The problem is that it becomes apparent later on that the gourmet coffee, cable, and a weekly date they cut back on weren’t the problem. It turns out they’ve got much bigger expenses that they haven’t even touched: for one, they’ve got two rental properties which they own, are paying mortgages on, and have failed to find tenants for. For another, they just got a horse – which they are paying the equivalent of a car payment to maintain. They made room for that by cutting down on the several hundred dollars a month they were spending on gymnastics and ballet lessons.

The problem here is that if you focus obsessively on cutting down expenses like the $3 a month you pay to get an unlisted phone number, you are wasting your time if you haven’t already cut out the bigger chunks of fat from your budget, such as extra houses and ponies. If you’re having spending problems on $150,000 a year in Nebraska, cutting coupons is not going to help you. People who make $25,000 a year are the ones who benefit from that, because a lot of little savings can add up to a big chunk of their budgets. People who make six figures aren’t going to right the ship by cutting out the small things alone, because as a percentage of their paycheck saving a hundred bucks a month is not as big a deal. In this case, I think they’re using frugality as a crutch. The article states that the family used to make $250,000, until the husband recently lost his job. You’ve got a lot more room to waste money on a $250,000 income – that extra money is gravy in the sense that you’ve probably already paid for your house, cars, and basic costs of living. Any money above that isn’t really committed to any “need,” and $100,000 will buy you a lot of “wants.” The problem is that losing that money means you lose a lot of your ability to spend recklessly on stuff you want but don’t need. I don’t think this family has adjusted their mindset in the aftermath. They got the horse and the renthouses when they could afford it, and now they can’t. But they don’t want to give them up – and they’re using the excuse of being frugal about the little stuff as a way to justify keeping all the bigger toys.

This is one of those rare instances where I think being frugal can actually be a bad thing. It’s masking the real problems – true frugality would involve making a hard choice and giving up the stuff they don’t need, not making little savings here and there that aren’t going to add up to enough to solve their problems.

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The only problem? $44,000 is nowhere near enough to pay back that debt – especially in California, with its extremely high cost of living. The result is that even though she hasn’t started paying her $680 a month debt payment because of deferment, she already uses up 58% of her monthly income on rent and credit card debts. That extra $680 is going to be a budget breaker.

The suggestions to her for what to do now aren’t all that great, but really there’s not much to do at that point other than wait until she’s older and can make more money because of experience. The lesson anyone else should learn is this: just because you’re getting a professional degree doesn’t mean you’re going to make a lot of money. You shouldn’t go $150,000 in debt to get a graduate degree unless you’re sure that you’ll make enough to pay it off – and with many professions that’s not a sure thing. There are a lot of lawyers and MBA’s who pay $200,000 to get a degree at schools where the bottom part of the class just isn’t going to get those six figure jobs. Scholarships or going to a state school will often solve this – or the alternative of paying about the same at a really prestigious school where nearly everyone does well. But you can’t just assume that you’ll be able to pay off your diploma. There’s another very good article here that goes through a lot of examples of people who have run into this problem – including a pair of married acupuncturists who are $350,000 in debt. I’d take away these lessons if you’re thinking about a graduate degree:

1) Not everyone in your class will get the salary your school touts to you. Some people will do poorly and earn less – only 10% of your class can be in the top 10%.

2) You probably won’t earn the average salary in your field until you have more experience, so don’t expect to be able to pay off your student loans that way. Again, there are lots of exceptions (based on school, class performance, and profession) – but the reality is that a lot of people get degrees when they aren’t going to be at the top of their field starting out. Yet they get loans assuming they’ll be making those high salaries right out of the gate, and it often doesn’t work out that way.

3) Not every degree is worth getting. The non-profit leadership degree for $110,000 in that story is a good example – I’m sorry, but you won’t make enough working for non-profits to pay that off for some time. If you want to get a degree in social work, you shouldn’t do it unless it’s cheap.

4) Just because you’re a doctor or a lawyer doesn’t mean you’ll be rich. Sad but true – every average has people who run far below it, and salaries in these professions are no different.
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But as the children grew, so did the Schenkels’ expenses. When their small 3-bedroom home became a squeeze, they built a bigger one for $325,000, raising their mortgage payments to $2,500 a month. As the four kids inherited Kelli’s passion for gymnastics, the couple began spending $1,000 a month for classes and travel to competitions. And they couldn’t resist buying extras like the 50cc Suzuki motorcycle that Nate rides around on (predictably crashing into the deck and gashing an eyebrow shortly after learning to ride).

While the Schenkels have been pretty good about keeping track of their six lively children, they haven’t been as vigilant about tracking their cash flow. The price of neglect became clear when Jay Berger, an adviser with Integrated Wealth Management in Traverse City, Mich., recently met with the Schenkels (at Money’s request) for a financial planning session.

Sitting at their kitchen table, the couple were aghast to discover that they’re spending nearly $9,000 a year more than they earn and have drained most of their $112,000 home-equity line of credit. Plus, they have almost no savings – only $23,000 in retirement funds and no college funds at all for the kids.

This struck me as willful ignorance. No one spends $9,000 more than they make every year and then suddenly realizes it after they’ve burned through $100,000. But they do refuse to admit when they’ve got a serious problem – often moreso with money than anything else. In their late thirties, this couple will barely have enough time to right the ship – and that’s assuming extreme cutbacks in their spending. I do think that although the problems here weren’t initially caused by having so many kids, the size of the family has caused the budget issues to snowball – and anyone thinking about doing that ought to think twice. It’s not an absolute no-no, but the reality is that a child is a drain on your budget. Six children are only going to magnify that – and if you can’t afford it, you shouldn’t be trying to create your dream family just because it’s something you want. Everybody wants things – for some people it’s cars or houses, for others it’s vacations, and maybe for you it’s a big, loving, Brady Bunch sized family. The only problem is that you just can’t go blowing all your money on something just because you want it – even if it is something warm and fuzzy like a big family. If you spend $100,000 on your dream wedding and you make an average income, you’re going to regret it. And if you have more kids than you can afford to take care of, you’ll regret it later on, too. Dreams are great – but you can’t decide they’re going to come true regardless of the consequences. I think this particular decision is more likely than others to get people into a bind because it often has no logical basis. No parent of six is ever going to sit down and regret having one of their children. But if they’d really thought it through beforehand, it doesn’t seem like that good an idea unless you have a pretty high income – or some of your kids are already out the door. This family tried to have it both ways – all the spending and luxuries of a smaller family, with all the expenses of a larger one. It doesn’t work that way – if you don’t make a huge income and you want more kids, you’ll have to sacrifice some of your other dreams, period. And if you try to have it all, you’re going to dig yourself a financial hole you might not be able to get out of.

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One of the particularly useful tidbits of wisdom these posts have is something I haven’t seen mentioned as clearly elsewhere with regards to the negative effects of overspending using credit cards:

“Perhaps the biggest problem was that I allowed myself to appear much richer to my family in friends than I actually was. They began to have this impression that I was just made of money – and it just wasn’t true. But I felt this desire to keep up the charade because… well, because it made me feel good.”

This is a key point that I’m guessing will be the source of some problems in the future posts in the series (and was already mentioned again as the basis for overspending on his honeymoon, as he led his wife to believe he had more money than he did). Nobody else sees your finances. And it’s actually very common for people to “posture” towards each other – the only things that the Jones’s see are your house, your car, your clothes, and your stuff. If you’ve got it, you’re assumed to have money – because they don’t see your bills, your credit card balance, or your brokerage account. Too many people end up setting up a Potemkin life filled with stuff they can’t afford, teetering on the edge of collapse from the slightest financial difficulty. But those deceiving appearances have consequences beyond your balance sheet. If other people start to think you’ve got money you don’t have, they may expect you to share the wealth. Family members may not understand why you aren’t willing to help them out of a bind – because they don’t understand that you really don’t have the kind of money you project. That can lead to serious consequences for your relationship with them if things go sour – and if you’ve faked how much money you have, that’s virtually guaranteed to happen. Think about it – if you really did have tons of money, you wouldn’t care too much about making a loan to your loved ones. You might not even want it back. But if you don’t have much money and are deeply in debt yourself – you’ll need that money, and you’ll want the loan repaid. Your family members may not understand, however – if they see you as a greedy miser, when you’re really a desperate debtor, both of you are going to get angry if the loan isn’t paid on time.

And it isn’t just limited to loans. Friends who do have money may expect you to go out to expensive places. You won’t want to let the facade you’ve built up break down. You’ll have to spend – and you’ll only be digging the hole deeper.

That’s the kind of thing you can learn about through a retrospective. If you’ve got a blog, doing one is easy. If you don’t, just get out a pad of paper and divide your life up into stages. The Simple Dollar posts are a good outline, but you can also go by year or by decade. What mistakes did you make? What were you doing with your money? What would you do differently? Sit down and think about it, and reflect. Hopefully you can think of at least a few things to do differently in the future.

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1) They overpriced the home.

2) They had a lazy / bad broker who didn’t work to sell the house – and bungled the bids when they got a few.

3) They left it empty instead of “staging” it.

4) They moved out before testing the waters with the old house, and carried two mortgages.

The end result is that they’re running against the clock – at some point they have to sell the thing to make payments on the new mortgage, because right now they’re double-paying each month. That’s a bad situation to get yourself into – but you can take heart in that from what the story sounds like, you’d pretty much have to make ALL those mistakes to get that far along. If the broker hadn’t bungled the bids, they’d have sold above market. If they’d started out lower, they probably would have sold a long time ago. And even though they moved out before getting a good idea of what the market was like, they did at least have enough money to last six months without a sale. The last two may be debatable as to how much they constitute a mistake, but I think it’s safe to say they could have set up the transaction to run a little more smoothly by either doing more research or showing it before they moved, just to see what happened. At any rate, it’s something to be careful of – if you end up in that worst case scenario, you might have to be willing to knock quite a bit off your home price just to get out.

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Looking at the assets of Vanguard 401(k) plan participants, Ameriks found that those who were saving enough to retire comfortably had a median income of $69,000 and median assets of $200,000.

The group falling behind, with assets of just $38,000, earned more – a median of $83,000. “Clearly this group is spending relatively more of its income,” he says.

So on average, people who make more money are a lot worse at saving for retirement. I’m not sure whether this is from the attitude that they’ll just make more in the future anyway or from how easy it is to keep ramping up your spending as you make more money, but in either event it’s a good cautionary note. Making money won’t make you richer unless you spend some basic time laying out your budget and figuring out your retirement plan.

Then there’s the Shas, who started getting educated about finances a decade ago and are well on track to meet their planned goals. The lesson there?

Analyzing data from a 2004 national survey on the first wave of baby boomers, Lusardi and Mitchell found that those who did “a lot” of retirement preparation had a median net worth of $200,000, compared with $84,000 for those who did the least.

“Even a small amount of planning can make a huge difference,” says Lusardi. Those who did “a little” were also ahead, with a median net worth of $172,000. Planning pays off because it’s a crucial psychological trigger. Studies show that writing a plan down – or even simply thinking about it – greatly increases the likelihood that you will follow through.

That’s a pretty amazing difference. Preparing for retirement increases your net worth. I’ve long had a suspicion that the problem for most people is just that they want to stick their head in the sand – or they suffer from a taboo of not wanting to ever talk about money. It’s pretty clear that the people who are thinking about retirement are following through – largely because you’d have to be nuts not to.

Then you have the Jacobsohns – Jason, the husband, learned about compounding in college and was shocked into saving. The lesson: learning about personal finance leads to improvement in your finances –  

The study was done by Annmaria Lusardi, a professor of economics at Dartmouth College, and Olivia Mitchell, a professor of insurance and risk management at the University of Pennsylvania.

The findings: More right answers matched up with greater wealth. Those who grasped compound interest, for example, had a median net worth of $309,000 vs. $116,000 for those who missed the question.

In another study, Lusardi found that those who had attended retirement seminars had a 20% increase in net worth. Those with the least money and education got the most from the events, but even the wealthier profited.

It’s another good point, and it’s proof for the idea that people who learn about financial issues are able to implement that knowledge in ways that actually improve their lives. Anybody can grasp the basics of finance – it’s not very complicated stuff. It’s sort of like the Internet – everyone can figure out how to use it. Not everyone can do the most complicated stuff – but not everyone needs to.

Finally, there’s the Maldonados and the Halls. They teach the lesson that it’s best to save a set amount, every month, regardless of the markets – and that rather than managing your own portfolio, it can be a good idea to buy into funds that automatically reallocate assets based on your age. All good lessons to learn, illustrated by actual families.

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The bad? This sentence suggests she might not be saving all her money in the best investments:

After covering the rent for her one-bedroom apartment and all of her other day-to day expenses, she pours everything else into an online savings account where she earns around 5 percent interest and only transfers the money to her checking account as she needs it.

If she’s putting her money in there to earn 5 percent until she needs to spend it, then that’s smart. If she’s keeping all the extra money she saves towards retirement outside her 401(k) in a savings account, then that’s not so smart.

With this profile, though, most of it’s good. Like this:

And while that occupies a good portion of her free time, Nixon is also bolstering her resume, by working towards a masters’ degree in systems engineering at Southern Methodist University. But like most savvy savers, she’s doing it on someone else’s dime – her employer is picking up the tab.

If you can work that out, it’s always a great idea to let your current employer pay to boost your resume. And it’s surprisingly common. I get the feeling that most people just aren’t willing to ask – but I know several people who have gone into their employers with proposals to get an MBA or other degree at night and have gotten them approved. Sometimes they have to agree to stay for a certain period afterward or pay part of the costs – but it’s well worth it. The other thing that stood out as really smart was this:

By 2008, she hopes to at least double her $20,000 in short-term savings to cover a 20 percent down payment on a home and pay for a 17-foot runabout boat.

She’s saving up for something big she wants to buy! That used to be pretty standard, but today it’s so rare that it almost seems weird. You can buy anything on credit, and a boat is no exception. But instead of buying the stuff she wants every month and adding on more and more payments, she’s putting away the money and waiting until she has enough. And in the meantime, she’ll earn interest on the money. That’s a good basic personal finance lesson that everyone should keep in mind, especially once they get their finances to the ideal state of no credit card debt. Following that rule will help you keep it there.

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A series of recent events have exacerbated the differences in their financial styles. In January, Michael was offered a job in Phoenix, prompting the couple to move there from Chicago with their daughter Ava, 19 months. But Michael’s new position pays mostly on a commission basis, and Brittany’s hunt for part-time work has been stymied by the news that she’s expecting their second child in January.

Although Michael expects to be earning six figures again in a few years, at the moment their once comfortable $135,000-a-year dual income has dropped by more than half.

To make ends meet, they’ve burned through $11,000 of their $15,000 emergency savings and tapped $15,000 of a home-equity line of credit on their soon-to-be-sold Chicago condo.

It strikes me as a pretty bad idea to get in this position. The savings from moving to the lower cost of living area in Phoenix don’t seem to have materialized, especially if they’ve blown through $26,000 from the lower salary. The problem here seems to be a refusal to adjust their lifestyle in the face of a lower income. And that sounds like it’s going to get worse before it gets better – having a baby will only add to the expenses. Think about it this way – the $2500 the article says the husband spent on Christmas presents for the wife is nearly 4 percent of their current gross income! Imagine all the other random stuff he has to be spending money on. This is a good example of how one spouse can ruin the finances of the couple on their own, especially if there’s no resistance from the other side.

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