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

creating a plan to get out of debtA 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.

spending too much on food

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.

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

  1. Liquid says:

    $1,000 a month on food is quite excessive. I hope Dough has the financial discipline to carry out the new plan. Good luck to him :)

  2. Money Beagle says:

    Sounds like you came up with some great ideas and I think once the benefits are seen, it will be a lot easier to have those habits stick in the long term.

  3. debt debs says:

    I sincerely hope he has bought into it because he could be back to the drawing board if he doesn’t take it seriously. I know you said he needs to cut back eating out more and I would like to second that. Once a day is excessive. Once a week is acceptable. Clearly his food is too high.
    We spend $800 for three people and we think that is too high and it is compared to other frugal bloggers so we are looking into ways to reduce this. Good luck to Doug. If he can learn this lesson early, it will be a feather in his cap. Many do not learn after one do-over or more including yours truly.

    • We spend about $650/month between restaurants and groceries, and I think that’s high. Granted we invite a few couples over about once a week for a big meal, it just sounds high. When I was single, $250 for the month was more than enough.

  4. Lpack says:

    Goodluck Doug!! You got this!!!

  5. The great thing about Doug is that he is at least using Mint to track his spending. Most folks are visual. What you can see you can change.

  6. Just like Doug, one my biggest expenses every week is groceries! I’m making an ideal plan on how to solve this one, I think our city has higher food prices.

  7. I’m sure Doug will do just fine with you helping him out. I liked how you tackled the food issues first. If you aren’t eating out all the time, it’s pretty difficult to spend a lot of money on food, even if you buy a lot of junk food.

  8. Danielle says:

    I really loved this post! I see some similarities of myself in Doug, as in my early 20’s my financials were quite messy (and a lot of it was due to eating out – that adds up very quickly!). Luckily, I’ve completely turned it around and, as of my late 20’s, have great investments, savings accounts, no CC debt and a small, but very manageable amount of student loan debt. It really gives you a nice peace of mind when you’re financially secure.

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