Despite what you might think, what you don’t know can hurt you, particularly when it comes to outstanding debts. That’s what Jennifer discovered when she realized her $40,000 student loan balance, which she hadn’t been consistently paying, ballooned to $70,000. Although her student loans were the worst of her financial problems, Jennifer also had $9,000 in credit card debt and had been underfunding her emergency fund and 401k.
The reason people usually fall behind on their bills — even those with high incomes — is twofold. First, they don’t keep track of where they are spending their money. Second, they don’t have a plan for where they want their funds to go.
Related: Do You Need a Financial Planner?
Know Where Your Money Is Going
According to a 2015 survey by SunTrust and Harris Poll, more than a third of households that make $75,000 or more per year live paycheck to paycheck. And that number jumps to 71 percent for the millennial population.
So, although Jennifer was making a healthy $100,000 per year, she was spending more than she earned. That’s why financial coach Katie Brewer of Your Richest Life suggested the first step Jennifer should take was to track her spending for several months.
“Before you can create a budget, you have to know where your money is going,” said Brewer. “If you’re not tracking those numbers, people often just pull a number out from wherever … and they’re often wrong about how much is going out each month and where it’s going.”
Put Your Own Oxygen Mask on First
When Jennifer sat down with Brewer and reviewed her spending, it became instantly clear that she was spending more than she was bringing in. This is why she wasn’t able to chip away at her credit card or student loan balances.
“She was helping a family member with her finances, and she couldn’t really afford to help that person,” said Brewer. “When she bailed the family member out and paid her bills for her, she was basically adding that balance to her own credit card tab. She was putting herself in a worse situation.”
Just like you’re told on an airplane, you have to help yourself before you can help those around you, especially in an emergency.
“I suggested we put aside a certain amount that she could work into her monthly budget,” said Brewer. That way, Jennifer could still help her loved one, which was important to her, but she could simultaneously chip away at her own debt.
Get Strategic and Automate When You Can
In addition to her take-home pay, Jennifer’s position qualifies her for a sizable annual bonus during profitable years. “When we first started working together, she told me she usually has no idea where her annual bonus goes,” said Brewer. “So, we made a plan to anticipate the bonus and came up with an agreement on how it would be spent and how much would go toward each of her financial goals.”
Brewer and Jennifer created an approach where they chose to target two goals at once. As one goal was completed, they’d roll the funds from that goal into the next. “We started with paying off her credit card debt and building her emergency savings to three months’ worth of expenses,” said Brewer.
Brewer helped Jennifer set up several automated payment plans — one from her paycheck to her emergency savings account and one to make an extra payment toward her credit card balance. Automating like this can often make it easier to stay on track with a financial goal. The money goes where it’s supposed to go, and you don’t have to think about it each month.
When Jennifer received her annual bonus, which turned out to be $12,000 after taxes, she and Brewer already knew how they wanted to use it to further her financial goals. And unexpectedly, that same year, Jennifer also received a $4,000 tax return.
Here’s what Jennifer did with that money:
- She used $9,000 to pay off her entire credit card balance.
- She kept $3,000 for “fun” money — because all work and no play makes everyone unhappy. In Jennifer’s case, she put the money into a travel account,so she wouldn’t put her upcoming vacation expenses back on her recently paid off credit card.
- She added $2,000 to her emergency savings which, when added to her existing balance, was enough to get her to her three-month goal.
- She put $2,000 toward an extra student loan payment.
Make a Long-Term Plan
Once her student loans were paid off, and her emergency savings account was funded, Brewer and Jennifer decided to redirect some of that money toward boosting Jennifer’s retirement account balance. She bumped up her 401k contribution percentage from a meager 5 percent to a much more substantial 16 percent.
“In just six months, her account balance jumped from $65,000 to $84,000,” said Brewer, indicating that the new investment level is much more likely to help her fund her long-term plans for retirement.
Keep Yourself on Track
Even after some success, it’s not always easy to stay on track with a financial plan. As monthly commitments are fulfilled and cash becomes more available, it can be tempting to funnel your money toward new projects. That’s what almost happened after Jennifer paid off her credit card balances and funded her emergency savings account.
“She got a little comfortable and started thinking about upgrading her home,” said Brewer, who then reminded her of the goals they’d agreed upon when they first started working together. “You won’t have the extra money to put toward your student loans or your retirement fund. ‘What’s more important to you?’ I asked her. ‘Would you rather stay on track with these goals or would you rather upgrade your home?’”
Ultimately, Brewer leaves these types of decisions up to her clients. It’s their money, after all. Even so, having someone there to remind her of what she had set out to achieve turned out to be just what Jennifer needed to stay on track with her original financial goal: to pay off that student debt.
Don’t Give Up
Today, Jennifer still owes $67,000 toward her student loans, but she’s whittling away at it as best she can. Even with 21 years left on the loan, if Jennifer makes just the minimum monthly payment, Brewer expects she can pay it off in just 12 to 13 years — especially if she keeps making extra payments at the current rate.
“If she continues to get bonuses each year, we’ll probably be able to knock out additional big chunks at a time and pay it down even faster,” said Brewer. “If we can refinance the balance at some point in the future, it will probably be even faster than that.”
Jennifer still has a way to go to meet her ultimate goal. But by having Brewer available to help keep her accountable, she’s paid off $12,000 in debt. She has also fully funded her emergency savings account, boosted her retirement account and cut the time until she’ll pay off her student loans by at least eight years. And that’s all in just a year’s work. So whenever it seems like there’s no end in sight when it comes to financial debt, just remember to make a plan and commit to it. Then, almost anything is possible.