Mind the Gap: What Really Matters to Your Financial Well-Being

December 02, 2011

I was reading some articles recently and found this quote:

“It’s not the balance in a person’s bank account that makes them happy; it’s the ‘spread’ between their bank balance and their bills. If there’s a wide spread, people have more flexibility, more options. If there’s a narrow spread, people perceive themselves as stuck, and their happiness levels plummet.” – Paula Pant

That quote really hit home. It made me think about two people I’ve met in the last 24 hours who were in severe financial distress, losing sleep, worrying about their financial state and generally feeling “stuck.” This quote definitely rings true based on my experience, not just in the last 24 hours, but over the last 20 years. Here’s a sketch of two people I met very recently.

Today I talked to someone who said she felt like she was losing hope for her future because of her financial situation. Her happiness level had hit rock bottom. I was worried for her because she was expressing such despair and hopelessness. She had just missed 3 months of work due to some serious family issues, and her bills were piling up. She had no savings. She had emptied out her 401(k) through hardship withdrawals. She was living in a small 1 bedroom apartment in the lowest cost area she could find. She is a single mom trying to raise a teenage daughter while working for just a bit more than minimum wage. She didn’t see any way to dig her way out and was thinking of declaring bankruptcy or moving a few states away to live with a family member, while she got back on her feet. She would have to quit her job to move, and there was no guarantee of a job in her new location, so that path had some serious risk factors. When I dug into some of the details, her total combined indebtedness was less than $5,000. To her, that was overwhelming. Life altering. To someone else, it would barely be noticeable.

Her situation was not different emotionally than a person I talked to just yesterday. The feelings of hopelessness and despair were there. The same feeling of being “stuck” with no way out was there. The big difference? This person had nearly $60,000 in his 401(k), a $20,000 savings account, and a home worth nearly $275,000 (with a $300,000 mortgage). The mortgage being worth more than his house, the $50,000 in credit card debt and the $40,000 in student loan debt that he was facing seemed insurmountable to him.

If the woman I talked to today had the savings account balance that the other person has, she would feel like her future has no limits. There would be no stress. On the other hand, if the guy with the 401(k) and the savings account had her level of debt, he’d feel like his cash flow was manageable. It’s not just their bank balances or their amount of debt, but the spread between those balances and their bills that really matter. That’s why these two people in such different places financially, were in the same exact place emotionally. Neither saw hope for their future. Both are considering bankruptcy.

The good news is that through conversation and looking for ways to solve their current issues, both people are on their path toward finding peace in their lives. The woman with the $5,000 debt load is working with her church and a local organization to identify government programs that she qualifies for, and that could help her in the short term. She said her pride would never allow her to ask for help. She has determined to ask for it now, and then give back when she has regained her financial footing. I have a feeling she and her daughter will be volunteering A LOT over the next few years, and I expect to hear good news when we talk again in a few weeks. The guy with what was overwhelming for him is going to rent his guest room to a local med school student and that will cover his student loans. He is going to work with a non-profit credit counseling service to get out from under his credit card debt and lower his interest rates and monthly payments. He is feeling less overwhelmed and will be back on track in the not too distant future.

When I saw the quote above, I immediately thought of these two people. In a span of maybe 18 hours I talked to both of them. I was stunned by how both people expressed almost identical feelings about their financial situations but their incomes, their debt loads and nearly everything in their lives was remarkably different. At times, being a financial planner is more about understanding human behavior and emotions than it is about knowing the latest and greatest tax laws and financial strategies. My last 24 hours helps me keep that in perspective.