Path to Financial Freedom

It’s September of 2017. Karl works for a large tech company, earning an annual income of $99,000. He is single and owns a rental property. Despite his decent income, Karl is living paycheck to paycheck, struggling to pay his monthly bills. He has a mere $500 in his bank account. He has an outstanding $10,000 loan from his 401(k) that he used to purchase his condo, and has accumulated close to $40,000 in credit card debt (from unexpected condo expenses & other reasons). Unsurprisingly, he is stressed out about his finances, and believes there must be a better way to live. He reached out to us for help.

Using the Magnifying Glass

Upon closer examination, we discovered the following:

  • Karl had a monthly deficit of about $500 per month, mainly due to his high rental cost ($2,450/mo) and debt payments (>$1,200/mo). He also had a $1,600 mortgage (which was offset by the rental income).

  • Karl had about $12,000 in stocks in a regular brokerage account (not an IRA). He’s actually not asset-poor as we initially thought!

  • Karl receives Restricted Stock Units (RSUs) from his employer, worth close to $3,000 per quarter (after taxes). Another bonus!

The Plan

  1. Karl and I prioritized making a budget that increased his cashflow, so he’s not struggling to pay his bills. This entailed:

  • reducing his 401(k) contribution from 9% to 7% of salary, just to the point where he was still maximizing the employer match (we didn’t want to refuse free money), and

  • paying just the minimum payment for his two credit card bills.

  1. We then did a $10,000 balance transfer from his credit card that charged 24%, to his other card that charged 0% for more than a year. This will save him more than $2,000 in interest payments.

  2. We sold his stock holdings to pay off some of his credit card debt, and left the rest in his checking account so he’s no longer cash-poor.

  3. We agreed on a plan where he will sell his RSUs each quarter (even though it was tempting for him to hold them for future growth). The proceeds will be used to tide him over the next 3 months (since he had a deficit of $500/month), and to make a dent on his credit card debt. We will repeat this process each quarter.

  4. We agreed on an “allowance” of $400 per month for dining out, entertainment and shopping. He implemented this by directing $200/paycheck to a separate, dedicated checking account for his “Fun” expenses. He then uses his debit card to help him track his spending more closely and make more informed decisions.

After Nine Months

Karl is breathing a sigh of relief. He tries to keep at least $5,000 in his checking account, and thus no longer scrambles to pay his bills.

He’s on track to pay off his highest interest credit card debt (24%) by early 2019. He’s on track to be debt free by 2020.

Karl still struggles to stay within his “Fun” allowance of $400 per month, but this system is helping him realize the steps he can take to live within this budget (like cooking at home more often). His recent pay increase will also help ease the strain.

As Karl and I work together, we’ll continue to make sure he’s on track with being debt-free. Afterwards, we’ll focus on building his nest egg in a more tax-efficient way.

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