How to Get Out of a Mess
Note: The following is real life example, name have been changed.
Joe and Jane make $75000 per year, have 2 kids and 1 on the way. Jane is not working right now but plans to go back after maternity leave, and bring home an additional $1000 per month. Following the steps outlined in the Getting Started article, let’s see how it pans out.
Mindset
Joe came to me after overhearing a friendly debate I was having about personal finance. After a few circling questions he laid out all his numbers and confessed he felt trapped in a mess he couldn’t get out of. He was ready to make some real changes.
Debts
| Credit Card 1 | $1200 |
| Credit Card 2 | $2000 |
| Credit Card 3 | $6000 |
| Consolidation Loan | $19000 |
| Car Loan | $26000 |
| Total | $54,200 |
Monthly Budget
After going through online banking transactions we saw where and how money was slipping through the cracks. We setup a workable bare-bones budget to generate a surplus.
| Food | $800 |
| Rent | $1200 |
| Gas | $300 |
| Util/Misc | $350 |
| Total | $2800 |
| Take Home Pay | $4000 |
| Surplus | $1350 |
Save $1000
Thankfully he almost had that amount and would be there by next payday.
Pay Off Debt Smallest to Largest
Considering the insane car debt, that had to go. He owed $26000 and it was worth $22,000, I had a few recommendations here.
- Get a personal loan for $7000.
- Sell the car tomorrow for $22,000 and put $4000 from the loan with it to pay off the car loan for good. Car debt is now $7000, reducing it by $19,000!
- Buy a temporary beater car for $3000.
- Get a second job. Here he admitted he was already delivering pizzas out of desperation. Working 5 nights per week he could bring home an additional $2000 per month!
- Take a second look at taxes. Considering he makes $75,000 gross, his take home should be closer to $4900 per month.
New debt situation looks like this:
| Credit Card 1 | $1200 |
| Credit Card 2 | $2000 |
| Credit Card 3 | $6000 |
| Consolidation Loan | $19000 |
| Total | $35,200 |
With the new take home pay of $6000, that leaves about $2500 (approx.) per month to put towards debt.
$35,200/$2500= 14 months and all debt is gone.
$35,200/$3500= 10 months and all debt is gone once Jane goes back to work.
Next Steps
Once all consumer debt is gone, they now have enough margin to save up for their emergency fund, start investing 15%, save up for a better car and live on cash not credit. Joe doesn’t have to work two jobs and they will be in control. Of course I’ve rounded off the numbers and the plan is simple not easy. There will inevitably be a speed bump somewhere along the way but with a goal in mind the sacrifice will be worth it in the end. Note that I didn’t list interest rates for the loans. In about a year, the whole thing should be over with so the interest rate barely factors into it. I also didn’t account for the excess cash flow generated by paying off each incremental debt, but it’s a great example of how an average family who woke up in the middle of $54,000 worth of consumer debt can eliminate it in under a year!
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