The 3 Stages of Financial Despair

American Mailbox (Wakulla County, Florida) .. ...

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The road to financial independence isn’t always smooth and straight. There can be stumbling blocks along the way, and it’s also possible to end up on the road to financial despair.

How do you know if you are on the right road? What are the three stages of financial despair?

Neutral stage

The neutral stage is characterized by a steady state where you live paycheck to paycheck. You earn enough to pay your bills, and you may be saving just enough to pay unexpected and unique expenses. Otherwise, you are stuck in neutral and not really going anywhere. You have the choice of either following the road toward financial independence or the road toward financial despair, but it all depends on what you do next.

This characterized much of my student life. I was working part-time, sometimes up to 30 hours a week while studying full-time, but I was earning just enough to pay rent, a car, and other bills.

Stage 1

This stage is characterized by slowly increasing debt, whether on the credit card or on a home equity line of credit. When I was a student, there was a time when my spending was too high and I was starting down this road. I didn’t have the financial education back then, and didn’t really see the “big picture” of where this road would take me. I also knew friends that were getting into debt on 1 credit card, and then on 2 credit cards. Eventually they had to consolidate their debt onto a single card and work with the bank so that they could start to pay it down.

A lot of people talk about compound interest and the snowball effect of debt reduction. Well, the same effect applies in reverse, too! Accumulating debt leads to higher interest payments, which leads to more debt, and… well, you get the picture. If you are starting down stage 1, it’s not too late to get out, but it will take some short-term sacrifice for a long-term gain.

Stage 2

If you continue down stage 1, eventually you will reach a point where you will be up to your neck in debts, and all of your spare income will be going toward debt repayment. This is the experience I had growing up, when my mother and step-father had money to pay for beer, cigarettes, and a satellite dish, but we ate hamburger helper and mac and cheese every night. Eventually they declared bankruptcy and we ended up having to move to the ghetto.

This experience is one of my strongest motivators to stay far away from the stages of financial despair, myself, and to never put my own kids through the same experience. However, I understand that it’s not always due to lifestyle choices. My own grandmother ended up in this stage when my grandfather died not long after I was born. My mother was only 17, so my grandmother now had four kids to take care of. Managing a house with four kids by herself was a bit too much, so she had to sell. She never went bankrupt, though, and she was later able to open a business and run it with her son for several years, and things were a bit easier to manage after that.

Stage 3

Imagine if you had a debt that could not be discharged by bankruptcy? The kind of debt that could follow you to your grave? I have never known anyone in this situation, but I hear that student loan debts in the U.S. are like this. I suppose things could also get this bad if you deal with loansharks.

It is my personal belief that education is in a bubble, and while education is important, that doesn’t mean that students need to get into massive debt for it. If you are considering taking out large student loans in the hope that it might pay off in the future, please read more of my own thoughts on this subject:

Dear reader, have you ever started down the road to financial despair? I have seen what it’s like there, and it’s not pretty! I’d love to hear your stories, and please let me know if you have any questions or comments; I’ll do my best to answer them. :)



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  1. says

    Those scenarios are very scary. Fortunately, I’ve never been in those situations. I’ve always spent less than I made. Before I started making money, my parents helped out and I was very cheap with spending.

    • says

      Sounds like you’ve managed to stay out of trouble! :) It’s always good to get a good example from the parents; they are the most important teachers.

  2. says

    I definitely agree with the bubble theory concerning post-secondary fees. I’m sorry you had such a crappy experience when you were younger. I’m glad you have used it is as a motivator rather than “playing the victim” as a negative cycle repeated itself.

    • says

      It’s easier to take the victim path, but ultimately that way is also self-destructive! The only way to break the cycle is to move beyond it.

  3. says

    Kevin, my experiences mirror yours to some degree. I didn’t have a lot of money working through college, but neither did I go into massive debt (made other mistakes, though). After college, I made a lot of money and happily/foolishly spent much of it.

    I find this snippet interesting: “… when my mother and step-father had money to pay for beer, cigarettes, and a satellite dish, but we ate hamburger helper and mac and cheese every night.'” Not to make light of your bad experience, but it lends support to an investing strategy partly oriented towards smokes and booze stocks.

    • says

      Haha, it’s sad, but, true. In spite of my own personal bad experiences growing up, I think it’s fine for people to smoke and drink socially. Like anything else in life, it’s all about self-control and moderation. Anything can be harmful to oneself and others if taken to excess.

  4. says

    I haven’t quite been in that position, and am happy for it. That being said, I think that many people are probably one or two “unexpected” events from getting to that point. They just don’t realize it. Perhaps ignorance is bliss for one’s stress level!

  5. says

    I’ve personally experienced the Neutral stage and stage one. Thankfully, I’ve been able to work myself out of quite a bit of debt and started saving a portion of my income. Now all that’s left is student loan debt for the most part. It’s hard work, but it’s not impossible to achieve. It just takes commitment!

  6. says

    I had never really considered the three stages of financial despair, but your explanation is quite valid. I know a man in his mid 50s who has $350,000 of student loans. He is a doctor who makes a decent income, so paying these loans off is not impossible, but based on his track record, he may well be in Stage 3

    • says

      $350,000… wow. Doctors do make good salaries, so he may be able to pay it off in a few years, but that is still quite a substantial sum. Unlike a mortgage, I guess you can’t walk away from it either if it doesn’t work out, but at least medicine is a pretty recession-proof profession.

  7. says

    I’ve been fortunate to avoid these three stages, but it’s great that you are shedding light on it. Your take on education is dead on. It is important, but not important enough to set yourself up for financial despair. Nice work!


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