Josh makes a good living as a corporate business executive. He is 55, has a grown family, a 48-foot catamaran, a vacation home and a five-bedroom house in the suburbs. Both he and Madeline are in good physical health and enjoy taking European vacations twice a year.
Any talk of retirement is virtually non-existent, as he either works from home, or goes into the office a few times a month. They both agree they have a good life together. That is, except for this one problem: they are in debt up to their ears.
It’s not how much you make, it’s how much you spend
Not surprisingly, Josh’s income rose exponentially as the company grew. As a result, the days, weeks and months slipped away, and Josh and Madeline didn’t take as much time to plan for their futures as they did their cherished vacations.
Over the past two years their financial advisory team provided as much guidance and education as Josh would let them, and due to the lack of time and interest, correspondence was infrequent.
While the advisory team had proactively attempted to contact the couple by phone, text and email, mostly to encourage in-office reviews and focus on their long-term goals, most times, Josh and Madeline declined. This eliminated the key collaboration and partnership of a client-advisor relationship and any help toward defining success in building wealth in retirement.
Clearly, taking home $5,500 per month and spending $6,000, not including other expenses, was a struggle toward paying down their mounting debt. Had they met with their team for a counseling session, the team would have given important advice: “Stop using your credit cards as of today, and stop all investing for six months.”
Josh and Madeline would have to commit to using most of their earned income and part of their savings toward paying down debt. However, they could resume contributions when their balances were zeroed. Along with this commitment, the couple would honor a spending allowance to avoid getting in this unfortunate position again.
Unfortunately, there are many “Joshes” in the world
Why didn’t Josh make the time to ask questions and discuss his concerns? Experts narrow it down to two things: embarrassment and lack of control. There is no quick-fix solution for them to getting out of debt. Survivors say it takes approximately 90 days worth of bank and credit card statement reviews to pinpoint how and where the money is going, and roughly three to five years to resolve the resulting debt.
Josh and Madeline must discover where and how they’ll cut back before it takes a toll on their marriage. Should they put their house on the market? Should they consider putting the catamaran and their vacation home up for sale?
If you feel these are drastic measures, ask yourself what would you do. Isn’t the goal to eventually pay off all debt that is costing more in interest than you could expect to earn by investing that money instead?
Experts say that would work out to be 4% for a conservative investor, 6% for a moderate investor and 8% for an aggressive investor. When the interest rate is below that, it is considered “good” debt.
Money borrowed on a home or educations are examples of good debt, mainly because they’re viewed as ways to boost your financial position. Conversely, bad debt is anything that does not boost your financial position that cannot be paid for in full in just a month or two, like personal items, credit card debt or a personal bank loan.
It’s time for a debt diet
The average credit card debt, as reported in Money, was just over $16,000. If you do nothing more than pay the minimum required each month, you’ll owe an extra $11,000 on top of that bad debt. With Josh’s $5,500 net pay per month as an example, there are several things to act upon right away. We’re assuming this is all credit card debt, but it could be outstanding loans, or a mix of both that’s dragging them down. Here are some ideas:
Start big – put at least 20 percent of income toward debt – $1,100 monthly – adding up to $13,200 per year. Credit card companies typically ask you to pay at least 2 percent each month so this is a great start.
Call your creditors – target one card at a time. The purpose is to negotiate a lower rate if you’ve maintained a good enough payment history. Negotiating a lower loan payment plan is also possible.
Use a new card – a 0 percent APR offer on balance transfers from nine months to nearly two years is what you should look at. Cut back on immediate gratification expenses like coffees, dinners out, expensive wines and electronics.
Sell your most ignored or neglected material items – if it’s in the attic, it’s not worth keeping. Maybe if you have a gym membership, and a treadmill in the garage, one of the two probably ought to remain.
Finally, it is never a good idea to pay off debt quickly by borrowing from your 401(k), home equity loan or other investments. Ask your advisor for alternatives.