Case Study: Paying Off Big Debt Without A Big Buffer

I love the questions I get from readers, and plan to start doing the occasional case study for specific questions. Thank you to this particular reader for sharing so much detail about the situation she and her husband are in.

A quick disclaimer: as a financial coach, it is not my role to tell people what to do. Even if it was my role, no one likes being told what to do so that wouldn't even be helpful ;-) My job is to ask the right questions, provide perspective, and share things to consider.

One quick note: I ask a lot of questions, and they are not asked with judgment at all. Be sure to not judge yourself for any of your answers, just see them as opportunities to identify opportunities for improvement leading to a happier, more effective money situation.

Okay, let's dive in!

The situation

1. Establish boundaries around the situation.

They consolidated her husband's student loans a couple year ago to get the monthly payment down to $1,000 from $1,800.

They have credit card debt of $33,600 with a 29% interest rate, and the minimum monthly payment is $900/mo. It sounds like the credit card debt is on one single card.

The reader reports dipping into savings more times than she can count.

Questions to ask: 

• Could some of the dips into savings have been anticipated by looking down the road at what’s coming or what might come? Kid dance or sport fees, orthodontia, new semi-annual insurance payments, an annual Prime membership are a few examples.
• Should you have been saving that money in the first place or do you actually need it in your monthly budget before you try to live without it (link to blog)?

2. Look at what has already been done to improve the situation.

The reader has also looked at their budget and cut out some extras, such as gym memberships they don't use, hiring out lawn care, and house cleaners. This should add about $335 dollars per month to their monthly budget.

I’m assuming this is the total amount of extra you have to work with in tackling your debt, taking your monthly payment from the minimum of $900 to $1235.

Questions to ask:

• Are you trying to save as well as pay off debt? If so, how much per month are you trying to save?
• How realistic and proactive is your budget? What does your system look like—hypothetical only, or are you using a planning spreadsheet in combination with a budgeting tool?
• Does your plan rely on nothing going wrong ever and you living on extreme discipline? That will be hard to sustain.
• Have you seen on paper how your realistic spending plan can work?

3. Assess possibilities for additional income.

Her husband is able to get overtime. This is great news. Any extra income means you have more to put toward your goals. My recommendation is to get really specific about this and see exactly how you can use it to your advantage.

Do this by outlining:

• How much overtime he thinks he can reasonably plan on.
• How much he can get paid for it.

Play around with the numbers here. Let’s say he can get $50/hr for each hour of overtime, and let’s say he is going to work an extra 10 hours per week or ~40 hours per month.. That would be an extra ~$1,500 per month (reducing $2,000 by 25% for taxes) to add to your debt payment.

Note: it may not be realistic for him to get that much or be able to work that much. But hopefully you’ll see how helpful it can be to plan it and see it working in your finances as we’ll do going forward.

4. Review solutions already being considered.

A consolidated payment.

It was not clear to me if you are considering consolidating student loans and credit card into a single loan. It sounded like there was just a single credit card, so that wouldn’t be eligible for consolidation.

You could consider a balance transfer to a lower-interest card, but I would like to know more about what you’re considering here. This article includes things to consider before consolidating, and many of the recommendations apply to balance transfers as well.

Cutting up the credit card.

Cutting up credit card, not using it as a crutch, and debt snowballing it. You expressed concern about it not being financially smart for the long term to do this. I’d love for you to elaborate on what might not be financially smart about it, and depending on your answer, would ask if credit cards have improved your life or caused more stress?

At my peak of debt, I came to the frank assessment that credit cards had not been a blessing in my life. Once you create a financial management system including budgeting that works, you have a much higher likelihood of using cards without accumulating debt.

Questions to consider:

• If card is maxed out, are you actually thinking you’ll get a new one for your crutch? You’ll walk stronger without it.
• Is there anything you can sell or part with to free up bigger amounts of money in your monthly budget? For example, if you have 2 car payments totaling $1,200 per month, could you sell one and pay cash for a much less expensive car to get you by? (Per Lending Tree, the average new car payment in 2023 is $725/mo and the average used car payment is $516, so I’ve landed between them to surface a $600/mo car payment). Or are you paying on a camper or RV that you could live without for a couple years, or rent it out to bring in some extra cash?
• Are there other options you've not yet thought of?

My recommendations

1. Honor what you've done well.

I would invite this reader to celebrate what she has done well all these years and honor the things she and her husband have been trying. She ought to give herself plenty of credit! Her desires have been to be responsible and create a wonderful life for herself and her family, and in so many ways she is already doing that.

2. Assess savings.

Because this reader has had to dip into savings multiple times this summer, I do wonder if they need to be more realistic about their true cost of living. It might be necessary to re-evaluate how much they can realistically save.

I am a huge fan of saving, but being able to keep money saved starts with being honest about true, average, cost of living, including occasional and annual expenses.

3. Evaluate the system.

I would advise her to get their approach to money management really dialed in. In my experience, most money problems are money management problems.

I say this with zero judgment! I'm not saying you are the problem, just that your approach might need some refining. I'd particularly look at her forecasting and budget process and tools, making sure that she's not signing herself up for misery or unrealistically low spending.

4. Get creative on extra income.

Her husband’s overtime seems like the best news here as it provides an opportunity to give them a bigger buffer to work with. I would recommend they play with various scenarios to see exactly how much it can help their situation.

Let’s assume there is nothing big they could sell or part with that frees up additional money from the budget, but that he brings in $1,500 extra per month from the overtime he's able to get. This would make them able to pay $2,735/mo toward the balance of $33,600 and have it paid off in approximately 1 year and 2 months. 🥳

Interest kills you over time, so I don’t worry too much about including it in simple debt-payoff math. Paying only the minimum will take approximately 8 years to pay it off. Paying the minimum plus $335 will have their balance paid off in approximately 3 years and 8 months.

5. Get excited about what you're making possible.

My final recommendation for this reader is to make sure their plan is realistic and possible. Once that is the case, you can get all kinds of excited about it. What will life be like when you don’t have $900 every single month going toward your credit card?

You can roll that into your payoff of student loans and knock those out in X amount of time. Then you get $1900 per month back in your wallet. That is incredibly exciting!!!!

Conclusion

Okay, that's a wrap! With an actual client, we'd of course really be able to dig into the situation with compassion and zero judgment, and together review and create the plan. It would obviously be more of a conversation.

Regardless of your particular money situation, I hope you found it helpful to see how I approach money questions. Please let me know what you found most helpful! Happy money-ing!