Debt has become the American way. So has denial. And superhigh debt levels paired with serious denial is becoming ubiquitous. While not all debt situations reach critical levels, when they do, the response must be equally severe.
Kevin, 24, has $19,000 in credit-card debt, drives a heavily financed, $45,000 high-performance car ($480 monthly payments) and still lives at home because he cannot afford to move out. In addition to his debt, he pays $2,400 a year for car insurance and $3,000 on gasoline, all on less than $20,000 annual net income.
Kevin needs to sell the car and buy a bicycle or a bus pass and get serious about his life. With no new debt and $787 monthly debt payments, he can be debt-free in 29 months. He also must sell all of his toys, pack his lunch and stop spending on anything that is not essential.
The Lewis family bought the home of their dreams eight years ago. In order to get the bigger model, the great floor plan and upgrades on all amenities, they opted for creative financing. Their highly leveraged, variable rate mortgage and a home equity line of credit eat up nearly 60 percent of their net, two-paycheck household income. Add on child care, car payments, credit-card debt and life essentials, and they are digging the equivalent of a financial grave.
The Lewises must sit down, take a big collective deep breath and get serious about their lives. What is really important? Is it
This family needs to plant a For Sale sign -- yes, even in this market -- in the front yard today. They can't afford this home. Period. It's time to pare down and pack up.
Meet Patty, 61. Everything was going great until her husband suddenly lost his job along with their health insurance. Patty arranged to enroll in her employer's plan during the next open season, which would commence just four weeks hence. And that's when she became ill.
Because she incurred big medical bills before she could enroll, Patty and her husband went from being financially sound to critical in a matter of weeks.
Extreme medical debt.
As soon as Patty was back on her feet, she took on a side job. A paper route. Every day at 3 a.m., Patty picks up the papers and walks her route, carefully placing a newspaper at the front door of each customer. Patty lives in Montana, where the weather is often severe. So far, her coldest morning has been 24 below. She receives $327 net per month, all of which goes straight to the debt.
"It's not that bad," said Patty. "I'm getting a lot of exercise, and I'm thankful for the additional income."
Write to mary@everydaycheap skate.com or Everyday Cheapskate, P.O. Box 2099, Cypress, CA 90630.