How Do You Behave During Personal Financial Booms?

Recently, when researching my staff writing post about the current job boom in North Dakota, I ran across an interesting article, “I Doubled My Salary in North Dakota.”  The article is about a man who had formerly worked in a factory in Nebraska, but lost his job thanks to the recession.  He took the leap of faith and moved to North Dakota and took a job in the oil fields.  He is not afraid to work hard and takes advantage of all of the overtime available.  He averages “on the low end. . . $92,000 a year, and [on the] high end. . . $130,000.”  Because I like good rags to riches stories, I was excited for him.  By working hard now, he has the potential to change his life forever.  He also sees the significance of what he is making, stating, “Where I’m from, the only people who make that kind of money are doctors or lawyers. And I don’t have a degree. . .”  His plan is simply “to make the most amount of money possible in the shortest amount of time possible.”

Earning (and Spending) Thanks to the Oil Boom

No one knows how long the oil boom will last, so his plan is a smart one.  Work hard now while the opportunity is available.  Before I could finish the article, my mind was already wandering with what he could do with that kind of salary for five or ten years—max out his retirement plan, start a college fund for his daughter, buy a house with a substantial down payment. . .His possibilities are really endless if he keeps his income low.  So, you could imagine my disappointment when I read on a bit.  He proudly states, “I’m able to buy everything my daughter has ever wanted — toys, clothes.”  I already sense where this is going.  Like one who can’t turn away from a car wreck, I read on.  He further states, “Before, I had a Jeep Wrangler and my wife had a Jeep Wrangler. So I was able to buy a brand new Mercedes, and my wife a Mercedes.”  Now I see that his future probably won’t be changed.  He may well likely be one of those people who win a multi-million dollar lottery and in a few years are bankrupt.  I hope not, but I have concerns for him.

A Financial Advisor Loses His House

Even more surprising, the airwaves and Internet have been abuzz with the story of Carl Richards, a financial planner who moved to Las Vegas right before the housing collapse, bought a house that was more than he could comfortably afford, repeatedly borrowed against the house as the equity grew, and then ultimately ended  up $200,000 upside down in his mortgage.  He and his wife stopped paying their mortgage and went through a short sale.  When interviewed on NPR and questioned why he, a financial planner, could get into such a financial mess, he explains:

“The value of the house is growing dramatically, my income’s growing dramatically and we all have this tendency to base the future on a relatively recent past. Right? So we project that into the future. And when you project that into the future, we had no problems.

And then the next mistake we made was not realizing that things change.”

What a powerful explanation.  He projected his success today into the future, and when he did that, he had no problems.  He didn’t make a contingency plan; he didn’t think things would change, but they did, rapidly.  This is human nature; to assume things will continue to go smoothly, which explains in part why it was so easy for the man who moved to North Dakota to buy two Mercedes.  Even though he doesn’t know when the oil boom will end, he anticipates living like this for quite a long while, even though he could be injured tomorrow, and the money would stop flowing in.

Tripled Salary and Still Saving

I have recently had the pleasure of watching Crystal from Budgeting in the Fun Stuff’s explosive financial growth.  This summer, she left a cubicle job where she was making $35,000 a year to work for herself as a blogger, writer, and advertising liaison.  While she was successful from the beginning and making at least as much being self-employed as she made at her old job, it is only in the last few months as her advertising business has taken off that her income has skyrocketed.  She is now averaging well over $10,000 a month in earnings, and she has been talking about her husband leaving his job as a school librarian to help her run her advertising business.

That fearful part of myself read the latest developments with some trepidation.  After all, blogging and advertising are very lucrative for her now, but they may not always be that way.  The blogging world is still very young; who knows how things will change in three years or five years.  Having her husband quit is quite a leap of faith.

Yet, unlike the others in this post, she is carefully laying the foundation for an even more secure future.  She is on track to pay off her house by the end of 2012, or at the latest, 2013.  She is not even 30 yet, and her house will be paid off.  She is fully funding her retirement, and she also has a large emergency fund.  While it would be easy (and natural, as Richards explains) to spend freely during this time in her life, she is choosing not to.  Sure, she may spend a little more for a nice dinner out, and she might buy sheets that are more expensive than most might buy, but she is not being reckless.

If her husband does quit, I believe they will be just fine.  If they continue to plan as well financially as they have been, they may both be able to retire by the time they are forty or younger.  And if that income stream dries up?  They will have a paid for house to live in, maxed out retirement funds and a hefty emergency fund.  In short, unlike our other two examples, they will be in a much better position than they were before her radical income jump.

How Do You Behaving in a Financial Boom?

When we find ourselves in a good financial position, we like to believe that our finances will be like this forever.  However, the nature of life is cyclical.  There are bound to be down times; while it is tempting to not plan as carefully for the future when things are good, it is ultimately in each of our best interests to do so.  Who would you rather model your financial behavior after? Carl Richards or Crystal?

Comments

  1. I do think it is unrealistic to believe that we can protect ourselves from every possible financial calamity. If unemployment lingers and income is too low, one stands a very good chance of losing everything, whether it is a large home or a modest one. Those in a more modest financial situation may last longer, but the end result is the same. Yes, it does make sense to buy lower and cheaper than our income, but it is no guarantee.

  2. If you get a raise or find more income, the key is to spend only a fraction of that, and save the rest. It’s easy to spend every ‘new’ dollar you earn, but you’re no further ahead that way. I don’t believe in not spending any of it, but spending say 25% and saving the other 75% (whether it be through retirement contribution increases, savings, etc.) will pay off so much more in the end, and protect you against bad things happening down the line.

    • Good point. Have a little fun, but be conservative with the rest. Overall, that strategy increases your standard of living because you get out of the feast or famine mode.

  3. I experienced a short-lived financial boom two years ago. With the extra money, I paid off my credit card debt and started a small emergency fund. That financial boom only lasted a year, but it allowed me to pay off a bunch of crummy debt. I’m almost debt free (my car is close to being paid off and I still have student loans). However, the next time I hit upon a “financial boom” it will be going towards savings and retirement- That’s my goal next year, make a financial boom for myself. 😉

    • That is a great use of the money; I bet you didn’t regret how you used the money, and it probably made life easier for you now as you are finishing up your degree.

  4. I sort of hoard my money, so an increase in money just means I save more. While my spending would increase a little if I had a huge salary boom, it would be small in comparison. I am not sure if I would have said that 10 years ago, but now that is how I feel.

  5. Thanks for including my story! I do think that if my husband quits, we’ll be very prepared for whatever comes our way. BUT, we also are going to test him out sort of next summer during his break – he may not even like answering emails all day, lol. I’ll leave it up to him, but he won’t be quitting before 2013, so the house will definitely be paid off and we don’t have any other debt. 🙂 Again, thanks for including me!

  6. Unfortunately I can totally relate to the behavior demonstrated by Carl Richards. Been there…done that. ALthough there are no gaurantees in life, I would much rather be a Crystal the next time I am caught in a low income cycle. Thanks to you and other sites like this, I am confident I am on my way to being a Crystal!

  7. I would not call the current economy a boom! My wife and I are doing fine and for many (10+) years I max out my retirement savings. My main reason is I want a very comfortable retirement. I do not know how long I will live nor the inflation rate.

  8. I love how Crystal has grown her business (and income), and it doesn’t appear her living standards have increased that much (although she does treat herself when they reach a goal). I think that’s the key – don’t increase your living expenses during a financial boom. Instead, use the money to build an emergency fund, pay off debt, invest, etc. Then, when the boom busts you aren’t left to maintain an expensive lifestyle.

  9. We were very blessed last year when my husband recieved a promtion at work. He drives a car that is held together by duck tape in some spots (yes I am serious) and his boss saw him get out of it the other day. She laughed and asked him when he was getting a new one and he said when this one falls apart. Our friends tease us that we only go out to dinner once a month and our food budget is still only $400 for a family of 6. We do these things because we are paying off medical debt but more than that we have a 14 yr old daughter that watches what we do. I pray that she learns early the lessons that my husband and I were not taught with money. We are not perfect with money but we try to set a good example.

    • What an inspiring story! I am trying to keep our groceries at less than $400, but I am struggling. What do you recommend? Part of our problem is buying soy and rice milk and other foods to accomodate our intolerances.

      • We have that same problem with our son. He has to have rice milk because anything else and we end up at the hospital or docs office. I try to buy what I can on sale and we eat alot of meat so that eats up most of the budget. There are a lot of things we don’t buy anymore because we make them at home. Lets see, any bread product to include bread crumbs, chicken broth, syrup, vanilla, hotsauce, the list goes on. I know that people say it is more to make the stuff but I know what is going into my kids bodies. Also a great book is The Tightwade Gazzette. My sister in law got it for me 2 years ago and it has great tips that helped me cut more out of the food budget. It took me 1 yr to get there and you have to think outside the box. Thanks for the insipration we get from you guys too.

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