Background

“Brett” just started working for a good IT company a few years ago. He had about $70,000 in Student Loan Debt and $10,000 in credit card debt. His credit score was 650. The APR on his credit card was 29.99%. He started his career making $50,000 and was “just getting by” on that salary. He is now making $70,000 and heard something about “paying yourself first”.

Issues

Although Brett has a good salary, he needs to figure out where his money is going. He does not know what an Emergency Fund is and he has a substantial amount of debt.

Plan

The first thing we do with any client is gather all of their information—using our powerful software to pull all of the data onto one screen. From there, we analyze the situation. In Brett’s case, it was clear that he was spending everything he was making. His bank account balance was very low and he had a couple of late payments on his credit card. Next, we discovered that he was contributing over $800/month to his Student Loans. He was also paying $500/month toward his credit card, but charging that much—or more—each month. So his balance kept increasing. We then learned that Brett’s employer offered a 401(k) plan and they matched up to 4% of employees’ contributions, but Brett was not participating.

Actions

In a situation like this, we might encourage Brett to start contributing at least 4% to his 401(k) plan. This would reduce his taxable income and allow him to start investing for Retirement. We would also run a program to assess his Risk Tolerance. Maybe Brett is willing to take a fair amount of risk. We would create a budget to help track his spending and we might discover his love of IPA’s and dining out with friends was costing him a substantial amount of money each month. We could suggest he use the savings from his budget to supercharge his debt payments and show him how much he could save in interest on his debt. We could suggest he consolidate his Student Loans and get him on an Income-Based Repayment Plan that offers forgiveness in 20 years. This plan might reduce his monthly payments from $800/month to about $400/month.

If Brett had stayed on his current path, he would have been paying $3,000 per year in interest to the bank for his credit card. This is where we could help Brett understand how important it is to pay off debt and “pay yourself first”. Once his credit card is paid off, he could deposit $400 per check directly to his Savings Account to build his Emergency Fund. This is how you “pay yourself first”. Rather than sending money to the bank every paycheck to cover past debts, we start to pay that money to our Savings account. This is one of the first steps in building wealth. We could show Brett a comparison of his Retirement Outlook. We would compare the results assuming he continued on his current path versus our proposed plan. In our plan, he might cut back his spending, pay down his debt faster, and start saving for Retirement. Looking at these two plans side-by-side would show him the impact of his options.