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!

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.

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.

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!

Invite Polly on the show!! YA!

As much as I want the planner, the poem rocks!!!

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.

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.