Ever worry you'll experience a financial setback so bad that it could leave you homeless?
New Yorker Jessica Jaye*, 43, believed the only thing between having an apartment and living on the streets was her ability to manage her five-figure credit card debt by using one card to pay down another. It certainly wasn't the life she had planned for, or envisioned, years earlier.
In 2000, the music industry worker quit her job so she could focus on being a songwriter while taking on part-time receptionist work. But after 9/11 part-time work dried up, and she turned to her credit card to make ends meet. With every $10 swipe of her credit card, she told herself she would turn things around ... eventually. But, of course, "eventually" never came.
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Five years later, she was $80,000 in debt.
Even as she swiped away, Jaye didn't foresee racking up a debt load nearly twice her current salary. "I was making very little money, living in New York City, and too proud to ask my parents for help, so I started living off my credit cards," she recalls. "I always had to use my credit card for something, either to pay my rent [with credit card checks], to buy groceries, to pay for gas and electric. I have nothing to show for that money except not becoming homeless and emaciated."
In 2005, she got a full-time job as a legal assistant and secretary for two entertainment lawyers, put her plans to "make it" as a songwriter on hold, declared bankruptcy and started the painful road of working her way back to financial solvency.
Jaye's story—plus those from two others who have seen their pocketbooks emptied in tough times—is a testament to one fact: Making a financial comeback is entirely possible. But it requires a lot of work.
How Financial Setbacks Happen
James Dannucci and his wife, Meegan, had great jobs as a software engineer and schoolteacher, respectively, when Meegan decided to take a couple of years off between 2005 and 2007 to raise their first daughter, Mia. Dannucci and Meegan had prepared for some financial challenges—paring down to a single salary, shelling out for additional food and health care expenses. But then came a blow that blindsided them.
In 2007, the recession started, and the company Dannucci worked for let him go. "So I basically had to go scrambling for a job," says Dannucci, 42, who lives in New Fairfield, Conn. "In order to keep the ball rolling, I had to dip into my retirement."
Dannucci pulled out $30,000 of his retirement savings to make ends meet. The couple had another daughter in August 2007, and the next year his wife went back to working full-time.
Over the course of a few years, Dannucci was employed on and off due to the difficulty of finding work and a second layoff three years later. That, plus the cost of day care and a mortgage, wiped out a total of $50,000 from his retirement accounts by 2010. In addition, the couple wound up with about $35,000 in credit card debt.
"I basically liquidated everything I had saved," recalls Dannucci, who remembers feeling like if something didn't change, he and his wife would lose their home.
"That last layoff, we had two kids and virtually no savings, and I had lost my job and I was living on $580 a week because of unemployment. We seriously did think the best thing we could do was sell our house," he recalls.
Fortunately, in early 2011, he found a solid, steady job, and his family is building its reserves back up again. But the new job came not a moment too soon.
"We were lucky I had two things: retirement saved so I could pay the bills when things got tough—though the I.R.S. penalized me, so I'm still paying them off," he says. "And I'm lucky my wife was able to get back to full-time work, so she could carry the benefits."
What Bouncing Back Looks Like
Southern California freelance finance manager and adviser David Landry, 33, thought he would be the last person to experience financial hardship, as he knew "every trick in the book" to avoid it.
"Working as an adviser to others, I thought I would be exempt from ever getting into any sort of financial hardship of my own," says Landry. "But during the economic crisis starting in 2008, with everyone really cutting back and removing extraneous expenses from their budgets, having a financial consultant wasn't deemed vital for many people. I found myself struggling to find work and losing clients who just couldn't afford to pay for my services."
Landry downsized every aspect of his life, moving from a spacious home to a two-bedroom apartment with his wife, Patricia, and two daughters, ages 4 and 7. He also sold one of his two cars; he could no longer afford both payments.
Today, after years of eating ramen noodles and tuna fish sandwiches, Jessica Jaye is now married and living in the black.
Landry eventually drew on his expertise, crediting his comeback to "careful budgeting and planning," as well as his and his wife's commitment to live just below their (new) means. That way, they figured, they'd build a steady cash flow to pull from and bounce back on eventually.
In time, the plan worked: The Landrys have returned to living in a house and once again own two vehicles.
"My business is doing just fine now," he says, "and I was able to learn new skills during my financial crisis, such as bookkeeping, that allowed me to still work in the field I wanted to work in and have a steady stream of revenue coming in to support my family. Overall," he now says, "it was a humbling experience that taught me a willingness to adapt."
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Today, after years of eating ramen noodles and tuna fish sandwiches, Jessica Jaye is now married and living in the black. And while her finances still aren't perfect, Jaye says she's learned to live leaner, be realistic—and use her bank debit card for 99% of purchases.
"Because I had such stellar credit before the bankruptcy, I started getting offers for credit-building credit cards within six months to a year after," says Jaye. "I was advised by lawyers and my research to actually do that to help start building up my credit. So I did, but I told them they were not allowed to increase the limit."
Dannucci and his wife have also learned to manage money better and say the experience has strengthened their bond. They hope to soon start rebuilding their retirement savings.
"We stopped using credit cards, and we started paying our bills religiously," says Dannucci. "We got into a credit union with my wife's job, a teacher's credit union, where we are able to get large, unsecured loans at 6% for five years. So now we're moving debt out of revolving credit into amortized loans. We also refinanced our house at a lower rate and paid off our cars."
*Name has been changed.
LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc. that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. The people interviewed in this piece are neither clients, employees nor affiliates of LearnVest Planning Services. LearnVest Planning Services and any third-parties listed, discussed, identified or otherwise appearing herein are separate and unaffiliated and are not responsible for each other’s products, services or policies.