Fix Polly: A Case Study
Posted by John Draper | Filed under This & That
Polly is 25 and single. She has almost $80,000 in debt, $60,000 of which is student loans. The rest is credit card debt. Polly makes $40,000 gross a year working full time, and she has a part time job where she grosses another $10,000. She has no savings and no emergency fund.
She’s about to get a $5,000.00 tax refund, which she is planning on using to pay off 2 credit cards and start an emergency fund of $3,000.
Polly can’t decide what to pay off next. She has contacted her credit card companies and cannot get her interest rate lowered nor does she qualify for a debt consolidation loan. She’s currently spending 15% of her income on debt repayment.
She’s left with:
- 1 credit card $12,000.00 (11.5% interest)
- 1 credit card $6500.00 (18.5% interest)
- 1 student line of credit $30,000.00 (prime + 1%)
- 1 student loan $30,000 (6% floating rate)
Okay, so now you have to do an analysis.
- What’s Polly done wrong?
- What’s her current debt service ratio?
- What does she need to do to get out of the hole?
Have fun!
December 18, 2008 at 8:41 am
Well I think that Polly should pay down the higher interest rate credit card first, the 18.5%. Then I would try to get another credit card that has a balance transfer option with a lower interest rate if she cannot get that one lowered or another means of lowering it. I would also not keep $3000 for a emergency fund, depending on the situation, i would lower that, as she ain’t making 18.5% in any savings account.
Her current Debt service ratio is 15%, I think, as that was she is spending on her debt. The only way to make a dent in the debt is to increase her payments to the max that she can afford, of course whiping out the highest to lowest debt first.
I think that shes paying just under $500 a month in interest.
December 18, 2008 at 9:05 am
I’m not good with numbers, but this might as well be me so I’ll give it a try.
What did she do wrong? 1) Track spending! She has to see where her money is going to be able to be able to make a realistic budget. I was afraid to track my spending because I didn’t want to make any more cuts. I felt I was already living on so little compared to the good money I was making. But if I would have seen how much money I was spening on clothes that I “needed for work” or on dinners and drinks, I would have been more careful. 2) Budget, budget budget! She has to see that as credit cards grow, they will take up more and more of her budget, thus making the problem worse. She has to make the cuts now and see just what it will take to have enough money to cover her expenses. Of course it’s not just making a budget (which I sometimes did). The budget must be respected (something I still struggle with but am slowly getting better). 3) Cash only! This is another difficult point to implement. It only works if points one and two are working. Otherwise, she will overspend and need to withdraw more money or use credit for basic needs (food, transportation) at the end of the pay period. In short, Polly was not living within her means. Student loans suck up so much money that recent graduates are fooled by their paycheck into thinking they have money. They don’t. This is when credit cards come in and compound the problem. She should have used an arsenal of financial planning tools to live within a budget and start reducing her debt instead of increasing it.
As stated, Polly is spending 15% of her income on debt. The text does not specify if this is net or gross, but I assume that this is her debt service ratio (based on an online definition of the term). From what I read online, this is fairly low. However, this 625$ per month (based on her gross income) could be a much bigger percentage of her take-home pay, depending on the deductions such as health and retirement plans. Still, she must be spending a lot to continue to go into debt under these conditions. Perhaps she has a high rent payment or other montly expenses. If she does not qualify for a consolidation loan, her debt-service ratio must be in excess of 36%.
Depending on her expenses, Polly needs to put as much money toward debt reduction while still staying within her budget. She should make regular payments on her student loans and put any budget surplus into the high-interest credit card until it is paid off. Keeping 3000$ of her tax refund for an emergency fund is a good idea to keep her on track. The balance should go to the high-interest card. She needs to follow steps 1-3 outlined in my what went wrong answer and stick to them. When the high-interest card is paid off, she should allocate the money to the other credit card.
Since she is getting such a big refund, she probably still has educational tax credits. In the spirit of yesterday’s post, she could apply to have her deductions reduced for next year in order to pay less tax throughout the year. This is only a good idea if she is discipined enough to use the extra income wisely (Ie to make bigger payments on the credit cards).
December 18, 2008 at 9:10 am
The $3000 emergency fund should be applied towards the 18.5% int c.card…she should contact the credit card companies again and keep asking for the manager (I remember Gail saying to a TV couple, “so they lied to you” in regards to not lowering the int rate) – this has stuck in my mind like glue. If that doesn’t work, then the remaining amount should then be transferred to the 11.5% card (if there’s enough credit avail.). This would effectively wipe out the highest c.c. Perhaps, she can try to get a Line of Credit, which would save her more.
My calculations show her DSR at about .63, which means she’s not making enough money to cover her expenses. I believe she’s incurring approximately $440.00 a month in interest charges!!
What should she do?…well, the emergency fund should be about $50 -$100/month. If she spent $60000 in education and is only making $40K per year…there’s something wrong…she needs to find a higher paying full time job.
If she could swing a Line of Credit for the remaining $77K ($80 less the $3), then just make one lump sum payment every month. And my last piece of advice would be…CUT, CUT, CUT!!..the monthly expenses (i.e. coffee, cigarettes, restaurants etc) and apply it towards the debt.
December 18, 2008 at 9:22 am
(Continued)
Interest per month from each card/loan:
115
101
113 (depending on prime)
150
For a total of: 479. This is pretty scary as only 146 of her 625 per month is going to the principal. She is spinning her wheels. This illustrates why she needs to put even more of her money toward debt reduction in order to get out of the hole.
Other considerations: She should make sure that her emergency fund is in a high-interest savings account. At current rates, she can make about 6$ per month in interest. As long as she is not dipping into the emergency account, she should re-invest this interest toward another savings account to use for irregular expenses or toward debt reduction (every bit counts).
December 18, 2008 at 9:26 am
I would be curious to know more about the nature of her student loans. While my inclination is to say “pay off the highest interest loan first!”, that won’t necessarily work in this case, particularly if her loans are held by a provincial loan organization like OSAP. OSAP won’t let your loan just sit there at the lower interest rate, they deduct directly from your account.
I think something Polly has actually done RIGHT has been to take on a second (PT) job, although she needs to be careful with her expenses there (how much do her transportation costs increase? How much is she spending on lunch/dinner/snacks at work?) If she can cut her luxuries down to a point where she’s actually spending within her means on the 40k salary, she should concentrate on putting as much of the $$$ from her PT work towards her credit card as possible.
December 18, 2008 at 10:21 am
Too much pressure Gail!!! Making it about prizes! I haven’t had enough coffee yet but here goes….
I am not going to cheat – the people above figured out the interest/DSR already. I wonder where Polly lives. Can she live with her parents or roommate to reduce her rent costs so she has more money to put towards debt repayment? You have said before the % are just a recommendation as long as you balance at the bottom. If she does not have a car or house I would make her emergency fund a little less and put more on her 18.5% credit card – the balance of that card I would move to the 11.5% card. Then she can add smaller amounts to her emergency fund to grow it.
As per your blog the other day – she needs to adjust how much her employer takes off for income tax to get her more money each pay cheque instead of such a large tax return. That gives her more money to put towards debt all year long and reduces her interest costs.
December 18, 2008 at 10:34 am
My first thought coincides with Melanie – get those income tax deductions lowered at source!!! If you assume that she is likely in an approximate tax bracket of 30%, her net income is only $35K combined, making her monthly 15% debt repayment $438; she is not even touching the principal of her debts!! I came up with similar interest payments as Melanie – a shortfall of $41/month, compounding at warp speed. If she had her income tax deduction lowered to account for her tuition credits, she could generate an additional $400+/month to put towards her debts. If she lived in Saskatchewan, she could also qualify for the government incentive of $10,000/year Income Exemption (tax Free) for four years, further reducing her taxes owing. The kicker is that all this freed-up cash MUST go towards reducing her debt. As she starts to see results, the “Can Do” attitude will accelerate, shining that light at the end of the tunnel. I believe that not anticipating the high cost of post-secondary education is likely where she went wrong, forcing her to live on credit She should most definitely be in a higher paying job than what she is, because that second part-time job is going to run her ragged. On the up-side, if she is working seven days a week, that doesn’t leave much time for shopping! On the down-side, she will need strong determination to see this through, or the “I work hard, I deserve it” demon will appear. I would also seriously consider using more of that tax refund to pay down debt, (cut that 18.5% debt in half) and work diligently to save on an ongoing basis. There are a gazillion ways to save money – get a room mate, for example, car pool, etc., that are beyond the scope of this article, but my money is on Polly – she can do IT!!!
December 18, 2008 at 10:59 am
1) she should pay off the higher int credit cards first.
2) screw the emergency fund for now, dump that chuck into debt, and set up a small weekly emergency savings deduction.
3) re-evaluate the budget. Move into cheaper accommodations if need be.
4) With that much student debt, she’s only making 50K with TWO jobs? Something isn’t right there. Perhaps she should consider finding a higher paying job?
5) With her new job, she needs to assess her tax refund, why is it so big?
6) While she doesn’t qualify for a debt recon. loan, she could always search out a new CC company that offers a lower rate.
Otherwise. I’m looking to see what others have to say.
December 18, 2008 at 11:05 am
(Not an answer, but a question)
How much SHOULD one be making right out of university, Gail?
40k a year at 25 seems quite reasonable to me given that at 25 she’s likely only a year or two out of school.
The topic of cost of university education vs. expected salary has been brought up by commenters a lot in previous posts, so I’m curious about what is considered appropriate.
I’m clearly assuming Polly doesn’t have a law or med degree- her debt load would likely be a lot higher!
December 18, 2008 at 11:37 am
I could be very wrong but I think Polly should be contacting a trustee in bankruptcy.
Be kind because I am definitely not experienced in interest rates, etc. and had to do some guess work but it will take her WAY too long to pay off this debt. This is what I figured:
INCOME: She grosses $50 000/year. I assumed a 20% tax rate although it is likely even more if she is getting $5000 in tax rebates. At 20%, she would be netting $40 000 a year or $3333.33 per month.
DEBT REPAYMENT RATIO: For her monthly budget, Polly would be putting 15% towards debt repayment. 15% of $3333.33 is $500. It is unlikely that Polly can afford allotting more than the 15% towards debt considering that she has zero savings and needs to build an emergency fund and savings.
DEBT REPAYMENT PLAN: This is where I really had to guess or assume some things. The first things I assumed was that her minimum monthly payment for her credit cards is calculated at 1.5%. I set her minimum payment on CC1 at $180 and CC2 at $97.50. Going back to her debt repayment amount of $500, we would then have only $222.50 to pay down both lines of credit with or approximately $111.25 each.
Unless I am way off the money, and assuming Polly doesn’t increase her wage substantially, she should consider filing bankruptcy. Her monthly interest fees are almost the exact same as her 15% debt repayment. It will take her upwards of 25 years to get rid of this debt. Even given an extra $3000 or an extra $5000 lump sum towards debt repayment, her debt is unmanageable and especially considering/assuming she doesn’t have any assets like property/houses she should consider filing bankruptcy.
Hope I’m not sending dear old Polly up the creek without a paddle!! Also, forgive my guess work, I’m new at this.
December 18, 2008 at 11:48 am
Sounds like some bad news and a rough ride for the next little while unfortunately. Here’s my calculations:
Minimum payments:
CC @ 12K => $360 (3% min)
CC @ 6.5K => $195 (3% min)
SL @ Prime + 1 => $345 (114 months)
SL @ 6% => $425 (114 months)
Total min payments = $1,325
Net income (50K @ 32% tax) => 34,000
Monthly net => $2,833
Debt service ratio (if I’m understanding correctly) => 1325/2833 = 47%!
So 47% of net income should be going to just pay the minimum amounts on all debt, but she’s only contributing 15%. So her debt is piling up quickly. Even if she was paying the minimum, it would be a challenge to not rack up further debt just by paying for basic necessities (i.e. food, shelter, etc.).
So what’s gone wrong? Well, without knowing what her academic path was, I would say poor money management while a student. Assume it took 5 years to complete a 4 year degree at $5,000-8,000 annual tuition, which would be $40,000 in tuition, leaving $20,000 for “life”. Maybe she didn’t live at home, maybe she did. If possible, she should have lived at home, or if not, at least work while in school. I suspect that reckless spending, and/or not working part-time while in school got her into this mess (I worked part-time while taking 5 courses a semester and did fine, so no excuse). And poor money management – i.e. inability to stick to a budget, or create one – is probably still haunting her today.
I think keeping some of the refund money for emergency is a good idea, but a lower amount should be sufficient. The rest should be paid for the debt with the highest interest rate.
However, given her debt service ratio, I wonder if declaring bankruptcy would be the way to go. Her debt is overwhelming her income. Even if she were to get a job paying $100,000, it still would be a significant challenge. And we all know, someone at that age won’t be getting a job like that anytime soon.
Some other options is to get some kind of student loan relief through the Debt Reduction in Repayment Reduction (DRR) program provided by the federal government which can contribute up to $26,000 of relief; however, looking over the guidelines, she probably won’t qualify. But she can get interest relief, where the government will pay the interest for a term, which she could probably qualify for.
As for the notes regarding adjusting her income tax so she doesn’t get a sizeable refund at the end, here are my thoughts. Because she has no RRSPs (“no savings”), she’s not getting credit from that. So she is either grossly and incorrectly setup with her workplace regarding tax base, or my thoughts is that this is just residual tuition credit, and that the refund the following year will be drastically lower, or she may even have to pay!
As I said, unfortunately, it looks like some tough decisions are ahead for Polly.
December 18, 2008 at 11:56 am
Holy crap. If this is a real person, my heart goes out to her…by my calculations she would have to pay more than 50% of her net pay just to make minimum payments($115/$100/$136.25 as prime -depending on the bank- is roughly 4.5 now – I checked online-/$150)!!! Since Gail is such an advocate of emergency and savings I would put a little in each at the most $500 in an RRSP (which will do her well where she is so young) and $500 in a TFSA that would give her a high interest rate and still have access to it. I would put $2000 onto that high interest rate card, which would reduce the interest from $100 to $70 per month off the bat.
Where did she go wrong??? I know, I know! She doesn’t have Gail as her mom and was never taught how to budget, or what the consequences would be to her spending (been there!). So she spent, and spent and spent. When one credit was full, she just opened another (again, been there), and another. And I’ll bet 20 bucks those student lines of credit are not all on student fees, tuition, and books!!! Another mistake!
To get out of the hole, she has to work hers off! She has to waaaay cut expenses, shop at second-hand stores for clothes, move back in with mom and dad or get a cheaper place or get a roommate (although this could be more work – been there too), ask for a raise depending on her situation at work, and where she just finished school she must be a pretty smart cookie – do some tutoring – in Cape Breton you could make easily $20 per hour! I know I needed a tutor in university, and probably should have one for a couple subjects in high school from time to time. It’s easy work and pays well.
Then she just has to budget – big time! And just keep picking away at those debts, and over time ( 6 months actually ) there is an automatic reassessment of interest rates (on credit cards at least) and if she is making at least min payments on time every time they will automatically reduce it significantly, so that will cut her interest again. It may seem frustrating and like there will never be a light at the end, but I would reassess everything every 6 months to see if she is in a better situation to renegotiate interest rates with others…how does that sound, Gail?
December 18, 2008 at 12:03 pm
…can you get interest relief when it is a line of credit?? I assumed she couldn’t, otherwise I would have suggested this, although I have done this, and when the payments come due again (which comes really fast) it hits harder than always having to make room for it….and she would have to make an effort to get something paid OFF before the payments kicked in again…again, been there…
December 18, 2008 at 12:07 pm
Interest relief only applies to federal granted student loans, not banks line of credit for studies.
December 18, 2008 at 12:13 pm
That’s what I thought…and I never thought of bankruptcy, which I would consider, if she learned from the experience, but I’m not sure she’s old enough to really have learned her lesson, and I have a feeling she would be back on the spending path again…
December 18, 2008 at 12:15 pm
Well, there is no way I can compete with all these answers,so I won’t. But what I couldn’t get over is the $60,000 student loans & only making $40,000. Of coarse she is just starting out & will earn more, but I make that much doing office work & all I have is grade 12. Times are different, but I think if money is spent on higher education, students need to research how much they will earn in that particular field. What is the ceiling for earnings? Also, the longer they are in school, they are racking up debt, when they could be earning money. Now, don’t get me wrong, some fields require years of university & that’s ok. The best way to explain what I mean is by using my son as an example.
I wanted him to get a higher education. He didn’t know what he wanted to do, so he waited a few years. He said it was pointless to spend all that money until he knew what he wanted to do. He has seen too many kids waste time & money in university & come out not getting a job in their field or still not knowing what they want to do. He finally decided on taking a 1 year coarse at VFS in Vancouver. It was expensive ($20,000) & very intense, but he would be out & earning a living in a year. ( Don’t ask me what his title is, but he makes sound for video games). His debt is paid off & within a couple of years he is making over $60,000. By the way, he LOVES his career choice. So, I guess my point is all debt should be considered carefully & that includes debt due to education. And with education costs increasing evey year, people can’t just shrug it off as ‘ oh well, that’s what you have to do in todays world’ & ‘it’s all part of the youthful experience’. Was some of Polly’s credit card debt due to living away from home during university?
But, none of this helps Polly now. What should she do? What Gail has said in all her shows, track her spending (2009 TDDUP Life Planner will help), pay down debt: use refund to get rid of debt ( highest rate first), start putting away 10% in the new tax free saving account for emergencies & adjust the income tax being taken off as was blogged the other day & use that money to pay down credit cards ( not to use it as free money to spend on stuff!) If she is anything like me, you make it too complicated & she will get discouraged & give up.
December 18, 2008 at 12:19 pm
I think Polly needs to hit the pavement looking for a better higher paying Job although without knowing her academic path I don’t know if this is realistic. As Gail says…either spend less or make more! I think it would be Possible for Polly to get out of this mess with major dedication and stick to it…i would get the cc paid off first, then cut them up as she obviously does not know how to use them responsibly. The student loans next, then the LOC. IAlthough Gails blog did point out that tax refunds are not optimal, to receive such a large refund means Polly had left over tuition credits and thus the refund next year will not be so much if any.
December 18, 2008 at 12:19 pm
I’m sorry, my post was too long to put into comments and I wanted to show a rough budget I mocked up.
Here is my answer in full as posted on my blog.
fabulouslybrokeinthecity.blogspot.com/2008/12/answer-to-gails-polly-riddle.html</a
This was a lot of fun Gail!! I wish you’d post more of these.
@Kate: $40k is reasonable to me as well. It depends on the degree, I mean a History Major will not make as much as a Business Major. It depends on the job they are applying for based on their skills.
If she did a business degree like I did (private business school), it was $20k/year in tuition.
Other degrees are normally around $5000 – $6000/year in tuition fees. And after I paid for all of that, I ended up $60k in debt and with a $65k salary. It all depends (a bit) on how much you paid for tuition because I had a lot of great alum contacts when I graduated from my school which helped me land my job, which is even considered just as “average” since my peers started at $80k – $100k.
December 18, 2008 at 12:21 pm
Debbie, your son is wise beyond his years. I deal with a lot of grads in my business, and I always ask them if they have plans for the following year, and I always tell those like your son that they are soo smart. I can tell the kids who will end up like Polly and the ones who won’t. I wish there was more LIFE education in our education system, as I’m sure there are a LOT of Polly’s out there due to lack of knowledge…
December 18, 2008 at 12:22 pm
Oh, and as for Interest Relief… it only applies in dire situations. You can’t get it if she’s able to make $40k a year and show that she’s still able to ‘live’ on $2k net each month considering rent, etc. If not, everyone would just abuse the system.
I think it only applies if you lose your job or if you earn $15k a year and have to make $500/month payments or something kind of outrageous. And you have to PROVE on paper with bills that you cannot make those payments.
At least, that’s what I think.
December 18, 2008 at 12:31 pm
Interest – 115, 100, 113(3.5% prime rate), 150
What has polly done wrong:
One thing polly should have done was investigate the annual income should would make based on her expected employement occupation after her degree was completed. She should have investigated the cost of her degree vs. her expected income. She either drastically over estimated her income or the amount that she would be able to use to re-pay her debt.
She shoud have thought about taking a year or two off before starting her degree to work and save up so she could have avoided the large student loans.
She should have filed a TD1 to reduce the tax the employer would take off her pay checks. $5000 refund is a lot of money not earning interest or being used to avoid compounding interest.
Current Debt Serivce ratio:
Debt service ratio of 91% given living expenses of 35% of her income.
What does she need to do to get out of the hole:
Given the limited informaion – I would recommend Polly file for bankruptcy if her loans are not cosigned by her parents. Before she does so she should have living arrangments sorted out as she will have a tough time after doing so finding anywhere to rent.
If her loans are co-signed – She needs to look into increasing the amount she can apply to her debt. Can she share an apartment with friends reducing her living costs? Can she take the bus or bike to work to reduce gas costs? She needs to set a budget and start looking at where she can but to make a larger impact on those debts.
Additionally, being a recent graduate she could be looking to get a raise or if she can do training or certifications to increase her annual salary she should look into these options.
December 18, 2008 at 12:33 pm
Obviously she’s seriously underemployed. Either that, or she’s employed in a highly academic, low paying job, which would make a great hobby instead.
With two 30000 student loans, she should have some sort of serious education that should land her a good job.
My suggestion is to stop everything she’s doing and find out what her options are for finding a better job. When I was laid off in 2000 I used the services of a employment consultant, and I was very lucky to get fantastic advice. [for instance, any line in a resume should have a good answer to the question "so what??"]
I recommend using such service, though, I also am thinking that maybe more debt is not a good idea…
If she’s not qualified for a better job by now, then… sigh.
December 18, 2008 at 12:34 pm
I want to edit “that should land her a good job” to say “that should land her a good _paying_ job”….
December 18, 2008 at 12:55 pm
Wow!! What a mess! That’s the title of a children’s book about a friendly but clueless puppy who gets into trouble. Perhaps we should make children’s books about friendly and clueless adults who get into trouble!
First – Gail informed us that she takes home gross $50,000, but after using a nifty income tax calculator (and assuming that she lives in Ontario, where I live), her NET income is: $40,159.
Here’s the website I used to give people an idea of what they owe — go ahead! It’s fun (or scary)!
http://www.ey.com/GLOBAL/content.nsf/Canada/Tax_-_Calculators_-_2008_Personal_Tax
She is getting $5,000 back in income tax credit. How did this come about? She’s not in an exempt tax bracket and she’s working (no student/tuition credit UNLESS she is claiming credit on past tuition,educational stuff, a move for work etc. , which would be fine. If she overpaid her taxes, shame on her (as per Gail’s recent blog)! She is giving away money to the government for free when she is drowning in debt. However, I’ve been living in Europe for 8 years, so I may not have a good understanding of the Canadian tax system. I’m filing my first Canadian tax return in eons this year ! Yipeee!
I have calculted that at 15% of 45,159 (net income + tax return) is about $564.48 per month ($6773.85 per year), she is NOT making her minimum payments for all of her various debts. I calculated that, roughly, her minimums for the various debts are:
Based on a minimum calcuated at 2.5% of the principle -
Credit card no.1 (12,000) = 300 (approx) interest paid per month: $115
Credit Card no. 2 (6,500) = 162.50 (approx) interest paid per month: $100 BUT only $62 of principle is paid off!! eeek!
Student loan no. 1 : Minimum (based on 1.5% like mine) = 450 ( of which $150 interest)
Student loan no.2 : Minimum (based on 1.5 like mine) = 450 (of which interest, calculated at the current prime rate of 1.75+ 1%) = $68.75
Annual total of minimum payments – $16,344 which is 40% of her NET income (not including the tax refund). or 36% (if one includes the 5000 tax refund). She’s WAY out of wack. Or am I? I’m not used to fiddling with figures. Maybe I’m wayyyy off. But this is what I get = scary numbers.
General Conclusion:
a) The second Student loan, while a large sum, is the least expensive debt interest-wise.
b)With these minimums, she needs to set aside $1,362 per month and it will take EONS to pay off at huge interest costs!! For example, if she pays off using only minimums, it will take on average over 20 years at a total cost of: **$36 764.12!!** GASP!!! (that is over the years of debt repayment). These figures may be slightly off since I’m not sure what the government had set up for her debt repayment schedule etc.
What to do:
1st: cut up those credit cards!!!!
2nd: Use all of that $5000 tax return to pay off that nasty 18.5 credit card debt and – hey — call that company back and tell them that you are taking your debt to another financial institution with a lower interest rate and that you’ll transfer that balance! Play hardball!! If that doesn’t work to lower the interest rate, then do that balance transfer to a kinder credit card company (If they actually exist). Once that debt is paid down by 5,000, then the the monthly payments will be vastly reduced. Putting that original $162 per month towards aggressively paying off this debt will pay it down in one year (at a cost of $131 in interest).
Once this goal is accomplished, she must pay off her second most expensive debt, and so on and so forth….
BUT – First – Call up the government and discuss your payment schedule etc. They have a miriad of options for those in dire straits. Despite their reputation, they are actually nice and helpful. I call them all of the time to ask questions about my loans. I’m usually happy, so are they. They may be able to suggest some helpful courses of action.
I feel very badly for this case study woman!!!! For her emergency fund and savings, she will have to put aside some small amount every month, not that $3000 lump sum, which is nonesense with a credit card noose around the neck tightened at 18.5%. Beyond what I’ve suggested, I’d say, go to Slice.ca and apply to appear on ‘Til Debt Do Us Part’! In the meantime, get a better paying second job (or first job) and use that extra money to pay down the debts! If this is not possible. Go to your bank and tell them where you’re at. Speak with your family social-network as see if you can arrange to live at home at a reduced rent whilst paying off those debts…Be aggressive. Try everyting. If all else fails: Bankruptcy may be the only answer. With no assets (house etc) or dependents (children), she may well be a prime candicate and would be able to start over. Whatever she does, her current position guarantees missed payments/non-minimums, so she will have bad credit no matter what.
Finally, she needs a good kick in the butt and should not use her credit cards as income!
December 18, 2008 at 1:02 pm
Well I am afraid I will repeat some of what is here already but didn’t want to read the other posts until I had put in my ideas!
Debt service ratio = net income : debt = 33890 : 78500 = 0.43
Net Income = 50000 – 8400 (fed taxes) – 5000 (prov taxes) – 1990 (CPP) – 720 (EI)
= 33,890
Interest: Credit Card #1 = (12000)(0.115)(30/365) = 113.43
Credit Card #2 = (6500)(0.185)(30/365) = 98.84
Student LOC = (30,000)(0.045)(30/365) = 110.96 (Depends on Prime)
Student Loan = (30,000)(0.06)(30/365) = 147.95
Total Interest = 471.18
Net Income per month = 33890/12 = 2824.17
471.18/2824.17 = 16.68% of each months net income is spent on interest
Issues:
1) $5000 tax refund is too high, she is paying too much in taxes each pay period – this can be reduced via Human Resources. This adjustment will “free up” more money each month to pay down debt, as interest is compounding on these debts – the sooner she makes a dent the better.
2) We are unaware of the interest rates on the cards she has chosen to pay off, we will assume that she selected cards with a higher interest rate to pay off first. That being said even if she did select a lower interest card you cannot underestimate the psychological power of having made the first step and paying something off in full. The momentum from this success may give her the strength she needs to continue on with debt repayment – small steps can be as important as big steps
3) Although an emergency fund is important, the better course of action would be to use the majority of the refund to pay down debt. A savings account will at most earn approx 3% while interest is compounding at as high as 18.5%. A smaller amount should be used to seed the emergency fund.
4) I have recently followed my dreams and returned to school so I am well aware of the costs involved. $60,000 in student debt seems high. She would have been better served applying for every scholarship and bursury available (scholarshipcanada.com lists everything imaginable) If she did not receive any assistance she may have considered seeking part-time employment – particularly on campus which may have offered her a tuition discount. However, what’s done is done – she must learn from it and move on. At least the interest on student loans is tax deductible!
How to Move Forward:
1) Sit down with all records and ensure the accuracy of the figures. Make a budget, eliminate all extras, take advantage of all savings opportunities (example I do almost all of my grocery shopping on customer appreciation day when I can save 15% – a running grocery list on the fridge makes this possible), apply all “found” money to debt repayment people do not realize that even 25.00 per month can make a difference over the life of the loan.
In the budget allow for RRSP contribution (may prove to be a good use of the refund money as well) the magic of compounding makes it beneficial to start ASAP. Even $50 per month will go a long way. If she deposited the $3000 now she would have conservatively approximately $32,000 when she retires.
2) As she owns no assets it may prove to make the most sense to declare personal bankruptcy – this decision must be made carefully. I also believe that the student loans cannot be erased by bankruptcy so this may not be an option for her. Also we are not certain if there is a co-signer for the LOC – she must not damage someone else’s credit rating.
3) She may be able to apply for a brief payment suspension of the student loan payments – I believe there is a maximum number of months that this can be done throughout the life of the loan. It may make sense to suspend payments and put this money towards the higher interest credit card debts in order to bring these balances down as soon as possible.
4) There are dozens of credit card companies – she should select a company with a lower interest rate and transfer her balances to the new card. The old cards must be cancelled as soon as they are paid in full. Make sure the new card is a “permanent” low interest card rather than an introduction rate which skyrockets after a few months.
5) She is already working two jobs – but can she find something that pays better? Does she have belongings that can be sold to bring in some extra cash? Are there little ways she can earn a little extra or save a little extra each week? I know that the bottom line is that you must earn enough money to cover your expenses but at some point you will reach a breaking point – she must determine the most effective use of her earning time.
Ultimately I think the majority of her debt is such that will not disappear even if she declares bankruptcy. Therefore she must examine her life and budget and make the necessary adjustments to dig herself out of this nightmare as soon as possible.
It will not be easy – but most things that are worth it rarely are!
Now I must start doing my homework or I will not be ready for my exams! Love to read your blog and posts.
Happy (frugal) Holidays to all
December 18, 2008 at 1:10 pm
What Polly has done wrong is borrowed more than she can afford to pay back.
While Polly currently pays 15% of her income toward debt repayment, her debt service ratio (according to her banker) would be closer to 34% (I assumed the student loans had 7 years remaining and were not interest-only payments) not including rent.
Using my assumptions, Polly is not making large enough debt payments each month to keep her payments up to date (perhaps why she can’t get a reduced rate on her credit cards).
Interest on her debt each month is $113.42+$98.83+$123.28+$147.95 = $488.48 This represents 16.74% of her net income (assuming a 30% tax rate).
To get out of this hole, Polly should try again to get a reduced rate on her credit cards.
And/or
If her credit is already damaged due to late/missed payments, she may want to go to credit counselling and try to embark on a debt management program (often interest on credit card debt can be reduced or stopped as long as program payments are being made – they may also be able to help extend the amortization of the student loan).
Another option is to offer the $5k tax refund to the credit card @ 18% as a settlement of the debt in full – if the credit card company accepts her credit will be impacted. This would reduce her monthly payment load by $195.
She should look at earning more income – is she maximizing her degree?
She could seek advice from a trustee re: bankruptcy or consumer proposal (I am unsure of the current rules governing student loans in case of bankruptcy/consumer proposal)
She should forgo the emergency fund for now as her current financial situation is a financial emergency that needs to be dealt with.
Hope I win the planner!!!!
December 18, 2008 at 1:13 pm
1. What’s Polly done wrong?
Polly is so young to have made so many mistakes! First, Polly did not plan well enough for her education – she should have saved up for school, applied for every scholarship/bursary/grant under the sun, worked part-time in school, and accelerated her studies if possible. She also should have lived frugally – avoiding parties and booze, splitting textbooks with classmates, buying used where possible, using student discounts, living at home if possible, using public transportation, and the list goes on. By the looks of her credit card debt, Polly probably left home for the first time and started living the high life with no regard to her future. Hard work and frugal living could have saved her from getting into this mess in the first place.
2. Her DSR.
I don’t really know how to calculate this! But my logic was this: Polly has $80,000 worth of debt. If her minimum monthly payment is at just 2% then she has $1600 worth of prepayments to make every month. I haven’t factored in interest here. But if Polly is in the 20% tax bracket and brings home $3333 every month, then 1600/3333 = .48.
3. How to get out of the hole.
First of all, she needs to Make More Money. Not that I don’t sympathize. I am making less than this with a Masters degree. (But then again, I don’t have debt to pay off.) Polly – get a higher paying job or ask for a raise! Next, learn to Live on Less. If she lives alone, she should get a roommate and move to a cheaper residence. Polly should get onto the jar system so she can track every single penny. She should also take most of that tax refund and put it towards debt repayment – maybe holding back about $500 worth. She should still have lots of university tax credits and can also deduct the interest of her student loans off her taxes, as well as the cost of tuition, books, and residence.
However, even if Polly cuts way back, I still can’t see how she can possibly get out from this mess with her high interest rates. If she manages to haggle her way to a lower interest rate, transfer to a lower or even 0% interest card (not impossible with interest rates the way they are) or line of credit, she could pay it off within a few years – especially if she started bringing in more money. But if she fails at increasing her income and fails at reducing her interest rates, I see no other alternative than bankruptcy.
December 18, 2008 at 1:44 pm
Polly is me and I am Polly….
I have slightly less gross income per month (but don’t have 2 jobs) and my student loans are much smaller (still at $15000.00 after 9 years thou). No savings, no emergency fund and 2 credit cards (one at 18% and the other at 24.5%)
After trying agressively, neither credit card company was willing to provide me with a lower rate or any other alternative and I was denied from other companies to transfer balances. I also attempted to get a consolidation loan, but wasn’t able to. Sold some items cluttering my home and generated some cash but not enough to make any significant payment towards a debt. My house is now free of all clutter thou!
The solution for me was filing a consumer proposal – which I did last week. Student loans are now able to be included if over 7 years from last date of enrollment and after examining all avenues with the trustee, this is the best option for me. I am able to make payments towards a portion of my debt over a period of time and have no interest accumulate. Yes my credit will be affected negatively but eventually that was going to happen anyway. The minimum payments per month to keep everything in good standing was becoming unbearable and I was starting to fall behind. If the consumer proposal is accepted, I have a budget already in place that will allow for savings, an emergency fund and even the possibility of my husband and I starting a family. This could not even be considered before and it feels like I might just get my life back. I am 31 and if all goes according to plan, I can have the comsumer proposal completed early and it should “fall” off my credit report within 5 or 6 years. It’s not easy – and its been hard but I had to take control of my finances and this was the best option for me.
Back to Polly…..
Polly likely would not be able to include her student loans as she is only 25 and hasn’t likely been out of college for 7 years yet.
Just thought I would share….
Shelley
December 18, 2008 at 1:50 pm
Not going for the daily planner here… Just going for the big stuff (ie. not worrying about her crazy income tax deductions, overextending on the student debt in the past etc. Sadly, there are many degree grads out there making around $50k/year, myself included – it’s very livable if you don’t carry debt.)
Bankruptcy.
Pay the $5000 against the student loan and then declare bankruptcy.
This will take care of everything but 25k student loan at 6%, which she can afford easily on her salary. (The student line of credit is covered by bankruptcy rules – assuming that she doesn’t have a co-signer.) No significant assets are listed. This leaves her interest payment at a manageable $125/month + principal, which leaves her more than enough to live on and save (and aggressively pay down principal).
Yes, it will take 7 years before she can build her credit rating, but it’ll take much longer than that to pay off the debt she has accumulated at the rate that she’s paying it back (and she doesn’t have the salary to increase that by much, if any) and the money she’s making.
December 18, 2008 at 2:11 pm
I recommend that Polly keep at least $1000 in her emergency fund and put the rest towards her 18.5% credit card, and dedicate the rest of surplus income to killing off that debt first, and then move onto the next lowest sums. No need to worry about investing in RRSP or TFSA while carrying that much debt load; but the $1000 will keep her from getting more into debt whenever life attacks.
Those who are saying that she should have chosen a better career or thought about what job she’ll be able to get while in school I think are being a bit harsh. I mean, what if she went to school to become a teacher? A teacher starting out can make even less than $40K but I consider that a noble profession and it’s very easy to get heavy into debt if you’re going your on way from day one. She has a fulltime + parttime job so working hard is not an unknown quality to this young woman so I’m willing to bet she did the best she could to keep debts down. Many jobs also pay low wages the first few years and then grow rapidly while others start higher but plateau quickly.
Also to the poster who said that she makes more than that with a grade 12, I think she meant to say that she makes more than that with a grade 12 + 15 years experience. That makes a big difference in pay scale, she’s only 25 and making $40K is pretty good at that age in my opinion, when there are people in their 30s who make less than that.
Salary Source: http://www.education.gov.ab.ca/FactsStats/teacherpaid.asp
December 18, 2008 at 2:22 pm
First off, way to go Polly for recognizing that she needed to bring in more income with a second job! She must’ve seen TDDUP …..
Second, Polly is actually making a good wage at her full time job. At 40K a year, she’s grossing about $20.83 an hour. None of my friends who chose not to go to university were making that wage at 25 (except for construction workers)!
Third, it’s very much possible that she aquired all the debt just because she was trying to make it through school. I personally worked my butt off during university – worked 20 hours a week, took full-time or more classes to shorten the time frame I needed for living expenses, had all the scholarships and bursaries I could find, had no life, etc and still wound up with tons and tons of debt. It’s also quite possible that Polly had a learning disability, had a kid when she was in highschool, is disabled or simply comes from a tiny town in the middle of nowhere. There are tons of reasons to rack up lots of student debt, besides partying!
Fourth, kudos to her for building an emergency fund. As a single person, she especially needs one as there’s no other income for her to fall back on should she get sick or lose her job.
She should pay the minimum possible on her student debt, apply for interest relief on them, and continue to pay down her credit card debt. As she pays debts off, she should rollover the payments to increase them as she goes.
She should also look at hosting exchange students. We host students and we love it! It’s a great cultural experience, provides lots of free entertainment at the school events, helps to pay the bills and looks great on a resume. If she can’t host students, she should definitely look at her housing costs – moving to someplace smaller or closer to work (no need to have a car if she can walk to work) can be a big budget booster.
She also needs to research ways to have free fun! She won’t be able to continue on her path to being debt free unless she can also balance it with having a life! Maybe potlucks with friends where she can start a Gail club for support?
December 18, 2008 at 2:24 pm
Woops, just found a mistake I made…story of my life…can I try that again…
so… $50,000 minus 30% (rough guess to the tax man)=35000/12=2916/month
are my calculations close?? If so she should be able to pay off her debt in a little over 3 years if she’s willing to stick to budget. According to Gail’s own up to your debt worksheet the payments (to pay off in 3 years) would be like this…167, 403, 917, 925 =2412
I realize that these are high payments, but she is still left with $504…am I way off?? I know Gail says to put a lower percentage on debt payment, but while she is single and has no other responsibility but to feed and shelter herself she should buckle down before she brings this kind of debt (and stress into a relationship). I don’t know where she lives but if she’s single she should definitely get a cheaper place or a roommate or as I mentioned before moving in with mom and dad if poss…am I being crazy? Even if she played with the numbers a little and made interest only payments on the low interest debts, paid off the big ones, and then applied those payments to the rest and so on it should be doable…what I could do with that kind of money!!!
December 18, 2008 at 2:29 pm
Here is my 4 step process to be rid of financial anxiety!
1. Ditch the apartment, and move in with mommy and daddy (or the good nature of freinds). That way you can pretend that you are saving your rent money to help with bills – but actually use it to buy all the stuff you want.
2. Get more credit cards. Get as many as you can. If you have at least one that has room on it, you can use it to pay down the balance of the others. That way, you keep yourself at at even keel. sure you may not actually pay off your debt, but again, you get to buy more stuff.
3. Get yourself on a reality show. Polly at 25 and single? Do we say Bachelorette!! Get on one of these shows and win, it’s a cool million easy as pie . . . well, more like 500,000 with all the taxes. But still, Cha-Ching
4. Land yourself a rich hottie! Have him shower you will money and gifts. Use the money to pay your bills, and exchange the gifts for store credit. Everybody wins.
(P.S. Gail, you said the planner would go to the person whose answer you liked the best . . .not the person who got it right! I love your work and your show)
December 18, 2008 at 2:36 pm
Ok. So from above, Polly is making $40K at her full time job and $10K at her part time. We’ll assume these are Gorss totals from here on out. This means she Grosses $50K per year. She has a student debt of $60K, spread over a line of credit and an OSAP type student loan. She has two credit cards – one at $12K and one at $6.5K. She is making good money for a straight-out-of -school job so going after a raise may not be in the cards just yet, depending on how long she has been with her current FT employer. As someone who has just upgraded from my first post-graduation job, I understand how Polly could have gotten here in the first place. That being said, I was lucky and was not there myself.
So here’s what polly is paying in interest on each of her debt facilities:
Credit card 1 (11.5%) = $2875 per year interest = $239.58 per month
Credit Card 2 (18.5%) = 1202.50 per year interest = $100.21 per month
SLofC (prime + 1) = 3.5 = 1 = 4.5% = $1350 per year = $112.50 per month
SL (6% floating) = $1800 approx per year = $150 per month interest
Total interest = approx. $602.29 pr month on all debt facilities.
$40K gross = Approx. $30000 Net
$10K gross = $7500 Net
Total take home is approx. $37500, 15% of this $5625 per year or $468.75 pr month. If the above calculations are correct, Polly is getting dinged more in interest than her 15% covers…making this a huge reason why she’s in serious trouble. To boost this repayment, I would suggest putting all $5000 of the tax refund onto that credit card at 18.5% to clear it out as much as possible. This would reduce her interst on that card from approx. $240 per month to $23.13 per month, and get her into a better place with that debt.
A second suggestion, while not taking care of the problem, would be to consolidate her credit card payments to one card – 11.5% is fairly low, and providing there is room on this card, adding the extra $1500 would drop the interst rate from 18.5 to 11.5 for hte whole debt.
Further to this, asking her part time and full time employers for opportunites to make more money, whether through a raise or working her butt with extra hours/duties she needs to find a way to make more money to get these debts under control.
Third – though this may not be a better altrnative, she needs to find accomodations for living that are cheaper than what she has so she can redirect more money to that debt repayment – perhaps she is lucky to have parents who will trade her room and board in exchange for chores around their house. I was lucky enough to have a year grace period from my family in which I deflected the rent payments my family would begin charging me one year after graduation towards my student debt to get it paid off. I got through my payments in one year – instead of the 25 years OSAP amortized for!!
Perhaps, also, Polly could begin trading jobs with her friends, in that they make group purchases for items instead of all of htem buying hte item. She could bake cookies for a neighbour/make meals for a carpooling friend in exchange for the service. And as everyone else has said, find ways to cut back on everything else – like that coffee everyday, or a magazine once a week, or hitting a club with friends on the weekends.
Polly also needs to get herself some jars and a budget that works and start tracking every cent of her money. She may find things start getting easier.
Had Polly been in a position to have saved for her education earlier on, she may ot have had to borrow as much to fund that education. Assuming she did not budget her loans from OSAP/Credit loan, she could have been in a better position had she operated on a budget throughout her scholastic time. Rather than drinking alcohol, coffee, eating on campus each day, she could have made small but substantial cut backs on many items during school that could have reduced the outcome earlier. Polly needs to get educated about money and debt NOW to finally stop the financial bleeding, get herself a half hour each night and watch Gail, and sit down with her finances and make that balanced budget, live with cash only and the jars and begin getting herself out of this debt.
An aside – when I was in school and doing all these things, I asked my family not to purcahse me anything on my wants list, and instead help by applying the money they would have spent to helping me pay off bills or purchase food, or books for school. I didn’t really need anything while I was away since I’d saved for what I thught I would need, and my family used birthdays and christmas’ to get me what I would need while on my own. I had monthly budget meetings with my mother to help me stay accountable to myself with my money. While it may not seem like a great gift, I found more happiness in getting books for class that I needed, or paying off that gas bill with a couple months of Christmas money than having an iPod/CD’s/clothes i didn’t really need etc. And it helped more than any othose “stuffs” could!
December 18, 2008 at 2:47 pm
Cool case study Gail, thanks!
What has she done wrong? Taken on more debt than she can comfortably repay on a first job post-university salary.
Current debt service ratio: based on living in BC and using last year’s tax rates, Polly’s annual take home pay is $40,695 or $3,391 per month. Using 3% as the basis for loan repayments, her total each month to repay is $2,355. That comes to a debt service ratio of 69.4%! Ouch!
What does she need to do to get out of the hole? Get a really big shovel!!
I’m not a fan of bankruptcy so I’ll look at other options. Besides, her student loans probably aren’t bankruptable anyway with the changes to bankruptcy law in the last few years and/or co-signers on those loans.
First off she should hold back only $1,000 of her tax refund to start an emergency fund and break the credit card cycle. This is enough to get her started and use the balance of the refund for debt.
She can apply for hardship deferral on her loans while she knocks off higher interest credit cards.
She needs to find a way to make more money either through working more hours or a better paying part time job. Or another part time job. She is at the beginning of her earning career so her salary will go up, but she needs a boost now.
She should understand why she is getting the big tax refund. If it is due to an ongoing situation, she should do what is necessary to have less tax deducted by her employers to put more in her pocket every month (or in her case, put more on her credit card/loan payments).
She will need to learn to live very frugally, get a roommate, or 2 or 3. Alternatively, take a job as a live-in of some type where accomodation is part of her salary. Maybe move back in with mum & dad. She also needs to make herself a written budget and learn to live on cash via jars, envelopes, or whatever. She should take a careful look around her and see if she can sell anything to kickstart some debt repayment. Does she have a car she can sell? A buspass is a lot cheaper than insurance/gas/maintenance on a vehicle. Or better yet, walk if possible! That way she gets her exercise without needing a gym membership!
She should find a way to squeeze $50/month toward long term savings. She needs to get in the savings habit now since she hasn’t learned it quite yet.
Bonus points: interest she pays each month.
CC #1 = $115
CC #2 = 100
SL #1 = 113
SL #2 = $150
Total = $478. This is 14% of her take home pay.
Since she is only putting 15% toward debt repayments this should confirm to her she will never get out of debt at the rate she is going.
December 18, 2008 at 3:20 pm
Alicia -
having been a student myself, I know it’s tough and I wasn’t implying that anyone who acquires student debt is lazy or a party animal or anything like that. I was just trying to think of ways that Polly may have acquired her debt load.
Nevertheless, I do think it’s possible to escape with minimal or no debt – here’s how:
Assume Polly made $5000 in savings from working while in highschool.
Then she worked 20 hours a week at $10 an hour for all 4 years, plus an extra 20 hours a week in the summer – 40 hours in June, July and August.
Let’s say that she got an initial scholarship of $3000 which was renewable with an 80% average (this was what I got) for $1500 every other year. Let’s also say that she won bursuries for each year for $600 each, again something similar to my own situation (and I went to a small school in a small town that didn’t exactly have a big budget for scholarships.)
The total for all of this income is $92,500. If her tuition is $10,000 per year, that’s a total of $40,000. That gives her a total of $52,500 to live on for 4 years, or just over $1093 a month. But if you live cheaply (I paid about $350 a month in rent in a house shared with 3 other girls) you can really cut down on your costs.
Not saying it’s not hard – or that individual circumstances don’t problematize things – just saying it’s not impossible to get out of school nearly debt free, or at least reduce that debt load.
December 18, 2008 at 3:22 pm
PS have you been to the moneysavingmom blog? The author and her husband stayed 100% debt-free while her husband was in law school and she was unemployed. Crazy frugal!
December 18, 2008 at 4:04 pm
The route I actually am taking to get out of my Polly mess is going back to school, even though that is what got me into the debt initially. This time I got a fellowship from my employer, am staying with family rent-free and working part-time. All of these things were impossible during my first degrees.
So I’m living on my part-time salary and applying all of my fellowship to debt-reduction and savings. I will return to my job in September with only my student loans as debt, an emergency fund building, RRSPs and a hefty raise.
December 18, 2008 at 5:01 pm
Oh my word..yikes!! Polly is swimming in debt! If she’s grossing $50,000. a year–I’m sure it’s about $35,500. net a year that she has to work with. She went wrong with=no savings, no emergency fund and seemed to keep on racking up debt(from all over the place).
1-Polly should start her emergency fund today, even with $5 and every paycheque she gets she should be sending this a portion..however small and cut up her 18.5% card. When the tax refund arrives, she should put all $5000 in the Emergency fund! Then if something goes wrong, she turns to the $5000 and not credit debt that she’s struggling to pay off!
2-Polly should clear off the CC with 18.5% and bal.-6500.00.
3-work on the st.loan of prime+1% by adding what she would of paid to CC @ 18.5% that’s now paid off
4-wipeout CC with 11.5% by paying what she would have paid on#3 and #4
5-focus solely, since it’s the only one there, on the floating 6% loan.
6-Save, save, save.
Obviously downsize housing if that’s an option, cut the cable, cell phone, and all extras.
December 18, 2008 at 6:05 pm
I just thought of another – although less responsible – solution! Polly should marry rich! and fast!
December 18, 2008 at 6:16 pm
…ah, if only we could all do that…
December 18, 2008 at 6:30 pm
I’m assuming that the interest rate on both student loans is equal for the sake of simplicity, not going to change for the life of the loan (a big assumption). Also, if you assume a 10-year amortisation period for the student loans, Polly should already be paying about $679.33 per month in interest and principal repayments, plus an additional $215.21 in interest on credit cards (ignoring any minimum repayment provisions). That would put her current debt service charges at about $900 per month.
Her gross income of $50,000, depending on which province in which she lives, turns into an after-tax income of about $38,500, or about $3,210 per month. That would make her ratio of debt service payments to take-home pay at least 28%.
Polly’s financial situation is bad, but not insurmountable. One mistake was financing part of her life on credit cards. The interest payments on those make up about a quarter of her monthly debt servicing costs. Her investment in education might not be paying off as well as it might yet, but she is still young, her salary growth prospects are probably decent. Making $50,000 gross per year at the age of 25 is pretty good.
To get out of her current predicament, she should budget carefully and be disciplined. After debt service payments, she has about $2,310 in disposable income. If her living expenses (including rent, food, utilities and miscellanea) are $1,500 (optimistic perhaps), she should have have $800 per month to throw towards her credit card debt and to save. Instead of saving the $3000, it might be best to put it towards the $6,500 credit card debt. In four months, she can have that paid off, which will free up an extra $100 per month that she would have been paying in interest. Escaping the credit card debt could take a year-and-a-half, but that is reasonable if she is aggressive in paying it off. Any means to making more money would also be welcome. Once the credit card debts is paid off, she can allocate more funds for RRSP and reserve savings, as well as decreasing the amortisation period of her student loans (by increasing her payments). She may have to live like a pauper for a couple of years, but her life will get better once the burden of credit card debt is lifted.
December 18, 2008 at 7:00 pm
Ok now i’m depressed. I bet Polly is too! After reading the post and all the responses all i can think of is ‘what a mess’. Poor Polly probably had money dumb parents ( hello, i’m Alicia’s mom. Reformed now
). If her parents didn’t teach her, and she didn’t have innate budgeting ability it’s pretty easy to end up in this situation.
It’s a funny thing – as i was reading the responses i started to go into shutdown mode… just like i used to when i was worried about bills piling up. The figures just kept going over my head and not making sense.I bet one of the reasons Polly is in the situation is due to avoidance of the issue because it was so overwhelming. I seriously couldn’t think of what Polly could do other than find a rich lifepartner.
But then i remembered how i got out of my bad habits – by watching the show alot! So i’d recommend she watch every episode.Apply to be on the show and make all the committments and work Gail gives. Make an appointment with the bank to see if her debt could possibly be consolidated and paid over a longer time. Do the things others recommended too – try for a higher paying job, find out what’s up with the income tax. And like Alicia said, host a student or two.
Once the TDDUP philosophies are embedded in her brain she will have hope again and be able to tackle things. When you have hope and can respect yourself and take responsiblity for things ( instead of blaming situations) you can move on and upward
I also think Polly needs to make sure she is having some quality of life. She could take up a hobby like knitting. It’s not expensive, there are lots of knitting groups that meet up which provides great social time and you can make practical things. It’s good to have something to do other than shop, especially when it’s something that makes you feel good about yourself
December 18, 2008 at 7:55 pm
No savings plan? Polly needs to check herself before she wrecks herself!! At least she’s taking that income tax refund in the right direction by setting up the emergency fund, and paying down some debt, but she needs to start saving for the future! Pay yourself first, and then worry about the debt. And since you can’t change the past, I won’t dwell on the fact that she should have saved up some cash before she went to school to help ease the student loan debt.
I’ve heard Gail say it before that 15% is what you SHOULD be putting towards your debt from your income. Increasing her debt service ratio might be a good idea to pay down debt, but Polly needs to make sure she’s going to stay sane enough by cutting back from other things to increase her debt repayments.
Since she’s paying about (eeek–Grade 12 math…why can’t you save me now!?) $490.21 in interest a month, she should try to see if any of her debtors offer some kind of balance transfers at a lower introductory rate to see if she can bring that down. Since she can’t consolidate, and can’t get lower interest rates, she should try to take her business elsewhere! And she’s already working a second job…other than trying to get pay raises, or find better paying work, you can only stretch yourself so thin.
Most importantly, Polly needs to get herself a TDDUP life planner. Just kidding, but I thought I could win some brownie points if I included it in my answer.
December 18, 2008 at 7:58 pm
What more is there that hasn’t already been said????? Except…..
Polly, Polly, you’re undone by your folly,
What were you thinking? Mismanaging your lolly;
Only one thing could have saved you – you would have been sure not to fail,
If your last name was vaz-oxlade, and your Mom’s name was Gail.
December 18, 2008 at 9:12 pm
The poem wins. I also enjoyed the “marry rich” and “win on a reality show” solutions.
December 18, 2008 at 9:15 pm
polly is making me sad and my head spin. i can’t even begin to figure out what to do for poor polly.
December 18, 2008 at 9:25 pm
Congratulations to the Poet!
Oh dear! I’m mortified if anyone read anything other than good (and clean)humour into my post (re: comment awaiting moderation)!
I will endeavour to inject less humour into my posts from now on.
December 18, 2008 at 10:06 pm
Catherine’s poem is my favourite!!
As much as I want the planner, the poem rocks!!!
December 19, 2008 at 12:26 am
Another suggestion:
Invite Polly on the show!! YA!
December 19, 2008 at 8:31 am
What can I say that hasn’t already been said!!! Polly knows what she has to do, it’s just a matter of doing it and sticking to it. A complete lifestyle change!!! It’s not too hard and it might even be enjoyable! Entertain at home, walk instead of driving when you can etc. And tell your friends and family what you are trying to do! Just having someone to talk to who knows what you are going through can be a great help! You might even have some people join you in your adventure! (and that is how you have to look at it!)
As for lowering the interest rates, she NEEDS to call those companies again, ask for the supervisor and explain that she wants to pay her debts but she needs their assistance. Don’t be afraid to this and they would love to hear from you on a regular basis as well. Always keep in contact with people you do business with.( and you are doing a lot of business with the CC Companies!) The last thing banks or credit companies want right now is more bad debts on their books!
Gail, you didn’t say why there was such a big tax refund! I know that a tax refund of $5000 seems to be a lot on a $50K income but I am assuming that a great deal of that comes from student loan interest deductions! At least I am hoping that Polly is claiming that interest she is paying. That is something that can only be calculated at tax time! I don’t believe you can have those deductions taken from your pay in advance.
And if Polly hasn’t been taking the tax deduction for that interest, call Revenue Canada and have them re-asses her taxes!
Any refund needs to go straight on the highest interest rate card first. Try to get the lower interest rate card down even lower and then transfer the remaining amount from the higher card onto the lower rate card. Keeps the payments the same as if you were paying the 11.5%.
Oh! and get out those Magic Money Jars and start using them! And the Budget Binder too. It’s amazing to see how well you can do with cash and writing every penny down!
December 19, 2008 at 10:17 am
gail, will you tell us what you would suggest for polly?
December 19, 2008 at 10:27 am
the suspense is killing me as to what Gail’s solution will be for poor Polly (or should I say broke Polly ha ha). Can’t wait to hear, Gail…I’d love you to do a case study on my situation…
December 19, 2008 at 11:08 am
Polly can’t afford anything but the basics, and that is food and shelter, provided she gets to keep her jobs in these scary economic times. If she lives alone in an apartment, she should consider moving back with her parents or double up with a friend or relative. If she has a car, she should let it go. No more eating out or buying clothes. A sewing machine is a good investment. She should get her groceries and other essentials at the best cost possible. Get rid of her cell phone/internet. She should even get a third job or try to make more money on the free time she has left.
Every penny saved should go to debt repayment, starting with the most expensive credit card. Even then, it could take her years to get to be debt free. Will she have enough wilpower and persistence? I doubt it.
In fact, that seems almost impossible. If she hadn’t lived way above her means, she wouldn’t be in such a dire situation right now. If I were in her shoes, I would file for bankruptcy.
December 19, 2008 at 11:34 am
* What’s Polly done wrong?
Living off of credit cards. How she managed to get 18K in credit cards while netting 3K a month is something else. Anyhow,
* What’s her current debt service ratio?
About 16% – 18%, depending on how optimistic you are.
* What does she need to do to get out of the hole?
Ramp up her debt repayment, specifically her credit cards. No credit until she has paid them off. If she sets her debt repayment to 25%-30%, then she should have her credit card debt paid off in about three years. Should could cut off 6 months by committing her emergency fun to the debt, but that would leave her without any seeds.
It sounds like what I, as well as a number of other people, have done after college/university. Which is to get lost in the gleam and glamour of it all. We are graduates and part of the intellectual and cultural elite, we have our niche hewed out for us and we had better live like it. The credit companies see this and give us just enough rope to hang ourselves with. We will spend credit like it is our hard earned money.
The other problem is that she hasn’t applied to the government to forgive her loans. There is a way, if you have enough, to have some of your loans forgiven. This would lessen the amount she has to pay back. My brother got a good amount forgiven from what he owed.
College and university are nice, if only they would give you an education.
December 19, 2008 at 6:13 pm
Pollys’ income is $50,000 year, less 22% taxes (CRA) which is $39,000 net
Monthly income is $3250
Housing (35%) $1137
Transportation (15%) $487
Life (25%) $812
Debt Repayment (15%) %487
Savings (10%) $325
Fixed expenses are housing at $1137
Variables are:
Transportation (15%) $487
Life (25%) $812
Debt Repayment (15%) %487
Savings (10%) $325
To help Polly balance her budget this is my plan:
Transportation will stay at 15% $487/month
Life expenses will be reduced from 25% to 15% which will be $487/month and divided up between food, entertainment, clothing/gifts, and everything else.
Because Polly is able to put $3000 of her tax refund into savings I am going to cut her savings to 5% which will be $162/ month. Having $3000 in her emergency fund almost gives her 3 months worth of rent (fixed expenses).
Her jar allocation will be as follows:
Transportation $112 week
Food $100 week
Entertainment $4
Clothing/Gifts $4
Everything Else $4
This gives Polly an additional 15% per month of her income to increase her debt repayment, which becomes 30% of her monthly expenses at $974.
Debts are:
$6,500 at 18.5% is $100 per month (A)
$12,000 at 11.5% is $115 per month (B)
$30,000 at 6% is 150 per month (C)
$30, 000 at 5% is $125 per month (using 4% prime plus 1) (D)
If Polly puts $2000 of her tax return towards the highest interest rate (A), it lowers her amount to $4500, the minimum payment becomes $69 month which doesn’t matter because she is going to knock it off first.
The minimum payment of B,C and D is $390 per month.
$974 – $390 is $584. Debt A can be eliminated in about 8 months with $584 being applied to it.
Once that one is done, tackle Debt B.
Debt C and D combined payment is $275 per month, so the repayment on Debt B is $699 per month which would take about 17 months to pay off.
Now 25 months later, Polly has Debt C and D. Debt D has a repayment of $125 per month, so the total of $849 can be applied to Debt C. It would take her 35 months to get out of debt after that, applying all of the $974 would take about 30 months to pay off. Please note: I am not taking into consideration how much the debt changes based on minimum payments but am using only the starting amount.
Total time for her to get out of debt is 89 months or 12 years. 2 years of that was just consumer debt and 10 will be student loans. I have heard many people with similar student loan amounts taking just as long or even longer to pay back.
Gail often says student loan debt is good debt so I don’t mind putting Polly on such a long debt repayment plan. Also, it is my understanding that student loans are not eligible for bankruptcy. However, I am hoping that during this time she uses her education to make more money with which she can increase her debt repayment plan.
Now, if Polly can find a way to bring home an extra $1000 a month net, she can reduce the payback time to 41 months, just under 4 years. Big difference!
During this time Polly is saving $1944 per year, which small as it seems, adds up to over $23000 during the course of the 12 year repayment, so it isn’t all doom and gloom. By the time she is debt free, she can use that money for her emergency account but also have a small amount for a down payment should she decide to purchase a home. She could also at some point decide to take some of that savings and pay off the debt a bit sooner.
If she is able to pay off all of it in just under the 4 years, then she will have $6642, which is nothing to sneeze at.
(Savings do not take into account interest accrued)
Gail asked: “What has Polly done wrong?” My answer is:
She got used to living on borrowed money during university and didn’t realize the time to stop began at her first paycheck.
I would have liked to have calculated the interest she pays per month and how it relates to her income, but I don’t have time.
Thanks for the exercise, your website really helped!
Cheers!
December 28, 2008 at 10:04 am
I did my best here.