your income and expenses in front of you it becomes really clear how much is going where. If that’s too hard (I.E. you can’t figure out where all the cash is going) get a expenditure diary and whenever you buy something or pay a bill write it down in there. You’ll soon see all those little things that add up and can easily identify where some sacrifices can be made. Every little bit will help, and the sooner you do it the more likely you are to avoid running yourself into the grave financially.


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  1. I agree if only because I’ve never understood the mass use of credit cards. I’ve had one for over 2 years and used it for the first time the other week. I could technically cover the cost, but the card was easier and paid it off in full the following week. I’d love a new laptop, or TV and so taking on a second job to cover them. To put them on credit just so i can get them now seems absurd to me.
    That said, You and I both work in industries that pay significantly higher wages than most entry positions. IT in particular has ridiculous salaries compared to similarly trained professionals. I’m not taking anything away from your achievements, but if you were on 40k as a graduate (say you took a physics career given your space fascination) I’d expect you’d still live within your means, but hardly be in the financial position you are in (ie able to pay off houses and weddings and still think about travel). Just as some in Gen-y have huge credit bills, many others are simply putting off big life choices (house, marriage, family) because they simply couldn’t pay for them given their chosen industries salaries.

    That is, whilst everyone could choose to just pursue a high paying career instead of doing what they are good at/enjoy; and whilst everyone could make alternate financial choices, that doesn’t mean it’s always entirely their fault. You’ve told me before that a slightly deeper GFC could have caused you real strife even with your careful financial planning.

    What all this really proves however is that it is a gross failing of our society that we don’t make financial planning a core unit of study in school. We simply haven’t updated our education institutions for the modern era. (Or at least made it compulsory. I did Commerce and Economics at School, but was one of about 30/200 in my year who did)

  2. True, my choice of career has been rather fortuitous and as such I’ve managed to do quite a lot more than the average person of my age. If I had chosen a different career path that didn’t lead to such wealth quickly I definitely would have reconsidered a couple options. The second house and travel next year would have been completely off the books, but they’d be the only significant changes that would’ve slipped by the wayside.

    Gen-Y as a whole seems to be pushing back most of life’s big decisions to much later in life than their previous generations. As you detailed in one of your posts we’re delaying most of the big things in life because we can, unlike our forefathers. Whilst finances play a part in that I believe that it’s not the first thing that comes to mind, which is why many end up in financial holes.

    It’s true that there were several factors that would’ve lead to me being unemployed and in a tricky financial situation, although I will whole heartedly admit that the majority of them were under my control. The decision to take on contract jobs and buying a second house right before a wedding were both risky decisions to make at the time. Had I been so inclined I could have cancelled the house purchase saving me a cool $40,000 which would’ve bought me many months to recover had I not found another job.

    I think your last point drives the point home that I was trying to make. We often end up in these situations because we don’t consider them an important part of life. Whilst our education teaches us many of the basic things required to function in the wider world soft skills like basic budgeting and financial planning elude the majority. Whilst I’m ashamed to admit it the Accounting for Managers class I did as a part of my engineering degree was probably one the most helpful in this regard, even though it never failed to put me to sleep.

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