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Mistakes from the Financially Unimaginative

This past weekend I was listening to NPR (National Public Radio), my favorite source for news and general knowledge on the radio, and I happened upon their finance talk show called Marketplace.

It’s a good show and usually has some good, if not interesting, tips and trends to enlighten me with. Well, in this episode the Marketplace gurus decided to take on outside callers in a segment they called Getting personal: Where to park extra money.

Normally, as soon as outside callers are involved in any radio show I change station or just turn the radio off. I don’t really care what opinions the general mass has on relevant topics, mostly they either agree with the host (which is pointless) or they spit out some view that is about as relevant as the humidity of a monkey’s ass is to a lion stocking its prey. BUT, for this show I decided to continue listening to see what the callers might say…hoping that they wouldn’t drive me nuts immediately…I was wrong.

Along Came Sue

The first caller (let’s call her Sue) was a single Mom who apparently was about to be given a large inheritance from her Mother. Sue explained that her Mom and Dad divorced when she was young and that her Dad helped her out through college (she eventually earned a Masters in Fine Arts) while her Mom didn’t have the financial means to help out at all. But, now that her Mom received the inheritance she wants to give Sue a large chunk of it to help her out.

Well, right now Sue is a “writer” which she jokingly clarified meant that she works at a bookstore. She didn’t say what position she holds, but I’m assuming it’s a standard position that any high school kid (or at least high school graduate) could get with enough time working at the store (meaning it’s not financially justifying her degree).

However, she did mention that she was going to be published next year (2011). She didn’t seem too thrilled by that idea so I’m not sure if it is a self-publishing deal or something really small BUT either way I’m impressed. To take the time to write an entire book worthy of any type of publishing (and I’m going to give her the benefit of the doubt that with her Masters in Fine Art she can at least write) is a challenge and should be respected when accomplished.

The Pickle…

The reason Sue called in is because she didn’t know what to do with the inheritance money she was going to receive. Her Masters of Fine Arts degree left her with a $38,000 debt in the form of federal loans (I believe it was $38,000…maybe it was $37K or $39K…either way it was basically $40K). And the interest rate she had on the loan was six point something…which according to the radio hosts was a bit above normal.

As I mentioned above, she’s a single Mom. Her son is two years old and they live together in a small one bedroom apartment. She obviously doesn’t make much money from her bookstore job and she admittedly stated that she lives month-to-month and paycheck-to-paycheck.

NOW, she said her pickle was that she wasn’t sure what was the best avenue to use her inherited money. She asked if she should (1) pay of her student loan completely, (2) pay off a portion of her loan and put the rest into savings or (3) pay off a portion of her loan and put the rest in a down payment on a house for her and her son…

MY HEAD EXPLODED!!!

My dear Reader, do you know which choice our Sue wanted to go with? Can you guess which one she preferred and hoped the Marketplace hosts would advise her to go with?

Of course it’s choice number 3!!! Because everyone needs a home, and little Billy (that’s the generic name I’m giving her son) needs a house to grow up in because an apartment is no place for a growing boy. If you can’t sense the sarcasm I’m shooting out of this page…I need to learn to write better because if this were a video blog you’d CLEARLY SEE how sarcastic I was just being…

This woman who can BARELY afford what she has now and who lives, by her own accord, month-to-month thinks it’s a good idea (no, the BEST idea) to pay off a chunk of her loan and then buy and house…seriously! And the worse part is that when the radio hosts asked her why she felt that was the best decision. She admitted that the idea of owning her own home is more secure then renting…WHAT?!!

According to her first option above, her inheritance is large enough to pay off her ENTIRE student loan. So let’s just make the guess that she’s getting AT LEAST $40,000…cash, cleared….ALL HERS TO DO WITH WHAT SHE WANTS!!! Now, she lives in a one bedroom apartment making butt-little money per month to support her and her son. Well, unless she didn’t disclose her full financials (which I’m sure she did) she currently CAN AFFORD to pay for her and her sons living WHILST still paying off her student loan. Meaning, that if she didn’t get the inheritance she’d still be technically fine…broke, but fine.

So here’s Sue. She’s a single Mother living paycheck-to-paycheck but is financially stable and might even have the potential to make millions should her authorship take off. She has a debt of around $40K BUT she has a flat monthly fee (that if she played her cards right WON’T increase for the life the repayment…that’s how mine is, it’s not hard to do) that she CAN AFFORD right NOW! And now, precious Sue has been given 40 thousand dollars in CASH (after taxes, because if she said she could pay off the loan, she must have that much after paying back big brother).

Now, assuming she’s working a regular job she’s probably making around $30K a year (probably less actually) but after taxes she’s clearing probably $25K (probably less) per year. So, she’s living the current life she has with her son, in their home (it may not be a house but it is their home), paying off all her bills for a mere $25K per year. BUT, she now has $40K in cash in her bank. What does that mean?

It means that she has a little over ONE YEAR AND A HALF (40 / 25 = 1.6) of on-hand cash reserves should anything happen (like she loses her job). Do you guys understand what I just said? Sue was just given an entire year and more of living expenses paid in case ANY emergency happens…that sounds like security to me.

Yet, somehow she thought it wise to throw away all the money to pay off some of her debt (even though she can afford the static monthly payments) and then buy a house where she’d then have to live month-to-month once again.

Her excuse?! Because she’s a home-body and wants her son to have a backyard to play in and blah, blah, blah. My rebuttal to that is (1) your son is two years old, he’s happy playing in a box…he couldn’t care where he lived as long as it was with you so get over that excuse. And (2) if you were so obsessed with owning a home and having all these material things then why get a degree in “Fine Arts” and be a writer? Why not go for a quick and easy money field (engineering or something) so you could get your big house right way? Why? Because you chose to follow your passion and pursue your love of writing, well bravo, I agree that is the best choice you could have made BUT don’t give up yourself just yet.

You don’t make enough money to buy a home so don’t even think about it. Make sure your book is a best seller and then get the house of your dreams. But right now, take the money and use it as an ultimate security blanket and save it. Let it be there for you when you need to take the jump to success and you need financing to back you up.

And guess what, the Marketplace people agreed with me. They recommended she follow her number 2 action. Which was to pay off some of the debt and then save the rest. Since she has a nice year and a half worth of living in cash, I’d say pay off the half to the loan and just keep a years worth of living in the bank. So, $15K to your loan and $25K to your bank.

Readers, if you don’t understand why my head exploded when listening to the show. Or if you don’t know why number 3 was such a BAD decision…please do some reading and studying. There is far more to life than owning a home or paying off pointless debt. Use your money to support you and your life long goals, don’t use it to create some false sense of success (buying what you can’t afford) or horde it for a rainy day that will never come (you really shouldn’t save more than an entire years worth of living unless you’re old and are going to die soon…if you’re young, use the extra money above that to make more money).

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