Mailvox: the loan trap

An older reader emails a cautionary tale:

Back in the 90’s I had several gold and platinum credit cards. I had a typical mortgage on a typical house. I had a good paying job with decent benefits. I had savings in the bank and was “investing” in a 401,000. I actually owned my Chevy suburban. My family was living the typical American dream, nice home, good cars, delivery pizza twice a week, etc., etc.

Then the job went away. It didn’t go down the street, it went overseas. But, I had years of education and training in electronics, computers and math, so another job was just a few resumes away, no problem.

During the time it took to send out 473 targeted resumes, the bank wanted their mortgage payments and the bills kept rolling in. At first, the payments came out of savings. Unemployment benefits mostly handled daily living expenses, and the savings would be replaced when a new job was found.

It takes very few mortgage payments to wipe out a modest savings account, and unemployment benefits disappear quickly. No problem, all the credit cards were sending blank checks with the monthly bill, so I started paying the mortgage with those credit card checks. Again, no problem, the credit cards would be paid back when the new job arrived.

It dawned on me (finally) that it was not just my job that had been exported, it had been the bulk of the industry. American IC chip foundries, IC chip manufacturers, IC chip designers … almost all gone to the Asian rim. I am told that in the process, we lost 3.5 million good paying jobs in America’s IC chip industry in less than 36 months.

It takes very few mortgage payments to Max out a credit card … try it sometime.

So here I was, no decent job in sight, savings gone, cards maxed, unemployment benefits used up, but the bills (of course) never skipped a beat.

So, we got a second mortgage on the house. That kept the bank and the credit card boys happy, along with food on the table… until it was gone.

Still stupid to the extreme, I was still clutching to the idea that a decent job was out there to be found. To stay afloat, my wife and I jointly decided to cash in the 401,000 for living expenses. Try to guess how much of the money we lost doing that.

Tell you what I finally found. A job in the paint department of a Super Walmart for six bucks an hour, NO benefits but workmen’s comp.

The house is gone. The Chevy suburban is gone. The credit cards are gone. The savings are gone. The 401k is gone. Our credit rating is tanked. The only thing we have now is Social Security, which allows us enough money for a one bedroom apartment in the “older” part of town, and we are driving an eleven year-old car with almost 100,000 miles on it. When it blows up, we walk.

My point?

I see many other Americans in exactly the same cycle as we were.

It would be easy to offer post-facto criticism of this man’s past decisions, but instead of people wasting space attempting to derive a smug sense of superiority by posting how they haven’t imitated him, I’d prefer to focus on some of the important lessons to be learned here.

First, an immediate lifestyle response to a reduction in income is REQUIRED. English novels from the nineteenth century were filled with the sad ends of those poor, short-sighted souls who were foolish enough to spend their capital; they may have been fictional but were salient examples to bear in mind nevertheless. Wealth derives from capital, ergo it must never be spent except in extreme emergencies.

Second, it is always easier to find a job if you have a job. Any job. It is quite common to make the mistake of thinking that if you don’t “waste time” working at an inferior position, you’ll be able to devote more time to job-hunting. That may be true, but the problem is opportunity cost and the subconscious message that unemployment sends to prospective employers.

TPAM, an attorney, took a floor job selling computers at Computer City after he was encouraged to leave the first law firm at which he worked over his reluctance to artificially inflate his billable hours. Not only did this job cushion the blow of his reduced income, but the computer knowledge he gained there gave him the leg up he needed to get a job as first a contract lawyer at a multi-billion dollar company, which eventually led to his becoming a director there. The fact that he was willing to take a “lesser” job did not harm him at all in the eyes of his prospective employer, instead it sent the message that he was a man who didn’t shirk from doing whatever needed to be done.

Another friend, a pretty MBA with a somewhat rosy-glassed approach to life, spent two fruitless years looking for the perfect job in New York. When I needed someone to fill in for a data entry position for three weeks, I called her and she took the job, more as a favor to me than anything else. In her next interview, the guy was impressed with her international experience and consulting contacts – however limited they were, she had more than the other applicants – and hired her to set up and run their London office.

Third, if you have a mortgage and lose your job, and you don’t get an equivalent job within two months, immediately sell the house and switch to rental accomodations. You can always get back into debt to buy another house, but a reluctance to take immediate steps in a vain attempt to preserve your lifestyle uninterrupted can mean losing the house, the capital and the lifestyle.

Fourth, credit is a killer. Debt kills perfectly profitable companies, it puts relationships under incredible pressure and it simply isn’t worth the ability to live beyond your present means. I know a number of wealthy people who spend more time worrying about their ability to maintain their lifestyle than they do enjoying it; a beer on your humble porch is much better than a bottle of Crystal a hotel balcony in Paris if you can’t afford to pay cash for the latter.

There will always be stories in the glossy magazines about how people have made zillions through leveraged investments. But the far more numerous stories about houses lost, bankruptcies, and relationships broken under the pressure of debt are seldom heard because they simply aren’t as sexy.

If you live within your means, you may not live a terribly exciting and glamorous life, but unlike the Joneses, you will be unlikely to eventually have cause to regret it.