-$114,000 Net Worth: Creating a Plan to Get Out of Debt

A friend of mine, “Doug,” came to me last week asking for some financial advice. He lives in New York City, has a stable job at a fortune 500 company paying $60,000/year, and we have very similar educational backgrounds. Except that he has $117,000 in student loan debt, $1,300 in credit card debt (maxed out the credit card and is paying 13.99% APR), and a 5 year old $4,000 debt that is in collections. Oh, and -$23 in his checking account!


It sounds a bit crazy, but that’s exactly why Doug came to me asking for some help. He’s exhausted all resources and while his parents have helped him get by, this actually may be holding him back from getting his finance in order rather than helping. In asking for my help, he agreed to (and actually recommended) using this on the site as a project.

Where His Money Goes

I took a quick look at his Mint account to get a good snapshot of where his money is going. The first step is taking inventory and finding out what’s happening now; later we’ll look at how to improve. His rent is $1,000/month, which is fairy reasonable for where he lives in Manhattan. And Doug iss smart enough to have a couple of roommates. But he has a lot of “random” expenses like cab rides and travel that significantly takes up his hard-earned money. He’s a mid-20s guy living it up in New York and hasn’t taken the time to get his financial life in order. But hopefully that will change soon.

Critiquing His Spending

The thing that stuck out most to me was that Doug spent $748 at restaurants, $185 on groceries, and another $106 on fast food. That’s $1,039 spent on food alone (not including alcohol and bars)! For reference, Lauren and I spend about $700/month on food, with about $100 of that being spent at restaurants). None of this is included in the $480 of cash/uncategorized transactions in the month. Finally, there are $51 in ATM fees/finance charges that could be simply avoided. That’s not preventing him from being in a good financial position, but it’s indicative of his general ideas about money: do what I want now and I’ll figure the rest out later.

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Creating A Plan

After getting over my initial shock, we discussed a plan going forward. The immediate need was to pay off the credit card bill to avoid the high interest and build a cushion in his checking account. Then we’d tackle the collections account and start some more future planning. How would we achieve this? We’d make just a couple of tweaks that would have a tremendous effect on his finances.

First, Doug agreed to eat out at most once a day. Previously, he was eating 2 meals out every day. And when you’re ordering $12 Chipotle multiple times a day, it makes it really hard to get by and save. Instead of $1,000+ a month, we reduced his monthly food budget to $500, which is completely doable and I’ve already seen him put the changes into practice.

Next, we reduced his 401(k) combined Roth and traditional contributions from 15% of his salary to 4%, enough to get the 2% match at his company. And that drop in contribution leads to over $550/month in after-tax earnings that he’ll be able to use to tackle his debt in the short-term.

One thing I made him do was call his bank and request that his recent $35 insufficient funds fee be credited back to his account. He told them it was a one-time thing, and they removed the fee for him. That was a very easy win, and it showed him that while it will take a significant amount of time to get into positive net worth territory, the immediate changes he was going to put into effect would have a positive impact.

Future Financial Plans

Looking down the road, once the immediate needs are taken care of (we project the credit card will be paid off in October), we’ll look to settle the collections account. And of course, pay down the student loans. It will certainly take time, but the interest rates on those loans are fairly low, in the 3-5% range.

This plan is not foolproof. Doug must be serious about changing his lifestyle and seriously cut back on his spending. He can’t continue to spend on taxi cabs, eating out daily, and unnecessary fees. The good news is that he is young enough that time is on his side and he won’t be saddled by debt forever if he gets his act together. It will be an interesting journey, and hopefully your encouragement will help give him the motivation to stay on track and turn his situation into one of having just about nothing to one where he is in control of his financial future.

Do You Need a Financial Advisor?

Like it or not, money is important.

No, your life shouldn’t be focused solely on money but you can’t ignore the facts: money is a tool and without money you’ll be downright miserable.

Which brings us to our question today.

Do you need a financial advisor?

What is a Financial Advisor?

First of all, let’s look at what a financial advisor is. In general a financial advisor can be anyone who gives you advice on your money. This could be an insurance agent, stock broker, an accountant, or a certified financial planner.

Some financial planners try and cover a wide range of topics while others go into more niched down topics. However, one of the most common uses for a financial advisor is getting investment advice.

Do You Need One?

Using a financial advisor is a personal decision that you need to make. Here are some questions to ask yourself before making the decision.

  • Do you understand your investments?
  • Have you mapped out a plan for retirement?
  • Do you have a complicated tax situation?
  • Do you need help starting a college savings account?

If you don’t understand your investments and retirement talk sounds like a foreign language then you might need a financial advisor.

There’s no shame at all in getting help with your money. In fact, it makes far more sense to hire someone to help you make your money work for you.

Traditional vs. Online Financial Advisors

In the last several years many online financial advisors have started to pop up. This has led to the question; should you hire a traditional financial advisor or opt for an online financial advisor?

There’s no easy answer. Let’s take a look at the two.

Traditional Financial Advisors – A traditional financial advisor is a person, or depending on your situation, a team of money professionals who are there to aid you. This could be a certified financial planner, certified public accountant, or stock broker. You meet with them in person, discuss your concerns, and they offer advice.

Traditional financial advisors can help you choose investments to best fit your needs, help with retirement planning, taxes, and estate planning.

The pros of traditional financial advisors are:

  • In person advice
  • Customized investing advice and guidance
  • Advice on taxes, estate planning, and insurance

Online Financial Advisors – Online financial advisors have become increasingly popular and rightfully so.

Online financial advisors, like Future Advisor for example, use investing algorithms to custom tailor investments for their clients. Most online financial advisors will ask you a set of questions pertaining to your personal situation, risk tolerance, and investing goals and pick investments for you.

They typically offer several different types of investing accounts you can open and track your progress for you.

The pros of online financial advisors are:

  • Customized investing advice
  • An easy to use platform
  • Low costs compared to traditional advisors

What’s Right for You?

If you need investing advice it’s never been easier to get it.

Whether you go the traditional or online route you can get the investment help you need.

This post has been sponsored by FutureAdvisor. The views expressed represent the opinion of the author and are not intended to reflect those of FutureAdvisor or serve as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell securities.

Getting Credit Where Credit Is Due — Namely, To You!

Credit is a big deal. Being known as a financially responsible person is a key component to your ability to make purchases on credit and to get the best available interest rates on them. Forget the days when everybody knew everybody and all that. When it comes to credit, you are a number and you must make sure it’s a good number.

There is a lot that goes into your credit score, and many people know a lot about those factors. But sneaky things can hurt you, so you must also know how to watch for and avoid those problems.

Find And Fix Mistakes

It’s bad enough to screw up your credit with your own bad choices, but it’s worse when something incorrect shows up on the report. How do you know this happens? Many times, you don’t. Something gives you a hit on your score, but because you don’t apply for new credit anywhere for a year or two, you never realize the blow to your financial reputation.

This can happen easier than you might think. One true example is a college freshman who traveled with his parents on a cross-country trip. Their first night at the destination saw him in the emergency room with food poisoning. Because of his student status, he was on his parents’ health insurance, but it was slow paying the claim because the hospital was out of network. They ultimately covered the entire cost, but by then the debt had gone into collection and the hospital neglected to tell the collection agency that the balance was settled. The student took a hit on a credit score that he barely even had Two years later he was denied his first cell phone because of his bad credit. He investigated through a series of phone calls and letters, and eventually his credit was restored.

This family handled it the do-it-yourself way but, given the rise in identity thefts, there’s a whole world of experts out there to help you fix these errors and omissions in a timely, efficient manner.

Stay Put—At Least For Creditors

We all have transitional times in life where we move a lot. We graduate high school, maybe go through several addresses during college, and then get a job and work our way through a few other residences before finally buying a home where we stay for several years. It’s just how life is. However, constant changes of address and phone number are bad for your credit because it looks like you’re trying to elude creditors.

What to do? Get a constant address and phone number. With nationwide wireless calling, you can make a cross-country move and still not be a long-distance call from your old number. And as for your address, for as long as you stay in the same general area you can get a post office box. They’re cheap and safe, and you can move many times without ever changing your address.

Watch That Score!

The ailing vacationer above never knew anything was wrong for a number of years. He lived off his scholarships and his summer job money, never applying for a credit card or vehicle loan. When senior year came and he wanted a cell phone for potential employers to reach him, he found the problem.

Don’t let that be you. Get a free credit score periodically to make sure that you aren’t getting wrecked by somebody else’s mistakes, and use it as an accountability tool for your own spending and credit habits.

Be Prompt In Paying

You know what’s a simple way to help your credit score? Paying your bills on time. Technology makes it easy, yet people still manage to screw up and end up late on bills they have the money to pay! We are years past worrying about which day to mail a bill so that it’s not late to the creditor or early to our checking account. With online bill payment available for literally almost anything, we can be properly credited for the bill on the exact day when it’s due, without gambling that our mail carrier doesn’t have a lead foot.

So pay on time! Just as soon as you receive the bill, set it for automatic payment a day or two before the due date. And if cash is still a little tight as due dates approach, use a credit card as a bridge. Pay the bill with plastic, then as soon as your cash allows, pay it off of the credit card.

Paper or Plastic? Paper Is Better!

Which brings us to another point of prevention: Don’t rack up the plastic. Certainly it’s handy in certain circumstances, and in others it’s a must. For example, it’s not advisable to use a debit card for online shopping or telephone transactions, because any hacks that take place will involve a theft of cash from you as opposed to an unauthorized expenditure on a credit card. Obviously it’s preferable to let the latter one float until the fraud protection kicks in, compared to the former.

And there are times when credit cards can save you considerable money and hassle. Many stores offer discounts for opening or using their store charges. Nothing wrong with that…if you pay it off immediately and avoid interest. It’s also nice to use store charges on items you may return. With growing kids, you may need to buy items in a number of different sizes and have the wrestling match/fit check at home, then return the unneeded sizes later. As long as you make those “reverse shopping” transactions before interest accrues, it’s preferable to using cash for a bunch of likely returns.

But borrowing money via plastic simply because you lack the cash is a darn fine way to build a snowball that will crush you in debt. Credit bureaus are watching the flakes accumulate, and when they start to see mounting balances and minimum payments, they’ll begin to ding your score. Swipe carefully!