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When Life Happens: Series 2 - Repossession

Target group: Recent college graduates

Welcome back to the “When Life Happens” series! As you may recall in Series 1, Steve put himself in a really tough position and had to use his last resort in order to cover his expensive unforeseen medical bill. Today, we have another person who unfortunately was on the wrong side of “When Life Happens.”

Meet Adam aka the “Successful Guy”

Adam is a 27 year old single bachelor. He graduated from Loyola University with both an undergraduate degree in business and a Master of Business Administration (MBA). He currently lives in one of the most expensive states in the U.S., which is California. Adam has been known to be a very successful guy and landed a job a few years ago with one of the biggest consulting firms in the nation. He makes about $70,000 a year and bought a home about a year ago. One of Adam’s weaknesses, however, is his lack of financial management skills. Although he was able to buy a home due to his fairly high salary and good credit score, he simply doesn’t know how to manage his money well. He loves to travel and spends a great deal of his money on leisure activities. Adam also has a significant amount of student loans with a current balance of $100,000, which is due in eight years. He pays about $1,100 each month for his student loans. As the bachelor that he is, his home happens to be on the luxury side and he has a two bedroom condo, which he purchased for $300,000. He pays about $1,900 a month for all of his housing expenses. So already, Adam is responsible for paying $3,000 a month just for his housing and his student loans.

So let’s recap. We have an individual that doesn’t know how to manage his money well and already has to pay $3,000 a month in housing and student loan costs alone. Something’s bound to go wrong pretty soon.

Bad Habits

On top of Adam’s hefty monthly payments, he only saves about 10% of his paychecks each month in the bank, which is about $500 each month or $6,000 each year. For your average individual, this amount actually isn’t that bad. However, Adam puts himself at risk in the event of an emergency because based on just two of his monthly expenses, Adam doesn’t save enough. To add insult to injury, Adam just purchased a brand new BMW for $40,000 and pays about $700 a month for it. He also has to eat, workout, enjoy his leisure activities, save for retirement, and all the other necessary things that he “must” do. Add all of those expenses up and it amounts to about $800 a month. So $3,000 for the house and the student loans, $700 for the car, and $800 for his other expenses equal $4,500 a month in total. He makes about $5,800 a month pre-tax. So prepare for the worst.

The Tragedy

Adam was truly enjoying life and living the American dream. He had to the job he wanted, the car of his dreams, the home he desired, and the lifestyle almost everyone wish they had. Adam was also a good performer at his job and had everything going his way. One day, Adam received a phone call that his company had been acquired by one of their largest competitors. And what does this typically lead to? Layoffs. And guess who was one of the first people in line to lose their jobs? Adam found out a few days later that his position was being eliminated due to budget reasons and other restructuring reasons. As you can imagine, Adam wasn’t prepared for this. He was told that he had to leave within the next month. Adam was so shocked that he took a week off of work and didn’t start applying for a new job until the last day of his vacation. Fast forward a month later and Adam is now unemployed. He applied for a few positions, but hasn’t had any positive results so far. Adam is in a state of panic and even had a mini heart attack that sent him to the emergency room for a few days. Luckily he had enough money saved up to cover the bill. But as you can recall, Adam has $4,500 a month worth of bills that he has to pay.

At this point, he had about $9,000 in the bank, just enough to cover two months’ worth of bills. His job was his only source of income. Fast forward another month and Adam still hasn’t found a job yet. He’s only down to his last bit of savings, just enough to cover his bills for one more month. He tried to cut back on his food and his other miscellaneous expenses. He somehow managed to cut $500 out of the budget, leaving him with $4,000 worth of bills. Another month passes by and Adam still has not found a job. At this point, he’s ready to give up on life. He stepped up his search efforts, but was told by some potential employers that his application was still being processed. Let’s fast forward another month and Adam still doesn’t have a job, forcing him to miss part of his mortgage payment, all of his student loan payment, and all of his car payment. His car was repossessed about twenty days after missing the payment. His mortgage lender was generous enough to let him keep the house, but was warned that he shouldn’t miss anymore payments along with being charged a late fee. A few days later after his car was repossessed, Adam finally received a phone call that he got a new job and that he can start in a week. He was extremely excited, but also knew that another month’s worth of payments are coming up. He ended up missing yet another mortgage and student loan payment, and he received a notice of foreclosure on his home. His student loan lender was more generous and charged a late fee along with a warning. Luckily, he reached a settlement with his mortgage lender and agreed to make all of his missed payments within a specified period of time in order to keep the home.

Adam quickly realized that when life happens, things get real. His new job paid a higher salary ($85,000) and he was able to start making payments toward his delinquent bills. What if he lost this job? What if an emergency happened? What if his home actually got foreclosed? Do you see where this is going?

The Solution

Clearly, there were a lot of things that went wrong for Adam. He didn’t have enough money saved in the bank. He was living beyond his means. He didn’t have another source of income. First things first: you should never live beyond your means. Although Adam’s monthly income was higher than his monthly expenses, he wasn’t able to save as much as he should nor was he able to invest his money in a profitable investment. A home is certainly a great investment and there’s nothing wrong with driving the car of your dreams, but was there a more cost effective route? Maybe Adam could’ve bought a less expensive house. Maybe there was a very nice used BMW that he could’ve paid almost half the price for. Living beyond your means can and typically will set you up for failure.

Next, Adam didn’t have enough money saved in the bank. A strategic rule of thumb is to always have in the bank at least three to six months’ worth of your total monthly expenses. The reason for this rule is because it typically takes at least three months for someone to find another job. Adam only had two months’ worth of savings when the tragedy happened. He would’ve been in a slightly better position had he had three months’ worth of savings and would’ve certainly kept his car and not been delinquent on other loans had he had six months’ worth of savings.

Lastly, Adam only had one source of income, which is one of the biggest mistakes you can possibly make in life. I’m sure Adam had some other talents that he could’ve put to use. Maybe he’s physically fit and likes to work out. Maybe he can be a physical trainer or something along those lines. He also doesn’t have any investments such as stocks, preventing him from making any major returns on his money. By having multiple sources of income, you mitigate the impact of what losing one source can have on you. And what was he doing during the whole time while he was unemployed? I’m sure he could’ve found a side hustle or two.

Moral of the story: either have enough money saved up in the bank or find ways to make more money to live the lifestyle you truly desire or change your lifestyle to fit what you can afford with the money you have/make.

If you have any questions, please don’t hesitate to reach out to me.