Good morning! I hope that everyone had an invigorating weekend.
Today’s post comes in response to an ongoing conversation I’ve been having with a reader named Tara [She is not named Tara] who agreed to be part of a case study in a post — provided that I anonymized her information — wherein I offer my advice. You all can see if you agree with my advice and offer any other ideas you might think I missed.
Tara is a working professional living and working in New York City. She’s single, a couple years out of grad school, and in her late 20s.
Long-term goals are important. Tara wants to own a house someday, help her parents out with a little cash every month in 15 to 20 years. She’d also like to be in a comfortable spot financially to react as life throws its curve balls at her.
Tara’s finance problem (according to Tara)
I’ll get to what I think her problems are in a little bit. For now, here’s what she said needs a lot of work. Tara has debt — a lot of debt. Upon meeting her, she told me that she desperately wants to pay off her $120,000 in student loans in five years because she plain doesn’t like debt. Some mornings, she wakes up hyperventilating when she thinks of how much debt she has. She’s even considered moving to Dubai solely due to higher-paying jobs and the absence of an income tax, but in the same breath mentions that she doesn’t really like Dubai.
Tara’s net worth statement
Savings and investments
Other than a $10,000 emergency fund in a depositary bank account, Tara doesn’t have any other savings or investments — retirement or otherwise. Rather, I should say that she probably doesn’t have any retirement savings because she isn’t sure whether or not her company contributes to a retirement account on her behalf or if it auto-deducts a portion of her paycheck.
When I asked her to look up her account balances, it turned out that Tara actually has $100,000 in student loan debt. $50,000 of that is at 7% and $50,000 of it is at 2%.
This math is easy enough: $10,000 – $100,000 = -$90,000
Tara’s income and expenses statement
Luckily, Tara holds a pretty stable job and is paid well for it, netting $4,800 in take-home pay every month. Back-tracking the taxes out, that would make her annual gross pay in the high $80s. Other than this job, she has no other sources of income.
Here’s where things get a little dicey. Tara didn’t know most of these answers:
- $1,400 Rent
- $800-$1,000 Food [People always underestimate food, so that she would guess this high is a bit scary]
- $300 Taxis and transit
- ??? Health insurance
- ??? Utilities
- ??? Cell phone [OK, you get the point]
- $1,500 Student loans [Importantly, none of her loans are federal so in lean times, she has no explicit option for reducing her payments
There’s $600 that are unaccounted for in there, and I’d guess that some of the numbers she did have are very squishy.
Tara’s problem (my take)
Her student loan debt of $100,000 is definitely a very big deal; the name of this blog wouldn’t even make sense if I didn’t think so. However, it’s a very manageable one given her income.
Her outlook is actually more concerning to me. She’s in a good position financially but is making herself miserable thinking about how daunting it is to get rid of six figures of debt.
Not knowing whether she is contributing to a retirement fund is pretty disconcerting. Even scarier is not knowing whether or not her employer offers a company match for contributions.
Also, she doesn’t track her monthly spending in a budget. This might not be important for everybody, but given how extreme some of her line items could be, there might be a very big difference between her perception and reality.
She spends a lot on food.
For the student loan debt, I would suggest that she pay the loans in order of highest interest rate first, to the extent that’s possible. This post helps explains why:
For the outlook, there are two things I would do. First, I would put together an amortization table of how long it would take to knock out your loans given your current payment schedule. Not only would this let you know how much you have to pick up the pace to get to zero in five years, but it would also make you feel more in control — and control is so important to not burning out. Let me know if you need help with the Excel. This post helps with the philosophy:
Second, I’d take a deep breath and realize that things are going to be OK and that being miserable doesn’t help anyone. One of the things that I like to do is chart my progress rather than charting my balances. Maybe read this:
For the retirement fund, at a minimum, find out if your work offers an employer match. Not taking advantage of that is basically throwing away free money.
In order to get to a place where you can work on a monthly budget, spend the month of May tracking all of your expenses. It’s good to want to spend less, but that’s tough to do when you don’t know where your starting point is.
For your food spending, I recommend some introspection to see if this is something that’s as important to you as the $1,000 in spending would make it seem. Maybe try limiting eating out to just a few times a week for starters and get some high quality groceries and some nice recipes in order to make eating in feel more appealing.
And that’s my advice!
Anyone else have thoughts for helping out Tara?