Case Study - 27, High Earner with Heavy Student Loan Burden
« on: February 03, 2017, 10:15:36 AM »
I'm posting this case study on behalf of and with full permission of my sister, who is new to MMM but ready to make some changes to her financial situation. She has admitted she's somewhat shameful of her situation, but once we started talking about it (and after I got my mom setup and on track with her finances), she realizes its time to open up her books, and at this point she thinks, the more help, the better! So, this plan is what I'm proposing she do moving forward, but wanted to get more thoughts from this community as well!
First, I’d have your sister read this website: https://nomoreharvarddebt.com/
It’s about a guy who graduated from Harvard with quite a bit of debt. He was making good money, but decided that stretching the debt out forever was not in his best interest. He did things, interesting things, to get out of debt. He got a roommate, even though he didn’t particularly want a roommate. He tried all sorts of second jobs…driving a pedicab, xeriscaping lawns. He sold things that he loved (think motorcycles and fancy cars) to put the cash towards debt. He gave up dating for a while. His kind of intensity is going to make him a success no matter what he tries in life. Good lessons there for someone like your sister.Life Situation: 27 single female, living in Denver area and moving to Boulder in March for a new job
Gross Salary/Wages: $70,260, working in Aerospace (switching jobs in March but same salary)
Pre-tax deductions 401k: $3150 (assumed for 2017, but will start with basic contribution to get full matching but not 100% sure what new employer benefits are)
Adjusted Gross Income: $4116 monthly / $49398 annually
Taxes: $17k, including roughly $3k in state tax
Current expenses (note some changes/cuts will take place to make this possible - but this is the goal)
Rent…$1,000
Could she look into renting with roommates or renting a room in someone’s house to keep this as low as possible?
Home/Rent Insurance $15
Personal Care $10
Cable TV $0
Car Insurance $88
I’d call around or shop online to make sure this is the best she can get.Charitable contributions $0
Christmas/Holidays $0
Clothing/Shoes $40
Unless your sister is naked now, I’d cut out spending on shoes/clothes temporarily. Especially if she’s new to the job…they haven’t seen all her outfits yet. Maybe check her closet to create a capsule wardrobe of stuff she already has.Credit card fees $0
Dentist $0
Dining (Lunch/Dinner/Etc.) $150
She’s in debt. A lot of debt. I’d say cut this down to the cost of one meal out a week. Since I think it’s possible to have a nice meal for $20-25, cut this to $80-$100. New amount $100 ($50 towards debt)Gifts (not charitable contributions) $75
It’s always nice to give gifts, but she’s giving gifts using other people’s money. NO GIFTS until some of this debt is gone. New amount $25 ($50 towards debt)Dry Cleaning $0
Utilities $100
Hobbies / Entertainment $125
No. This is crazy. There are many free ways to have fun. She can take up running, or exercising/doing yoga with YouTube videos. She can teach herself to knit with kitchen cotton from Joanne’s for $0.99 on sale/with coupon. She can watch free movies from the library and read free books. It’s not forever, she’ll be able to spend more, without guilt or anxiety. She’s spending $200 below on Health/Fitness, so I’d cut this category here back to $25. New amount $25 ($100 towards debt)Transportation $190
Groceries $150
Medical Insurance (if not paid pre-tax) $0
Pets $30
Phone (cell) $0
Health/Wellness/Fitness $200
Subscriptions (paper/magazines/etc.) $10
Travel/Vacation
She’s paying a piddly $20 or $30 a month on some of her debts while putting aside over $400 to travel. $5K a year for travel. My husband and I didn’t spend money like that until we were well in our 40s and both had good jobs and ZERO debt. You are a good sister for not backhanding your sis and telling her to GROW UP.Non-mortgage total $2,508
Assets:
$44k in old 401ks
$3.3k in liquid cash
I’d spend $2000 of this to retire a couple of the small debts.Drives a paid off Chevy Cruze
Debts:
Balance APR Approx. Monthly Minimum
Stafford A (Unsub) $1,811 6.55% $20.20
Stafford B (UnSub) $1,936 6.55% $33.67
Pay off the Stafford Loans using some of her savings then add the $54 freed up to the Chase.
Chase Credit card $4,007 19.49% $76.09
I found you an extra $200 dollars above to put towards this, in addition to the extra $50 from the UnSub Staffords). No kidding, pay this one off as if her hair was on fire. If I had this Chase and the Citi card (which will go up to 19 or 25% if not paid off soon, I’d get an evening/weekend job bartending or waitressing until every dollar of these was gone. I would also cut both cards up and burn them, while waving a chicken over the bonfire and chanting, “Credit card balances are for SUCKERS!” Every time she pays off a card or a loan, I’d roll that amount over to the next debt. She could get rid of this all in a short time. Or she could pay minimums FOREVER for a very long time. Like a sucker.Citi Credit Card $4,893 0.00% $0.00 *not sure when rate will increase
Discover #2 $7,497 9.00% $95.01
Discover #1 $11,159 5.25% $120.17
Discover #3 $3,616 2.75% $34.83
Direct Stafford #2 (Unsub) $6,918 6.55% $93.88
Direct Stafford #4 (Unsub) $6,542 6.55% $88.51
Stafford B (Sub) $3,306 5.75% $55.95
Stafford A (Sub) $4,020 5.35% $66.70
UAS Perkins $4,036 5.00% $51.91
Direct Stafford #5 (Sub) $2,134 3.61% $26.42
Direct Stafford #6 (Unsub) $6,889 3.61% $84.06
Direct Stafford #1 (Sub) $4,511 3.15% $54.27
Direct Stafford #3 (Sub) $4,589 3.15% $54.27
Estimated Net Cash Flow per month:
Without credit card payments: ~$640/month
Specific Question(s):
-She is currently spending a LOT of money on groceries every month (to the tune of $350/month) and I'm proposing she cut down to $150/month. Any tips on that?
Cut out soda and booze. Not kidding, they are expensive/ full of calories and offer nothing nutritionally. Sure, I like a beer of glass of wine, but if I was as deep in debt as your sister is, I’d spend nada on soda/booze. Water flows cheaply from the tap, or you can drink a lot of iced tea for pennies a glass.
I’d fix dinner that have good protein without a lot of meat. Bean burritos and rice. Scrambled eggs/baked beans/toast for dinner. Veggie stir fries with rice. Delicious vegetarian frittatas. Fruit for dessert. Turkey sandwiches or PB&J in my packed lunch. Big pots of chicken and veg or chicken and rice soup with veggies that I could freeze and microwave for a satisfying dinner. Baked chicken thighs (really, they are so good!) are inexpensive and tasty and you can do them with any sauce or rub, serve with some roasted vegetables, and they reheat great for lunches.-She loves travel, experiences, and doesn't want to feel "burdened" by having to cut things out, but she also says she spends somewhat on a whim. Strategies and suggestions for making those two things work in parallel? I've tried to keep a decent amount in her entertainment budget to allow for some flexibility, and we've allocated $5k/year for her in travel funds. (I mean, she is a social, single 27 year old after all!)
Oh my goodness, call the waaaaaambulance, she’ doesn’t want to feel “burdened”!!? Suck it up buttercup, she is burdened! She spent money on education and a bunch of credit card purchases that she has to pay back now. Every day/month/year she holds onto that debt she racks up more interest. She could be paying on these debts until she’s 47, how does that sound for a burden? If she goes scorched earth, my-hair-is-on-fire for a year or two, she could get out from under all the debt in a short period of time and start moving towards FI. Maybe she doesn’t care about RE, but getting to FI will change her life.Here is the guidance I'm giving her:
1. Stop any additional spending on credit cards, and put 100% of extra income towards the 19% interest rate credit card and then the 0% interest ($8.9k total debt, expect to payoff by Aug 1)
Good advice. Also, cut up the cards. Until she is debt free, she doesn’t need the temptation to put a “well deserved” trip or nights out at fancy bars on the cards.
2. Research rates to consolidate and refi ~$67k of student loans. Her goal should be 4-5% range max, ideally more in the 2-3% (if those rates exist anymore). Does anyone have thoughts on how to best go about this refi? (Not sure if her credit score is good). Should she keep the lower interest ones or just refi everything? I would think she can get her $880/month down to ~$660ish?
3. Open new employer 401k and contribute monthly the minimum to get matching.
4. Once credit cards are paid off (expected ~ Aug 1), then put $400/month into emergency savings and the remainder into increased 401k contribution (and/or HSA if her employer offers).
5. Consider using YNAB to track monthly expenses and not over spend
6. Rollover her old 401ks into a Vanguard IRA and put into low-fee index funds.
Any other thoughts or recommendations you'd have for someone in her situation?
When I was young and broke (and older and not so broke) I often worked my fulltime job and a second job 2 evenings/Saturday every week. The extra money went directly to savings, or in a period when my grad-student husband was ABD, it kept us from digging into savings every month until he finished his degree and got a job. No kidding, if you are in debt, more income helps. Also, if you are working and earning money, you are not SPENDING money. Win-Win.
Today there are things that didn’t even exist when I was 27. Uber or Lyft? Selling stuff on Etsy? Finding things at flea markets and re-selling online? A good friend of mine goes to flea markets and buys good hardback bestsellers for $0.50 or $1.00. She then sells them for $2.00-$5.00. Yeah, it’s not a lot per book, but do it enough, and it adds $50 to your bottom line every month. Imagine if you did that for things you could make a $10-30 profit on.
