2008-07-09

The Lady Who Wouldn’t Pay Off Her Credit Cards Even Though She Had The Money

There was an old lady who swallowed a fly.

I don’t know why she swallowed a fly.

Do you watch the popular personal-finance personalities on television (or listen to them on the radio)?

I watch and listen to a fair number, though on a somewhat irregular basis. For lots of them, I find that I’m learning less and less, as many of the basic principles are repeated. But sometimes, I feel I should keep up with them as part of the decision to write a blog like this one. And sometimes, it feels like the same fascination as watching a train-wreck of a performance on a game show or on reality TV. I don’t want to watch, but I can’t turn away.

The other night on the Suze Orman Show, a woman named Barbara called in—and for the first minute or so, I thought she might be a candidate to discuss as part of our Success Stories series on this blog. Here are some of her personal-finance stats:

  • Age 49
  • $1200/Mo. Take Home
  • $715/Mo. Rent
  • $428K Savings
  • $270K Retirement

I’m not sure what the show includes in “take home” pay, but it works out to $14,400 per year. We could do a rough guesstimate on her combined federal and state tax rate—let’s call it 25%. That may be a little high, but that’s okay for purposes of illustration. At that rate, her gross annual income would be about $19,200. So this is someone probably making less than $20,000 a year who saved nearly $700,000.

That’s pretty frigging good, if you ask me!

Then she revealed that she had $18,000 in credit-card debt. When asked why she hadn’t paid it down, she had no real answer. She certainly didn’t present the case that she had a 0% or low-interest rate (let alone some intentional though potentially risky strategy like credit-card arbitrage). She just had no answer.

She had $428,000 sitting in a bank account—not in a retirement account, not invested in a brokerage account, not in some other illiquid asset. $428,000 cash. If she paid off her $18,000 in credit-card debt, she’d still have $410,000 cash!

This was a woman who was doing so many things right, who might otherwise be a personal-finance superstar. Maybe she just came into a windfall along the way, but that doesn’t seem likely to me, because of the high amounts in retirement accounts (and the maximum annual contributions making it more likely she accumulated that over time). So probably, she was spending way less than she earned—and at such a low salary, was essentially a Jedi master of frugality. Many might say that she should be investing more of her $428,000 rather than leaving it in cash—but she had at least also been investing through her retirement accounts and had $270,000 in investments there.

But her credit-card debt ruined the entire picture—and gave the feel that she really had no idea what she was doing. It sort of injected some doubt as to whether this woman would be ultimately successful with her personal finances.

This woman may be an extreme example, but to me, she sort of embodies the difficulties of personal finance for many of us in two ways.

First, lots of us probably also do things with our personal finance—or fail to do things with our personal finance—even though we know better and have no particular explanation for our behavior. (Or if we have some explanation, it’s fairly weak.) I know I have things like that.

Second, we can’t do just one or two things in our personal finance and ignore the rest. For many of us, that especially means going outside our comfort zone. If we’re good at being frugal, and we enjoy thinking about ways to be frugal, we can’t then ignore our incomes. Personal finance is a total picture.

Do you have things like this—things you do or don’t do for which you don’t have much explanation or things that you tend to ignore or put off because they are outside your comfort zone?


Related Posts:

There Are Only Two Ways To Save More Money

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