Why you need an Emergency Fund...

[disneysteve]

From $70K to food bank, one family's struggle - CNN.com

According to the story, just weeks after losing her job, despite collecting unemployement and having her mother move in to help with the bills, she was applying for food stamps and going to the food bank. She used her tax refund to help pay bills for the first two months. What does that say? I'd say it means she had little to no emergency fund.

[Broken Arrow]

Ouch.

[atomicrc11]

She also bought too much house and should have sold it long ago. She has an interest only mortgage so no equity and a $2500/month payment! Even if she does hang on, how will she afford the balloon payment on that loan with another 70k/year job?

[LivingAlmostLarge]

She bought way too much house on $4500/month and $2500/month mortgage payment.

But yeah no ef.

[Seeker]

Where is her "estranged husband" in this picture?

Yes, she burned through her savings in a few weeks, but when did the husband leave and why?

He probably was with her before the house and the children.... but knowing his side of the story might put things in a little more perspective.

[Fizgig]

My thoughts exactly when I read that article. I feel bad for anyone in a tough situation, but it sounds like it was of her own making. Over half of her take home going to an interest only mortgage? Not exactly indicative of a smart money manager.

How expensive a house would that be? I don't know how to find a good calculator for it.

[HNorton]

I read this article and thought the same thing. It's tragic for her and her family but is a strong reminder that having 3-6 months of liquid savings is a must. ESPECIALLY in times like these.

[Merch]

Yea, I say that story to today. There was a video with that story. The kitchen has nice granite counter tops too. She was talking about when you go to the food bank you shouldn't bring your coach bag or tiffany bracelet. Wow that's good advice.

She was a loan processor (70k for a clerk seems a little high to me) who thought an IO that is adjusting up was a good idea. Nice.

She got turned down for food stamps because she owns a house. I figure in about 6 months, she should be eligible for food stamps. Then you and me will be supporting her.

[tripods68]

I read that article too. No mention of her 401(k) that she even cashed it out or use to help her out. On interview she mentioned it but it was never disclosed if any of her retirement cashing.

[Seeker]

Okay, I went back and saw the video.

Husband lost his job too. Sounds like it happened simultaneously and both lost their jobs. But husband made a choice to leave instead.

And this is California; where housing is ridiculously overpriced and has been for a long time. Renting is outrageous as well.

But the point I wanted to bring up here, is that while the story is true, it is somewhat incomplete.

The story makes it look like she's at fault for choice that she made alone.... but she didn't make these choices alone.

Yes, obviously there was no emergency fund. And that's a fault of both the adults in this family -- husband and wife. Husband & wife were both responsible for taking on an "interest only" payment.

You're responding to everything based on her past income and we have no idea what his income was!

Unfortunately, this story makes her look bad, while in reality, it shouldn't. She's a victum of a double whammy now (job loss, husband's job loss and leaving) and might end up with a third whammy down the line (the loss of her home).

This family went from two-income earners to zero-income earners -- She's left with picking up the pieces; and in reality, is the only courageous one in this story.

[geojen]

I agree. It is completely possible that his income was high enough to justify that house. Also, who knows what else he took with him? However, no matter what, an interest only mortgage is a bad idea!

[noppenbd]

All this goes back to reinforce DS's original point. Have an emergency fund for a rainy day. You never know when it's going to rain.

This goes double for people with high mortgages and interest only loans.

[MonkeyMama]

Certainly a good reminder...

of course, um, this is California, but I have no idea why you would buy a house like that on that income. ???????? Oh my. I mean obviously she could have found something more modest/affordable. Look at that house!

I know plenty of people making those kind of payments with no other choice. But she clearly lives in a more affordable part of the state. Those are some pretty nice digs. (I mean our relatives have $3k mortgage payments for condos, and due to the lack of affordable rents. That is very different from her story).

Just looks like another subprime mortgage mess to me. $2500 month? interest-only? Yikes!! This is the problem here. I am not sure how far an emergency fund would have stretched in this case.

There is no justifying that house payment on that income. Particularly not on an interest-only payment.

I wouldn't assume she bought that house with 2 incomes. It looks like the same-old, same-old. Of course, if she did, then when was it going to occur to her that she can no longer afford it?

[simpleyme]

the lady in this interview came off as a really nice gal

I find it interesting that she knew to take off her expensive items before collecting food at the food pantry , but did not seem to consider selling her items ,
also I did not get that her mom moved in with her and rented out moms house and now it is her(the daughters )income? either this lady owns 2 homes or a better choice would have been to try to unload daughters house and move in with mom

[disneysteve]

Originally Posted by noppenbd

All this goes back to reinforce DS's original point. Have an emergency fund for a rainy day. You never know when it's going to rain.

Exactly. If this house was bought requiring two incomes to support it (never a good idea), there should have been savings to cover costs if one income were to be lost for a time.

"She was talking about when you go to the food bank you shouldn't bring your coach bag or tiffany bracelet"

Gee. Perhaps she should have given some thought to putting that Coach bag on ebay or selling the Tiffany bracelet to raise money for food rather than going to the food bank.

This reminds me of that woman on the Oprah debt show last year who was spending some ridiculous amount (hundreds) having her hair done while she and her husband were drowning in debt.

[Joan.of.the.Arch]

Unless California administers the food stamp program differently than other states, then it is also not true the the woman would be turned down for foodstamps due to owning a house as she said. You can be turned down for food stamps for too much income or too many assets. I have no idea if they consider retirement accounts as assets when qualifying you for foodstamps, but I bet they do. One is also supposed to report jewelry one owns, and if she mentions the tiffany bracelet and goes on camera wearing jewelry, then I imagine she did have some jewelry assets. If she was honest in reporting it, that alone could disqualify her.

If she would happen to come to savingadvice,com, I would say she is a good candidate to recommend selling off some household items on ebay to raise a little money for food & gasoline money.

I also did not like the reporter saying that in such a short time the woman had lost her middle class life. To me she looks to be still surrounded with all kinds of middle class trappings, Coach bag and all. Sell 'em, sell that white elephant of a house and get out of there to something, oh, about 1/8 the size. Yeah it's sad to lose so much material stuff, but foodstamps were not going to save all that anyway. A new job and a new digs will be what it takes.

Oh yeah, Some rainy day savings were certainly needed!

[Caoineag]

[quote=Merch;159026]...She was a loan processor (70k for a clerk seems a little high to me) who thought an IO that is adjusting up was a good idea. Nice...QUOTE]

Actually that is on the low side for a loan processor. Those "clerks" are the ones that help underwriting do their jobs by making sure conditions get met. If you have a bad loan processor, your loan doesn't get closed on time.

The interest only payment is insane. No one should sign up for those. But I am rather interested in the disappearing husband. Losing two incomes at once is really hard on any house's finances.

Obviously a good argument for a large emergency fund. A 6 month emergency fund would have made a huge difference for this household.

[kork13]

Just for my own understanding, what exactly is meant by an 'interest only' payment? Basically that you pay all of the interest upfront at the start of your loan? I know that many companies, like for car loans, set the payment schedule to do similarly to this, where the first pmt is 70% interest, 30% principal, 20th is about 50/50, 59th is about 5% interest, 95% principal. But this sounds different... is there actually any benefit to the owner by doing an interest-only loan like that? If not, why do it?

[tripods68]

This is what's wrong when couples buy "more" than what they could afford. They are in so much in debt, its hard to save. She can't stay in the house for long especially when the unemployment check runs out.

[noppenbd]

Originally Posted by kork13

Just for my own understanding, what exactly is meant by an 'interest only' payment? Basically that you pay all of the interest upfront at the start of your loan? I know that many companies, like for car loans, set the payment schedule to do similarly to this, where the first pmt is 70% interest, 30% principal, 20th is about 50/50, 59th is about 5% interest, 95% principal. But this sounds different... is there actually any benefit to the owner by doing an interest-only loan like that? If not, why do it?

No, that is a standard front-loaded loan. An interest-only is where the buyer only pays the accumulated interest each month, so none of the payment goes towards principal. No equity is built up by paying the mortgage. There is usually a balloon payment due at some point down the line (principal due in full) so the expectation is that a sale or refi will occur before then. During the boom days of real estate this was pooh-poohed since the rising value of the home created equity without any work by the mortgage holder. Of course it works the other direction just as well.

The interest only loans were sold as a way to afford more house with the same payment. A lot of them give you the option to pay on the principal if you want. But of course what did most people do? Buy more house than they could afford and were barely able to make the interest only portion of the payment.