With the holidays fading into the past, many people face the reality of getting their finances and savings plans in order. Here are some of the steps I took with one couple to get them back on track.
Take Inventory. We listed and ranked their debt, including all outstanding balances, interest rates and minimum monthly payments for each of their accounts. The couple had five types of loans to review: a $30,000 credit card balance and $25,000 in student debt, along with 401(k) loans, student debt, car payments, and a mortgage.
Review Cash Flow. Next, we needed to determine how much income they were bringing home every month, what their expenses were, and how much was left over to save. This allowed us to create a starting point to identify what was available to put towards a debt repayment plan. Our detailed cash flow analysis told us that for the past 12 months, our couple averaged each month $10,000 in net monthly take-home income and $12,000 in spending. They were upside down, and their debt was growing by $2,000 a month.
Create a Budget. Looking at the $12,000 in monthly expenses, we then identified areas where we could make significant cuts to spending by grouping their expenses into two categories: fixed and variable. The fixed expenses included items like their mortgage and household utilities. The variable spending, however, was a different story. Each month, nearly $3,500 was going to restaurant tabs and entertainment bills, $1,000 to discretionary travel and hotel stays, and $500 on shoes. We confirmed that all of these items could be cut in order to make progress. Reducing their spending by $5,000 per month across these problem areas would cut their monthly spending to $7,000, thus freeing up $3,000 a month to repay their debts. While these lifestyle changes were painful at first, they were not as painful as the financial stress and pressure that was building up in their lives.
Devise a Repayment Plan. Our couple had an aggressive goal of first clearing their credit card balances, then repaying their 401(k) loans, and finally paying off their student loans, all within a year-and-a-half span. To make this a reality, we outlined a repayment plan of $4,000 per month over the course of the 18 months. So along with the expected $3,000 in monthly savings, the couple needed an additional $1,000 a month to make their plan work. So the couple sold their luxury car and replaced it with a less expensive car, netting them $14,000 and reducing their monthly payments. After that, they decided to sell all the unnecessary “stuff” that had cluttered their home—a three-month process that became a fun project for them.
Monitor and Report Regularly. My clients understood that a budget and a plan by themselves would not help them meet their goals. It is easy to say you will do something in the moment, but much more difficult to follow through in practice. To remain accountable, the husband and wife worked together to track their total spending and daily transactions by logging their activity on their smartphones. They would then compare how they were doing each night. In order to keep the momentum, we continually monitored their spending activity through weekly expense logs utilizing online budgeting tools.
Stay Disciplined. There is no easy path to take for becoming debt-free, but finding ways to make repayment plans more engaging will help you to stay motivated. Working with a financial professional could also help to provide additional support and guidance along the way. In this example, the burden of my client’s debt acted as the catalyst to begin their journey, but it was their conviction and teamwork that helped them to stay the course.
I’m pleased to report that my clients stuck with their plan and are now both debt- and worry-free. In a wonderful turn of events, they are taking the same discipline and planning strategies that got them out of debt and applying them toward a new set of financial goals.
Joe O’Boyle is a financial adviser and retirement coach with Voya Financial Advisors. Based in Beverly Hills, Calif., O’Boyle provides personalized, full service financial and retirement planning to individual and corporate clients. O'Boyle focuses on the entertainment, legal and medical industries, with a particular interest in educating Gen Xers and Millennials about the benefits of early retirement planning.