Debt: How One Bad Move Can Wreck Your Financial Life

Q: Thanks for your Love, Money + Real Estate financial newsletters. You helped me back in 2008 when the Great Recession hit and I was able to save my townhouse from foreclosure.

Fast forward. I moved to Sonoma County, California about 10 years ago. I unfortunately sold that home in 2020 due to many reasons. One of them was that our income was not, and has not been, stable. I also didn’t realize that buying a bigger home would be so expensive to maintain.

In 2017, when the wildfires hit, it changed everything. Home values went way up! We sold our home and made some money. My goal when I sold the home was to get a better paying job. I did that, and then I wanted to buy another home at some point.

We hoped to put down 20 percent on a new home when the market went from a seller’s to a buyer’s market again. But that never happened. Now I’m wondering whether I made the right decision to sell. I’ve run through all my savings from the sale of our home and no longer have a down payment.

Which Debt to Pay First When Improving Personal Finances

Worse, now I have debts. I’m trying to figure out how to pay off $30,000 in debt. While I make more money, my rental payments are more than 30 percent of my income. My sister lives in Connecticut, where it’s cheaper, and has asked me to move there. But, my parents are older and I want to be closer to them. Where do I go from here?

A: Thank you for being a loyal reader of Ilyce’s newsletters and we’re glad they helped you during the Great Recession. But we’re so sorry to hear that you’ve dug yourself into another hole. We have some questions, but will try to give you some guidance going forward.

We suspect you came out of the sale of your home with some sizable profit as real estate values in Sonoma County have boomed during the last ten years. What happened with the money that you got from the sale of the home? It seems that the cost of living in Sonoma got out of hand and started to eat into your savings. (Trust us – we understand, having recently visited California’s wine country.) Once that was gone, you took on debt. We suspect your income instability may be partly to blame.

Why did my credit score drop?

Given your income issues, spending less is a top priority, especially if you hope to stay near your parents. Ilyce’s advice over the years has been that you need to budget based on your known income only. That budget should include a percentage that you should set aside for emergency expenses.

That means, if your after-tax income is $5,000 per month, you should try to set aside $500 per month for your emergency fund and live on $4,500 per month. If the only home you can find will cost you more than $2,000 per month, you either have to find a way to augment your income (a second job or side hustle) or reduce that overall cost by co-renting with someone else (so your share of the rent will be less than $2,000 per month).

If you can’t find a way to make it work with the cash you earn today, and you can’t increase your income reliably, then you have to consider Plan B. Maybe that’s moving in with your parents or it’s moving across the country to live with your sister.

Pay Off Credit Card Debt

Moving across the country is a difficult decision but you need to do what is best for you and your family. We know that you might want to be near your parents. If that’s non-negotiable, then you have to decide what you’re willing to live without, or cuts you’re willing to make, to live near them.

Sonoma is lovely, but if you can make things work on your budget in Connecticut, you might have money left over to visit your parents several times a year. That’s a tough choice. One only you can make.

Let’s talk about your credit card debt. That is likely a huge burden right now, given that interest rates are approaching 30 percent. With those kinds of interest rates, it can take years to get out from under that debt level. The best thing you can do is tighten your belt and pay it down as fast as possible. Swapping housing expenses (if you live with your sister for awhile) for repaying your debt quickly might take a year or more. But when you’re done, you’ll can begin to plan for your next move: Finding your own place, or even buying another house.

Let’s start with a budget. Take out a sheet of paper and write down every cent you spend. Write down your take home pay. Then, strip everything you can out of your expenses. Calculate how quickly you can repay your credit card debt. If your credit score is still good, you might be able to apply for a zero or low interest card. Consolidating your debt there will buy you time to get that debt paid off.

Once you see where you are financially, you can make the next decision: Whether to stay in California or make a move to Connecticut. We recognize that each move has pluses and minuses. Only you know what you (and your family) can live with.

We’re sorry that there are no “easy” buttons. What you’re facing is about as challenging as it gets. But taking this first step will lead to another, and then another. Pretty soon, you’ll be in a much better place.

By the way, we don’t think you should be so hard on yourself. You sold your home because you couldn’t afford to live there. Had you stayed, it might have still been impossible to manage financially. Good luck, and please let us know how it goes.