Email Question: We’re drowning in debt! Please help!

Hi Pete,

My husband and I really need your help!!!!

I recently became interested in your blog after watching you on Fox59. We are in our late 20s and financially in a rut!  My husband and I have great jobs with benefits and retirement options.  While we have great careers, neither one of us made good decisions in our early 20s therefore; we are definitely reaping what we sowed.

I am frustrated because all the blogs, books and financial planners always talk about paying off credit card debt.  Well, we don’t have any credit card debt at all, but we are swimming in debt of other forms – medical bills, garnishments from medical bills, collections, car loan and student loans.

We have been living in apartments for the last 4 years and want to be on track to buy a home and expand our family.  I created a “financial binder” that outlines every debt and house our financial plan to pay back everything we owe! Well in order to decrease our debt we just moved in with my mother-in-law last week and we pay her $400 a month under half of what we were paying in rent for our 2 bedroom town home ($824).  In 2011, we entered into a lease-to-buy option that took our entire savings.   That situation was horrible!

We desperately want to eliminate debt, create an emergency fund and still live!  How can we do this with the amount of debt we have? 

My husband has even thought about getting a part-time job, but his employer will not allow that. Here is our financial breakdown:

Income:

Husband’s annual salary is $43,586 and is paid $1,060 bi-weekly ($756.00 after garnishment, this garnishment ends on 7/1)

Wife’s annual salary is $39,000 and is paid $1,175.00 bi-weekly after deductions.

Housing:

$400 – monthly to mother-in-law

$207 – monthly for storage unit

Bills:

$25/month – Dog health plan

$8/$8/$10 – Netflix/Hulu/WWE Network

$10/month – subscription to credit score

$166/month – car insurance

$300 – 3 cell phone lines

Debts:

Thanks!! 

Kelly


There is soooo much going on here. Too much for me to properly answer without more info. After emailing back and forth with Kelly a few times, we decided it would be easier to just talk it out on The Pete the Planner Radio Show on WIBC. I’m so glad we did. Kelly was awesome. Situations like this are tough, but there is hope for those who truly take responsibility and do the hard work to get out of debt. This is where Kelly and her husband are, they want out and they are willing to do what it takes to get there.

What you need to know about Kelly and her husband is they are suffering from major financial stress. Kelly admitted she vacillates between a 5 and a 9 on a 1-10 stress scale, but her husband is nearly always at a 9. Kelly started a financial binder which has helped them communicate and keep on top of everything but they are still stuck on how to tackle all the debts.

I had to start off by congratulating Kelly. Yeah, they are in a ton of debt, but they recently made a huge step in the right direction. I’ve done a whole series on how to avoid moving in with your parents, but there is a time when moving in with a relative is the right move. By moving in with her mother-in-law, Kelly and her husband cut their rent nearly in half. They had to get a storage unit, but they’ve still created margin. Margin is what you need when you are paying off debt. Whether it’s through cutting expenses or paying off debts, the more money you can free up each month, the faster you can pay off other debts.

Because of wage garnishments and the 17 bills in collections, Kelly and her husband don’t have the typical debt situation. The majority of their debts don’t have a minimum payment which means my usual advice to line up all debts and pay them off from smallest balance to largest balance, isn’t the best plan for them. If we did use the Momentum Method here the first debt to be paid off would be the $92 item in collections. But what you’ll notice about that $92 is it doesn’t have a minimum payment. While paying it off is still a good thing (and will have to be done eventually), it currently would do nothing to create margin in their lives. They are better off focusing on a debt where paying it off frees up a monthly payment obligation.

The best plan for them is to use an alternate version of the Momentum Method. We separated the debts by those which have a monthly payment and those that don’t. Then we chose the smallest balance from the list of debts with monthly payments, it’s a medical bill for $160.03. Kelly and I worked through this month and found there will be about $65 extra which can be used toward debt pay down. Combined with the $20 minimum payment, Kelly can make a $85 payment this month toward the $160.03 balance. If she can manage the same amount next month the bill will be paid off and she will have created $20 of margin. Next she would move to the $331 medical bill with the $50 minimum. All the while she’ll be paying the minimum on any bills with a monthly payment.

In July, Kelly’s husband’s garnishment will end which will free up around $500 a month. I have this theory that we get about two financial breaks a year. One of those times is often tax time and the other comes as some sort of bonus or something. July is Kelly and her husband’s financial break. With the garnishment ending they now have a significant amount of money they can use toward debt pay down. Side note: When you get a financial break, don’t absorb it. Use it for something specific. Whether it’s to pay down debt or contribute to a financial goal, determine in advance where the money will go and use it immediately. The longer it sits in your checking account the faster it will disappear. Back to Kelly – the best part of this is, as they continue to pay off debts, the previous minimum for the paid off debt gets added to the amount they can use to pay off the next debt. In the next few months they could potentially be putting $800-$1,000 a month toward debt!

Getting out of debt when you are in this deep takes a lot of patience, hard-work, organization, and a high level of detail. It’s even physically exhausting. BUT every time a debt is paid off there is a little zing of hope which will push you forward to the next goal. It will take Kelly and her husband nearly three years to pay off all their debt but that’s it. I know three years is a long time, but if they can manage to maintain the level of discipline necessary to reach their goal they are golden. Seriously, they will be set for life because of how much they will have learned. Paying off debt teaches you how much you never want to get in debt again.

Kelly promised to reach back out and update me in a few months. I’m excited to hear back from her and share their progress with you!

Too lazy to read all of this? That’s cool. You can listen to a run down of Kelly’s situation and my advice for her in these podcasts, courtesy of WIBC.

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