Dear Charlotte,
I need your help. I’m 38 years old, have never made much money, and always lived paycheck to paycheck. I also finished grad school in 2008 with close to $120,000 in student loans. Even though I made every monthly payment, those loans still grew to nearly $200,000 with interest over the years. Then, in 2020, they were forgiven as part of the Public Service Loan Forgiveness Program. Earlier this year, I received a big promotion at work and am now earning $160,000 a year with a bonus. I have no idea what to do with this money now that I don’t have student loans anymore.
Meanwhile, my debt situation is terrible. I have $30,000 in credit-card debt on two cards (I paid off about $8,000 of it this year already). As for savings, I have a little under $30,000 in an investment account and another $4,000 in a regular savings account. I constantly dipped into my savings account in the past, so I started moving my money to an investment account, which made it harder to access and spend the money, and the investments are doing well.
I am currently following the guide in my credit-card statement to make monthly payments that will get rid of the total in three years. I am also planning to use my bonus to pay it off. Following this plan, I think I should be free of credit debt in 24 to 30 months. My debt payments are about $1,500 a month.
Thankfully, my rent is affordable. I was awarded an apartment in the NYC housing lottery years ago, and my rent, utilities, and internet expenses are about 15 percent of my income. I am trying to save $1,200 a month, with $500 going to my investment account and the other $700 to my savings account. Whatever is left at the end of the month, I move to savings.
Does this make sense? I thought about hiring a financial advisor, but they all just want to sell you products. I can’t figure out if I just throw money at my credit cards and then start saving after that? I am also terrified this job will go away, and I feel a desperate need to save as much as I can now. How do I balance my debt with my lack of liquid savings and still enjoy some of my salary?
I also read financial-advice stories about 20-somethings with $100,000 in savings, and I feel like a failure and so far behind in terms of financial planning because of my career choice and student loans. How do I fix this?
First of all, congratulations on being one of the notorious few to claw your way through the Public Service Loan Forgiveness Program. (The program has famously denied 90 percent of its applicants, but is hopefully improving soon, thank God.) If you managed to navigate that, you are practically superhuman — the very opposite of a failure. Your next steps may seem daunting, but they’ll be a piece of cake compared to the last decade of bills and red tape.
This is an exciting moment! For the first time in your adult life, you can focus on your future instead of paying for your past. That said, this transition will be overwhelming. You’ve gone from one clear, main priority to a big buffet of financial goals (saving for retirement, getting rid of your credit-card debt, building up an emergency fund, and — importantly — enjoying yourself). Of course you’re at loose ends.
The good news is you have significantly more money to throw at these competing objectives. But remember that there’s no perfect mathematical formula, secret shortcut, or “right” way to go about it. That sense of ambiguity will feel unsettling, but you need to trust your ability to test out what works for you. You’ll want to make a realistic plan and allow for flexibility to make mistakes and tweaks as you go along.
To figure out that plan, I talked to two certified financial advisers: Shannon McLay, the founder and CEO of the Financial Gym, and Bryan Stiger, a financial planner at Betterment. Both agreed that your next big goal should be to pay off your credit-card debt, but also to zoom out and look at the bigger picture.
“For the last 13 years, you’ve been in a place of debt repayment and deprivation. And now you’re entering a stage in your life where you’re building wealth,” says McLay. You should be proud of getting here, she notes. Your previous decisions are obviously paying off, not just in debt forgiveness but also in setting you up for your current lucrative job.
So, down to business: Your next priority is throwing the kitchen sink at your credit-card bills. Interest rates on consumer debt are usually between 15 and 25 percent, which means that even if you’re paying it off quickly, it’s like pumping water into a bucket with a hole at the bottom. To make headway, you need to turn the tap on full blast.
The payment plan provided by your credit-card company isn’t a bad place to start, but you can fast-track it by taking a multi-pronged approach. Stiger points out that it could be worth cashing out some of your investment portfolio to pay off this debt more quickly — not all of it, but a significant chunk. Even with compound interest, that investment portfolio is never going to grow as fast as high-interest credit card debt. “So if you do the math, it’s a pretty straightforward tradeoff,” he says.
Meanwhile, McLay suggests that you look into taking out a personal loan (provided that you have a good credit score, which you probably do if you’ve paid your student loan bills on time for 12 years) and put that money toward your credit-card bill. Yes, you’ll have the annoyance of more debt in different places, but since personal loans tend to have lower interest rates than credit-card debt, the numbers will benefit you in the long run. To scout out your options, McLay recommends using the website Credible, which allows you to compare different loans available to you based on your credit score.
One other idea is to get a balance transfer card that allows you to “roll over” some of your existing consumer debt onto a credit card that has no interest for a limited period of time (you can read more about that process here). Chances are you will only be able to do that for a smallish fraction of your debt — say, a couple thousand dollars — but if you have a decent credit score, it’s another tool in your belt.
As for your savings: One thing you should absolutely do — at the same time that you focus on your credit-card debt — is look into your retirement plan options. If your employer offers a matching program, take full advantage of it (“free money”). That’s an efficient, effective way to start saving for your future without much effort.
You’re also right to want to build up an emergency fund, which will have the added benefit of making you feel more secure, but you don’t need to make it your tip-top priority. “We’ve found that most of our clients feel better about their finances, psychologically, when they have cash in the bank,” says McLay. Ultimately, you want your emergency fund to have at least three months’ living expenses — or closer to six months, if you’re really worried about your job — but don’t freak out if it takes you a few years to get there. Think of this as a second-tier goal, with your credit-card debt and retirement savings above it.
I applaud your instinct to break your income into percentages and divvy up your priorities like a pie. Without knowing exact numbers, I can’t say what the breakdown should be, but I encourage you to sit down with a calculator and keep playing around with the figures. For the next few years, while you’re hammering away at your credit-card debt and catching up on your savings, you do want to keep putting a high percentage of your income toward both of those things (it sounds like you already are). But while you’re at it, don’t forget to set aside a percentage for fun things that allow you to enjoy all that you’ve worked for. You can’t budget yourself into oblivion; even if you succeed, the results aren’t worth it.
(I should note that most financial advisors recommend the 50/30/20 rule — 50 percent of your income goes to essentials like rent, utilities, and groceries, 30 percent goes to “fun” stuff like trips and dinners, and 20 percent goes to savings. Your percentages will look different, especially at first, but that’s a good benchmark to keep in mind eventually.)
As for those 23-year-olds with six-digit savings accounts: Ignore them. You are not “behind” at all. You’ve just had a different trajectory from a small but very loud group of financial know-it-alls who like to trumpet their successes on the internet. “We see this with clients all the time: You feel like a failure because you’re comparing yourself to other people, but you don’t know the whole story of what’s going on in those other people’s bank accounts,” says McLay. “You’re running your own race, and you’re exactly where you’re supposed to be.”