Price protection for home sellers?
Ugh- just what we need, insurance to protect us against yet another thing that we could “self-insure” against if we wanted to do so. See what I’m talking about by reading this article in the NY Times.
This product, for a percentage point or two of the value of the home when purchased, will insure you against loss of value.
The companies offering this product, I would guess, are betting the success of this product on a couple of strategic assumptions:
1. It assumes that there is a decent chance that a home buyer is only considering staying in their home a short period of time, probably 5 years or less, before moving to a different city, a different place in their city, or to a larger home. If someone plans to move in just a few short years, they may be more likely to purchase this insurance to protect the potential “down side” they would experience if their local housing market tanked and their house plummeted in value right as they were needing to sell it. Rather than having to come up with funds out of pocket, this insurance plan would provide for them.
2. The plans are catering to buyers with little down payment. While most home buyers with substantial down payments would never dream of buying home value insurance, individuals with little or no down payment often understand the risk they are taking and would like to have a way to mitigate that risk. They don’t want to find themselves in the same situation as their old neighbor, or as their near-bankrupt relatives who paid dearly to sell a depreciated house they couldn’t afford due a simultaneous drop in the housing market and loss of their own job and income.
While home value insurance may be helpful for some, if you buy a home you plan to live in for a while– and if you buy it with a decent down payment, there’s no need for these products and it adds yet more costs related to the home purchase transaction. Ironically, one of the major arguments to staying in a house for a while before selling is that the real estate transaction cost incurred when you sell makes up a smaller percentage of your home’s equity than it would over a longer period of time. And yet this product, which itself aims to protect your equity position in your home, just adds to that cost burden.
It will be interesting to see how these products progress — will insurance regulators step in to regulate these products as what they are (insurance!), and what will be the opinion of personal financial coaches and advisors are on these products in the coming years…? Time will tell.
Netflix would never send a collections letter
Last week I received a collections letter; alarmed, I opened it and to my surprise it was from Blockbuster.
I have always been extremely careful to pay bills in full and on time, and I can only remember receiving one other true “collections letter” which was simply due to a mix-up over charges that was quickly remediated. So the receipt of this letter was so offensive that it tempts me to terminate my account with Blockbuster.
Blockbuster claimed I owed $16.23 on my account with them. Whether this was in late charges, or one of those fees related to “we guess you’re buying the movie since you didn’t return it promptly”, I’m not sure. Blockbuster’s payment terms have always been confusing to me. In fact, a couple of years ago shortly after implementation of Blockbuster’s current late fee policy, an employee even discouraged me from paying off a small balance during a visit to a store, saying instead “don’t worry about it, just pay next time you come in”.
What we see here, really, is a business model gone awry. It was widely reported last week that Blockbuster has recently announced they will be closing 960 stores; this move comes as no surprise to the industry as it simply proves what many have known for a while — that the bricks-and-mortar video rental business is in steep decline with heavy competition from mail-based and kiosk-based video rental companies. And this article pegs the market share of the various types of companies operating in the video rental space as follows: “[video rental kiosks] now comprise 19 percent of all video rentals nationwide, with subscription services such as Netflix accounting for 36 percent and brick-and-mortar stores like Blockbuster and Hollywood Video 45 percent”.
This would have been unthinkable several years ago, but the reality of CONVENIENCE and LOW COST demonstrated by Netflix and their sub-$10/month plans, along with the popular, $1 movie kiosk RedBox (owned by Coinstar, Inc.) has won out in the long run.
It is interesting how often the most convenient product also turns out to be the least expensive. Why? Because new products and services often make use of new or innovative technology (online movie selection in the case of NetFlix) or new distribution channels (online movie viewing for TiVo, NetFlix and others). As a result, they avoid “legacy costs” such as the pricy rental of a physical storefront, employees that may stand idle for 40% of the time when not helping customers, etc. Along with that, a savvy pricing and payment collections model (recurring, inexpensive credit card charges for Netflix, or the swiping of a credit card in a RedBox machine) ensures that customers will not be bothered with collection letters that accuse you of committing a financial sin due to a delay in returning a movie to that physical store much out of your way.
It should be obvious Blockbuster won no points whatsoever from me with their collection letter. If anything, they furthered my preference for the Netflix service we subscribe to as a family. Who wants to deal with a company that is unclear on what they will charge you and when they will require it to be paid? This is where business finance meets personal finance. The fact of the matter is, I wouldn’t mind a bit if Blockbuster asked me during my next store visit (if and when that ever occurs again) to give them my credit card or debit card number so they could automatically take care of miscellaneous balances, etc. when I racked up late fees. I wouldn’t mind a bit.
Anything is better than being threatened with a collections letter from a collections agency, when you’ve received nothing from Blockbuster stating you have a balance due, and when store employees in the past have actually discouraged you from paying off your balance.
Charitable giving correlated to prosperity, not tax deductibility…
Paul Sullivan, writing in the NY Times the other day, makes an interesting statement about charitable giving behavior:
“While there is not a direct correlation between tax deductibility and personal donations, there is a correlation between increased taxes in a continued weak economy and charitable giving.”
The article this quote was taken from, “All This Anger Against the Rich May Be Unhealthy”, analyzes the popular past time in our country at the present of criticizing the wealthy and tries to dispel some public misconceptions.
Sullivan’s statement and the evidence that backs it up is intriguing because it debunks the view that the wealthy only give in order to reduce their tax burden.
Why does it disprove this misconception? Two reasons can be extracted from Sullivan’s statement:
- Increased tax DEDUCTIBILITY does not necessarily lead to more giving. There are various limitations on how much a corporation, individual, etc. can give and the gift still be fully deductible. These limits vary based on several factors, including the size of the gift, the type of the gift (cash, real estate, etc.), and the income of the giver. As deductibility rules fluctuate, however, giving does not — meaning that individuals/companies are not inspecting current tax rules and then making a decision to give or not to give.
- Increased TAXES in a WEAK ECONOMY does lead to a decrease in giving. Why? Because in a weak economy, corporate profits and personal income is typically lower on average, and if the government is at the same time taking a higher percentage of a lower number, then it logically follows that fewer dollars are available to give charitably, or to use to reinvest in the business which could include uses such as employing more individuals.
It is unfortunate that it takes this type of evidence to debunk that view, as anyone with basic arithmetic skills knows it doesn’t make sense to give away a dollar to save 40 cents anyway. Most people (wealthy, average/middle class, or even struggling financially) give because they care about the cause or organization they are giving to! Why else would they part with the other 60 cents?
I cannot claim that human selfishness does not impact giving decisions one way or the other — this would be blatantly false as human nature includes that very powerful force of selfishness that few are regularly unaffected by.
However, I do think it’s important to point out that giving is not primarily a financial, tax-reduction activity for most who give charitably — rather it is a practice that many do, and increasingly so when the economy is prospering.
Saving for a home down payment: 4 BENEFITS
I read an interesting article the other day which reviewed a book written back in 2005 — the book was about the elimination of down payments and the related fraud in the mortgage industry that often allowed people to qualify for mortgages for which they would have not otherwise been approved (see the article by clicking here). It basically puts mortgage fraud and $0-down mortgages in the same camp — they each existed because the other did.
Mortgage fraud aside, however, one still might ask “is there really anything wrong with a $0 money-down mortgage?”
If by “wrong” you mean something inethical or morally wrong, then probably not, of course. If by “wrong” you mean ill-advised, then I would say YES it is ill-advised. Many financial counselors and planners alike have recommended sizable down payments forever, and yet many (usually those looking to buy a house with little cash) write off the advice as “legalistic” or “not practical”.
Instead of chiding those of you who have taken the $0 down or minimal down payment approach (because I too have done the $0-down thing in my less-informed past, though I’m now free of such an arrangement), let me instead focus here on FOUR BENEFITS of saving for a down payment.
There are other issues with home mortgages of course – how long of a mortgage do you get, is it possible to put too MUCH money down on a house, etc. — but those I will save to discuss another time. For now I’ll stick to my discussion on the benefits of saving up a down payment.
BENEFIT #1: IT LIMITS THE AMOUNT OF HOUSE YOU BUY TO A DOLLAR AMOUNT WITHIN YOUR BUDGET
There is some scary reverse psychology that most Americans have bought into (pun intended) that goes something like this– “the less I have to put down on a purchase (car, house, etc.), the better I can afford it!”. In fact, the OPPOSITE is true. The very fact you cannot save money to place down on the purchase should give you pause, and make you wonder if you can afford the monthly payments on the new purchase.
But when you force yourself to save money down for a house, you automatically limit the value of the house you can buy to the value of a house you can actually afford. I, along with many personal finance coaches, recommend you save up a down payment of at least 20% of the home’s value, and preferably, another 5% or so to fund new furnishings, minor improvements, etc. that each new homeowner inevitably wants (financial planner Dennis Stearns, according to this article, claims new homeowners on average spend 3.6% to 4.5% of the value of a recently purchased home on improvements alone). Note that this total 25% home savings should be beyond what you would hold in your emergency fund (typically made up of 3-6 months worth of expenses). Some might argue that a base down payment of 20% (plus improvement/move-in costs) is excessive, and that one can lower their risk and mortgage payment by saving up 10% or 15%. While that is certainly true, and while doing so is better than putting down no money at all, I explain below an additional benefit of saving a full 20% — avoiding the cost of private mortgage insurance, or PMI.
Let’s look at an example of how this actually works out.
A- Let’s assume your family has a household income of $75,000, resulting in net “take home” pay of about $55,000 (assuming a couple of kids and typical deductions).
B- You would like to purchase a house in an area that will cost you somewhere in the range of $200,000.
C- According to my recommendation, you would need to save up about $50,000. If you as a family are able to save 15% of your take-home pay, or $8,250, then at that pace if would take you about 6 years to save up for a down payment.
D- If that makes you say “yikes, six years!” then you can either attempt to save up more quickly, or scale down your plans in terms of price/size of house. If you instead aim at a $150,000 house, you could save up the 25% for down payment and initial expenses of $37,500 in about 4 1/2 years. Cut spending and save a bit more, for example save 20% of your take-home pay ($11,000 per year) and you could have 25% of a $150,000 house saved up and be ready to buy such a house in about 3 1/2 years.
Ultimately, most people will find that the closer to 2 or 2.5 times their annual gross income the price of their house is, the more likely they will be able to save for a down payment, and then make the payments on that house successfully.
Unfortunately, the mortgage world is still full of lenders that will loan you 95% or 100% of the value of your house and who would often like to sell you a house costing 3 to 4 times your annual gross income. Think about it – mortgage brokers are typically paid a percentage of the loan amount, so the more they can get you to borrow, the better off they are!
BENEFIT #2: IT LOWERS THE CHANCE THAT FUTURE FINANCIAL DIFFICULTIES WILL DEVASTATE YOUR FINANCIAL WORLD
When you have 20% or greater equity in your home from day one of your ownership you lower the odds that your mortgage payment will contribute to future financial devastation of your family. There is both a direct and indirect reason for this:
INDIRECTLY, by getting into a financial position of saving for your home purchase, you are unlikely to fall behind on your mortgage payments due to overspending as you had to create a disciplined financial environment in your family in order to save for the purchase to begin with.
DIRECTLY speaking, with ownership in a home that is worth substantially more than the debt you have on it, you have a “cushion” of net worth that can be accessed. Although equity loans are certainly available and though I recommend against them, the main thing I have in mind here is that should severe financial difficulty affect your family (such as a loss of all family income), and you burn through your several months of emergency funds and are still struggling, you could sell your home quickly at a good price and still come out with some cash in hand. Families who owe almost as much on their home as its value of their home, or who owe even more than the home’s value, put themselves at significant risk in the event their income drops or disappears altogether. Another DIRECT reason for the benefit of having equity in your home is that, in the event that life circumstances change and require you to move to another part of your city, or another city altogether, it is unlikely that property values will drop by more than 20% and so even though it will not be pleasant, you WILL be able to sell your house if you absolutely must.
BENEFIT #3: IT LOWERS YOUR MORTGAGE PAYMENT!!
See the chart to the right, which demonstrates the difference in monthly payments (loan principal + interest only) on a mortgage with 20% down as compared to 5% down (assumes 5% interest rate and a 15-year term). Note the substantial payment difference with the home values ($150,000-$200,000) used in our example above — there’s hundreds of dollars of monthly difference in the payments! And of course the difference grows even larger as the size of the home grows.
This is an obvious benefit that I don’t think many people think about when weighing the idea of a small vs. a more substantial down payment. However, it should be one of the leading factors to consider! This is because, although during the period of time in which you save up for your house down payment there could be some fluctuation in your budget and savings from month-to-month, once you’re locked into a mortgage, there will be no mercy coming from your lender — you’ll have to make the payment every month. If you’re going to be locked into a large monthly payment for probably at least 15 years, doesn’t it make sense that the payment be smaller if you can help make it so? The only other way to shrink the size of your payment is to a) go for a less expensive home– a good solution for some, or b) use a longer-term mortgage — not as good of a solution but also not a topic I will get into here. Finally, it is also critical to understand that by having a loan amount of 95% of the value of a $150,000 home, you will pay about $32,000 more in total over 15 years for the house (as a result of the extra interest on the extra borrowed amount) than you would with a larger 20% down payment.
The bottom line on my third point here is this: every dollar saved NOW for a down payment on a house is a dollar that you won’t have to pay someone later– with compounded interest.
BENEFIT #4: YES, IT ALSO ELIMINATES THE COST OF PRIVATE MORTGAGE INSURANCE (PMI)
Private Mortgage Insurance, or PMI, is a type of insurance lenders require homebuyers with small down payments to acquire in order to protect the banks against the chance the home buyer will be unable to make their mortgage payments. The fact that a bank would require you to buy insurance to protect them from you should raise red flags — because THEY apparently believe the odds of you at some point losing your ability to pay your mortgage are higher odds than YOU think they are, if you’re willing to get a mortgage despite this extra requirement!
PMI, according to AppraisalToday.com, is typically required when a home buyer brings a down payment of less than 20% of the home’s value. To illustrate the cost of PMI, the same source says that with 5% down, you would pay about $70 per month for PMI on a 30-year mortgage on a $119,000 home.
This cost can be completely avoided with a down payment of at least 20%.
Unfortunately, in recent years when people talk about “avoiding PMI” they are typically promoting an arrangement involving a 80% primary mortgage and a second mortgage ranging from 15-20% of the remaining value, thereby removing the need for PMI. For those who have taken this approach, however, they realize that they pay a higher rate of interest (often at variable rates that adjust periodically) on their second mortgage, and typically incur additional financing-related fees at the time of purchase.
CONCLUSION
It is challenging, from a purely financial and risk reduction standpoint, to make an argument for little-or-no-money-down home loans. And yet, the mortgage industry has made such an argument to do so convincingly, in an effort to drum up more of the commissions and fees they generate for originating a mortgage. The sub-prime collapse and housing market meltdown in general in recent years has brought this further to the forefront of public understanding, and yet mortgage products featuring little or no down payments are still prevalent today for those with decent credit and income — and so do not assume the marketplace is protecting everyone now from every bad financial product out there; I would encourage each of you to think twice before embracing such products.
Chances are, those of you who have bought homes with little or no money down (or are considering doing so) are not making the decision based on numbers or risk, either. It’s an emotional decision for you; you WANT a new home and so you’re willing to ignore the risks to get into that new home.
But I can assure you this — if times get hard for you financially after doing so, the grief that will come from the financial stress of a mortgage payment on a house you can’t afford the payments on, and can’t sell because you owe as much as it’s worth will far outweigh the joy of that new kitchen with granite counter tops and crown molding. Why put yourself through years of stress trying to get out of the house or make money to stay in it? Instead of suffering later, sacrifice NOW for a few years to avoid such a situation. I promise that it will be well worth it!
More evidence of the disaster that was Cash-for-Clunkers
An interesting article today in Seeking Alpha reported that the Cash for Clunkers program successfully contributed to a further decline in the American savings rate. I quote below from the article. Read the entire article here.
Purchases of Autos, in response to the “Cash for Clunkers” program, accounted for most of the August increase in purchases of durable goods, and more than accounted for the July increase.
If incomes are flat or rising slowly and spending jumps, it means that people are either drawing down on savings or going into debt. As far as these statistics are concerned, it doesn’t matter which.
The Cash for Clunkers program “succeeded” in getting the savings rate to come back down. In the short term, that is a good thing and has helped breath some new life into the economy. It was certainly good for Ford (F), CarMax (KMX) and Auto Nation (AN).
In the long term, however, this is a disaster. In August, personal savings (DPI minus PCE) was 324.1 billion or a rate of just 3.0%, down from $436.0 billion or 4.0% in July.
Our low savings rate and excessive dependence on consumer spending to power the economy is one of the key reasons the economy is in the mess it is in….
….A declining savings rate helps boost the economy, but a very low savings rate is unsustainable and eats away at the very core of its structure. It is sort of like eating your seed corn — you enjoy it while you are feasting, but the next year you have a much smaller harvest. This country has been progressively eating more and more of its seed corn over the past 30 years or so.
Excellent article on “Prudent Investing”
I read an excellent article on Buckingham Asset Management’s website this morning and thought I would share.
This may be, hands down, the best list of investing principles I have ever encountered in this short of a format.
You may read the article on Buckingham’s website by clicking here, or you may click here to download a PDF version I have created of the article.
Happy reading!
Big win for the consumer: BofA and Chase revising debit card fees
Great news reported by the NY Times today in an article about Bank of America and Chase Bank’s intention to change their debit card fee structure.
As I mentioned in a recent blog post of mine, Beware of the Hidden Costs of Banking, many consumers have suffered hundreds of dollars of overdraft fees coming from a few very small-dollar transactions after an unfortunate timing incident regarding a deposit.
The article today reports, among other things, that two of the largest banks will be taking the following steps very soon:
Bank of America:
- Will soon allow customers to “turn off” the ability to spend beyond their bank balance
- Beginning next summer will limit the number of times a customer can exceed their balance using a debit card at a store in a given year
- Will cap the number of daily overdraft charges at 4 per day
- Will stop charging any fees for customers who overdraw their accounts by less than $10 in a single day
Chase:
- Will stop processing all of a day’s debit card transactions from largest to smallest, thereby increasing the number of transactions subject to their overdraft fee, and will instead process them chronologically
- Will allow customers to “disable” overdraft coverage on their accounts, thereby stopping them from using beyond the balance in their accounts, which now results in huge fees piling up
- Will cap the number of daily overdraft charges at 3 per day
- It will stop charging fees when accounts are overdrawn by less than $5
Pressure from regulators and legislators has been building for a while now for banks to improve their debit-card fee policies to be more consumer-friendly, and Bank of America and Chase Bank’s announcements are likely designed to head off, or at least reduce, the current and future bad press they are getting on this issue.
Nonetheless, this is a big win for the consumer.
And other banks will undoubtedly begin to follow suit, even if it is a source of literally tens of billions of dollars for the banks right now. Increased customer frustration and negative press will take a toll on their business over time if they fail to continue addressing this issue.
Insurance: What is Needed at Each Life Stage? (Part 1)
I often find it interesting to encounter young, single individuals who support no one other than themselves holding large life insurance policies. Equally as baffling is to encounter wealthy, older people paying exorbitant insurance premiums on their relatively expensive foreign automobiles. Most of the time, individuals in either of these scenarios are simply over-insured.
Of course, many professionals would say that the problem of not having sufficient insurance is much more widespread.
So, I have attempted to create a chart here that lays out WHAT insurance most people need and WHEN in their lives they will need it, and I will further explain the rationale behind holding each type of insurance below the chart. Note that this information is not a substitute for professional advice based on your particular situation, but rather for informational purposes only.
TYPICAL INSURANCE NEEDS ORGANIZED BY LIFE STAGE
Automobile Collision Insurance: Most people think of automobile insurance as “automatic”–something they will get and must get if they own and drive a vehicle. That IS true in almost every state when it comes to liability coverage, which covers costs related to other individuals’ involved in an accident that is determined to be your fault. You definitely want to maintain liability insurance, as lawsuits and other issues could drive up claim amounts to high levels unpredictably. However, collision insurance is designed to cover damage to YOUR vehicle when you are at fault in an accident, and is not actually required in most states. If you own a vehicle outright, and have no loan you owe money on, you can very likely opt NOT to have collision coverage. This makes sense to do if you can stomach potentially writing a check for the full cost of a replacement vehicle in the unfortunate event you cause an accident that totals your car. Many people in their 50′s, 60′s and beyond self-insurance all automobile incidents, as they have sufficient wealth to cover such incidents without it drastically affecting their assets or lifestyle, and they know they will very likely spend less over the years than by paying collision insurance premiums year after year– particularly if they have historically been a safe driver.
Health Insurance: Regardless of where you stand on this hot-button issue philosophically and politically, the fact remains that if you are able to hold health insurance, you should do so.
The TYPE of health coverage you carry, however, may different throughout your life. If you are self-employed or have an individual policy and are in your 50′s or older, you may find that an insurance plan with a high deductible ($5,000 or $10,000), basically designed to cover major medical issues, is extremely affordable and may make sense to take advantage of if you can afford regular cash outlays for ongoing minor medical needs and medications. Such catastrophic coverage often costs just a FRACTION of what typical health insurance plans would cost.
There is one important thing to keep in mind with health insurance, however: One should never attempt to fully self-insure themselves in this area, because the frequency, odds, and costs of medical problems vary greatly and are very difficult to predict. Even with significant assets at your disposal, those assets could quickly be exhausted with major surgeries and expensive treatments in many situations. Insurance is at its best when it protects individuals against sudden, catastrophic losses that those individuals could not fund themselves. So, for the best overall cost control, many people in average health will find it advantageous to participate in their employer’s group health insurance plan, or if such a plan is not made available to them, to instead hold a high-deductible individual plan and save for ongoing expenses — either way, they should have some form of health insurance coverage throughout their entire life.
Disability Insurance: The statistics on disabilities are interesting. I have heard a variety of figures, but a commonly-quoted statistic is that a 30 year old male is greater than four times MORE likely to become disabled than die– and that an American is injured in an accident every 2 seconds. Many young couples secure the financial future of their spouse should they pass away by securing life insurance, but few purchase disability insurance even though, particularly within an employer’s group disability insurance plan, it is very affordable, typically only a few dollars per week.
Premiums for disability insurance through a group plan should be paid as an after-tax deduction from your paycheck, so that the payout later should you become disabled is also tax-free. Typically, disability insurance pays 60% of your wage at the time of your disability, but again remember it is tax-free. There are short-term disability and long-term disability policies available. If you have a large emergency fund, a short-term plan may not be necessary, but almost everyone of working age needs a long-term plan, as a permanent or long-term disability could otherwise be financially devastating to your family. Another key issue to consider when buying disability insurance is “occupation specific”– in other words, whether the plan pays you disability payments until you are able to return to your traditional employment or whether it requires you to take work of some sort to bring in some money to help offset disability payments. This is an important item to be aware of.
In my next post, I will provide basic info on the additional forms of insurance shown on the chart above that are not explained in this post. Stay tuned!
Rip-off alert: Aftermarket vehicle “service contracts”
Recently my wife and I purchased a 3-year old used vehicle from a small dealer in Dallas. The vehicle was priced very competitively, and a detailed inspection I had performed by an outside group, combined with a basic 90-day vehicle “warranty” covering transmission/engine issues gave me confidence that there were no major secrets lurking under the hood. The vehicle has done well for us so far, no complaints.
My complaint comes not with the dealer, but with the warranty company. The warranty that the dealer gave me, serviced by an outside party, as I’ve already stated, only covered major issues relating to transmission/engine issues. It cost me nothing, probably cost the dealer very little, and gave me added confidence to move ahead with the purchase.
However, this warranty or “service contract” company just sent me a Service Contract Renewal form, urging me to send them money to extend my service contract. And just look at the prices!!
3 Months – $275
6 Months – $410
12 Months – $650
24 Months – $1,050
36 Months – $1,400
MOST ALARMING IS THAT NOWHERE ON THE FULL-PAGE RENEWAL AGREEMENT DID IT INDICATE WHAT ISSUES WOULD BE COVERED BY THEIR PLAN WHATSOEVER.
What are the odds you will have a major engine re-build or transmission problem in the next 3 months, or even year? Not that high, probably. There are times it will happen out there, however, and probably old vehicles. If you have a 15-year old vehicle, maybe it would be worth buying this (if the company would even allow it, but my understanding is they typically impose a vehicle age limit).
Who has ever heard of sending someone money when you don’t even know what they are offering, and the odds of you needing whatever they are most likely offering are small?
Steer clear of these plans.
Getting out of the cycle of “living paycheck to paycheck”
More families than ever are living “paycheck to paycheck”, according to a recent study — that is the hard truth about the state of many families’ financial worlds.
Among the other sobering findings in the CareerBuilder-sponsored study was that 36% of those polled are not putting any money in retirement plans right now. This means that not only are many Americans struggling RIGHT NOW, many may also be setting themselves up for a FUTURE that is MORE UNCOMFORTABLE than their present. (You can read an article about this study by clicking here.)
This difficult struggle present all around the country right now IS possible to unwind if the family does have some income coming in.
The steps to take to stop the cycle of living paycheck to paycheck, although they may be difficult to execute, are simple in principle:
1) Spend less than you make each month
2) Use some (and hopefully, a lot) of the excess to reduce debt
3) Carefully allocate the excess, during and after the debt reduction period, among giving, short-term savings, and long-term savings.
Sadly, when debt is high, things get very difficult on a family whose income suddenly drops or disappears altogether. Discretionary spending like clothing purchases or trips out to eat and the movies are easy to cut, but mortgage and car payments cannot be done away with easily. During a downturn, then, a family with substantial debt will normally struggle significantly more than a family with little or no debt. This is often true even though the family with debt may, in many cases, have a higher income than the low-debt/debt-free family.
All of these issues deserve more discussion, but I thought it was worth at least pointing out here.
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