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“Give a man a fish and feed him for a day. Teach that man to fish and feed him for life…” – Chinese Proverb
Well, Lana (my first financial counseling client) was given a proverbial fish a few years ago, and although the financial hunger of credit card debt had subsided temporarily, guess what…? It came back in a big way. And before Lana had realized, she was in over her head in unnecessary credit card debt that equated to about 20% of her annual salary. What was the interest rate on that debt, you ask? 21%. Yeah. Lana was in for a world of hurt unless some changes were made. NOW. Here’s how it went down:
It wasn’t a lack of interest or desire, rather just a lack of some concrete plan. Something to believe in that Lana could latch onto with singular focus and know that the light will shine at the end of this tunnel. But… Even with that hope in the back of her mind, it wasn’t easy to just pick up and take action out of the blue. She needed some inspiration and as coincidence would have it – our paths crossed one day while she was discussing her credit situation with a friend. This friend also knew me and of the blog and said something like, “Hey. You should talk to Mike. He would probably be able to help you out.” …And talk we did…
The predicament – $7,197.11 of debt with a $44,000 annual salary (Debt = 16% of the annual salary)
After we had an opportunity to break the ice and decide that this would be a problem we could work on together, Lana and I scheduled our first meet. I asked her to bring all of her financial numbers to the table (i.e. debt, interest rates, monthly income, bills, checking/savings account balances, etc.) so that we could have a clear picture of the whole situation.
The worse news (aside from the debt itself) was that the debt was slowly, but consistently, increasing. This was mostly due to interest but over time if the debt had gone relatively unchecked we could’ve seen Lana in a demoralizing and seemingly un-winnable situation. Not good. Even worse yet was that Lana had faced credit card debt before, and she had overcome the issue. So, I asked her, “How did you pay off the debt back then, and then find yourself in this situation again?”
“Well, actually I got help from my dad to pay it off last time.”
Ahh… It started making sense now. Because Lana was ‘fortunate’ enough to receive a bailout from dad last time, she didn’t need to exercise the muscle that lets you get down and dirty to pay off every last cent. That’s the kind of feeling that sticks with a person… and drives them to stay far away from a similar situation ever again. But don’t worry – Lana will get to flex that muscle pretty soon. (BTW – if you haven’t guessed this already, ‘Lana’ has chosen to remain anonymous because of multiple reasons, but that doesn’t mean that we can’t all learn and benefit from her situation)
Back to the first meeting
We had scheduled an hour but really could’ve used 2. Here’s the rundown:
The debt total of $7,197.11 was split between 2 cards
Card A with about 10% (19.24% interest)
Card B with the remainder (23.15% interest)
Lana had $235.97 saved between two checking accounts and a savings account
And here was how she had been casually spending money (this budget didn’t exist at that time. We collected data from her credit cards and bank statements):
You can see that with $35 left over to pay credit cards (which wasn’t far off from the minimum payment requirement), we didn’t have a huge bazooka to throw at the debt. More like a Red Rider. In fact, given interest rates, and if the scenario stayed constant at that level, I gave her the estimate of 178 months to pay off all of that debt (or just under 15 years!!). Neither Lana nor I thought 15 years sounded good. That estimate actually pissed her off a bit… And that’s exactly what I needed.
(Side note: you do see student loans in Lana’s budget. The focus of our efforts was to eliminate credit card debt, regroup, and then handle the student loans. For the purposes of this article, we won’t discuss the student loans much)
We took a week to digest the information, brainstorm, and formulate a plan. After that time off I presented her with the first plan.
Here were the key points:
1) Freeze the cards.
I told her to literally grab a Tupperware container, insert both cards, fill the container 3/4 full with water, and stick it in the freezer. I’m not a proponent of cutting up credit cards due to the potential benefits, but I didn’t want her using the things for at least the first month. We needed to shock the system and reevaluate.
2) We instituted a 2-week minimum spending freeze (it ended up lasting the entire month).
If she didn’t absolutely need whatever it was for survival, she wasn’t allowed to buy it. No questions asked, end of story. This act had 2 purposes. The first was that she needed to test herself to see what saving and financial sacrifice could feel like – I wanted her to feel that ‘itch’ to win. And secondly, I wanted to see if she was serious about getting out of debt. I don’t have a ton of time to waste these days and if she wasn’t 100% committed, I knew she’d eventually fall off the wagon. If that was a possibility, I had better things to do.
3) We decided to shock the financial system for 4 weeks, then sit down for a debrief and make a more long-term plan
I started to find out how this process would go when we sat down for that next meeting
Lana came in hungry… ready for knowledge and actual food. The woman took the spending freeze to heart and I started contemplating a waiver draft to C.M.A. in case she fell out due to starvation… She was determined and I knew that if things went well, Lana would follow through on the plan. My primary focus now was to gain some traction to show her that we could make some progress, and hopefully prove the budget concept in her mind. Here were our next few goals:
1) We needed to create some stability in her accounts. For this, we had to beef up her emergency fund. $500 was our target here. As a homeowner with a fairly small commute, we needed to make sure there was some cash available but didn’t want to waste too much that could’ve been spent on debt.
2) Some of those expenses had to go. Blue Apron, Advocare, and ‘miscellaneous shopping’ were the unquestionable first three. There’s a time for the diet and food services but that time wasn’t during the budget crunch. Next up, while we eliminated Blue Apron, we knew the grocery budget would increase so that had to be kept in check. Fun money would either be eliminated or significantly reduced and conversely, we needed to establish a ‘savings’ line in the budget (see emergency fund above)
3) All remaining cash would go on the card carrying 10% of Lana’s debt. Simplicity and a moral victory were the drivers of this decision.
4) I also urged Lana to either work at least 1 hour per week in overtime (her job had this ability on occasion), or to find a secondary source of income to help supplement the debt payoff.
Now with a good idea of where she was spending and what was coming in, we started haggling
5) Could the insurance rates be negotiated or shopped around? Internet providers, driving less to use less gas, and we took a hard look at each of the remaining items to make sure they were absolutely necessary to Lana’s current life. Admittedly not much changed in this department, as I came to find out she had good rates and wasn’t frivolously spending in these categories.
One main thing to keep in mind here is that we all value different things/services for different reasons. You may see some line items on Lana’s budget and think, “Why in the world does she need that?” I would just say that if we took a hard look at all of our bank and credit card statements, there would most likely be a few of those head-scratchers on there. So let’s remember:
You can go on a diet and still enjoy eating…
6) Lana would make the minimum payment on her larger balance credit card and quickly eliminate the smaller counterpart.
The above plan remained mostly intact for the next 4 months
We would meet monthly to update the budget, track progress, and discuss new and unique financial circumstances, but she stayed the course and worked her tail off. Lana had received a raise at work and found a few extra hours each month, and in that 4-month time period she eliminated the card debt carrying 10% of her balance, and made decent progress on the larger (about $5,600 remained after 4 months, and when you add accumulated interest to the payoff amount, Lana was making great progress).
During our next meeting, Lana conveyed her excitement that progress had been made, but she couldn’t hide the fact that the progress wasn’t exactly what she had hoped for. Her mental plan was to knock the debt out in 1-year total and at the current rate, she would be debt free after about 2.2 years of tough, hard work. She asked, “What else can we do to knock this out faster.”
After describing the fact that just small monthly changes can add up the huge differences in the long-term, Lana became reenergized to work a little more often and spend a little less often. She found regular, part-time, work with a family member and really cut back on groceries and in the ‘fun’ category. We didn’t stop there, either… Lana had come to me with an idea of opening up an additional card and transfer the remaining balance to it. You see, there was a promotion going on that allowed 0% APR and no transaction fee for balance transfers on newly opened cards. The 0% interest rate would last for 12 months. The downside was that if the balance remained on the new card after 12 months, all accumulated interest for the previous year would be applied instantaneously… That would be a rough one.
There was much deliberation and discussion of applicable pros and cons, but ultimately, Lana decided to pull the trigger and make the transfer. One hiccup: we heard back from the new lender that she only qualified to transfer $2,500 over to the new card. We took the deal and then needed to decide on whether to focus on the card with 0% interest but a huge looming penalty or the card with a constant 23.15% interest rate and a few thousand dollars balance. We chose the 23.15% card and poured all resources into it while Lana made minimum payments on the distant, but steadily approaching iceberg.
More progress was made, more months passed by, and eventually, we had accumulated the $500 in emergency funds, so that line item was removed from the budget… That meant more to throw toward debt.
Let’s fast forward to 7 months after our first meeting and we’ll find Lana with only $2,606.77 remaining in debt and a mountain of self-discipline and respect gained. She also picked something else up along the way… A love interest (Archer). This new man was definitely a positive influence in many areas, including with personal finance, but Lana wasn’t 100% confident in revealing her deep dark debt secret at the onset. Frugal dates were had and the love grew, as did Archer’s desire to make a big gesture. It was a cruise and she said ‘Yes!’ (to the cruise only, let’s not get ahead of ourselves, here…).
Lana came back to our meeting in month 7 and dropped the hammer on me.
We were so close (maybe 3-4 months away from being debt free) and she was paying for and going on a cruise. I may have cursed out loud, I can’t remember for sure (and she’s remaining anonymous so you can’t ask her). The one financial positive to this situation was that Lana was resolved to paying for her portion of the trip entirely in cash (let’s re-enter the ‘savings’ category). We discussed excursions, drink packages, and taking only cash on the trip as to not overspend. Sure, the horseback riding was slightly cheaper, but I cautioned her that the hour spend bareback may bring less value than the whole-day snorkeling trip (priced at $35 extra). Honestly, I couldn’t believe that we were having these discussions either, but hey it was her life and she had worked hard over the last year to earn this near debt-free position. Her past discipline resulted in her freedom to choose and plan for this trip. So we made the financial best of it.
Another thing that resolved as Lana and Archer planned for their trip, was that Lana’s debt secret didn’t remain secret much longer. She knew that Archer deserved to know and if the relationship was headed where she thought it was, she would have to share these types of things. Lana relayed to me that Archer took it well. And, in fact, when I met with them for a follow-up interview to prep for this article, Archer said to me, “I considered paying off the remaining $1,600 or whatever it was for her when she told me. But I’m glad I didn’t.” Lana was nodding her head as he continued. “She got such a sense of accomplishment and self-pride for finishing the journey on her own. It was awesome to see.”
Despite the cruise, Lana didn’t lose focus.
She came back hungry (not literally, this time) and ready to knock out the remaining debt. And that’s exactly what she did. Here’s a recap in bullet form:
Total time to debt free was 14 months
Total principle paid off was the $7,197.11 she started with, although interest accrued meant her total payoff was some number higher.
Her credit score was 690 at the starting point and rests at a comfortable 800 average now.
She ended up earning a $46,000 annual taxable income over the debt payoff period (plus the additional secondary work)
There was a tax return (about $1,500) that came into helpful play along the way and presented both a moral and financial boost to the process.
She completely shook the anchor of credit card debt that had plagued her for so many months and Lana ended up picking up a partner along the way…
Back to our follow-up meeting
I asked the pair how life would change now that Lana’s credit card debt wasn’t something they had to worry about. Lana answered, “I don’t think our lifestyle will change much, if at all. We may actually go out to dinner now, but otherwise our day-to-day should remain much the same. I found out that there’s accomplishment and freedom in a life where you make sacrifices up front. We have what we need and we’re happy with that…” And like Lana normally won’t, she didn’t stop there. “…Besides. Now we have a wedding to start planning and saving for!!”
Thanks for reading!
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