Now she has a job, does she have any extra available once she’s paid the minimums? If so, can she snowball (paying the minimums on most of the cards and all the extra towards the one with the highest interest?)?
Moneysavingexpert covers a lot of ways to manage debts. Some of them might be relevant for your friend.
Sorry, I must disagree. We’re not talking pure numbers here, we’re talking behavior. She MUST have $1000 in an emergency fund. If she doesn’t have that, and Murphy comes to visit, she won’t have a cushion and will immediately put Murphy on a credit card.
We’ve had Murphy come to visit a few times while we were paying off the credit cards. Having the emergency fund allowed us to handle the situation without dumping it on a credit card. Then, you go back to paying the minimums until your emergency fund is back up to $1000.
The quickest way to build wealth is with your income. Would you rather have the income going into mutual funds and IRAs or toward the credit cards?
I agree with that.
I do think the inheritance can temporarily take the place of going through the motions of building the habit of saving for a while, an exercise I’m not too crazy about anyway. IMHO it is too easy for someone with a debt problem to backslide and justify spending this savings on treats.
Do the Dave Ramsey thing of having $1000 in a emergency fund, maybe a little more in such an expensive location, so that any minor repair or medical bill doesn’t send her back to borrowing. Other than that, pay that debt down.
I also think continuing to rent a place of her own in the city counts as a splurge. If she wants that splurge, I hope she can find the willpower to cut back to the bone other places.
Regarding the inheritance…let’s not count on that right now. Have her work as hard as she can to get her debt down. The more she pays off, the more choices she’ll have with the inheritance if and when it does come in.
Depending on the circumstances and how far along she is, she can either use the inheritance to pay on her debt, pay off her debt, or pay off her debt and have some left over to start Baby Step 3…savings equal to 3-6 month’s worth of expenses.
In any event, the inheritance should not be used for “fun” UNLESS she has completed Baby Step 3. It sounds like she’s on the right track, but we’re not there yet, and she has a huge mountain to climb.
Since we are talking behaviour here, saying that she MUST have $1000 in emergency savings is just false. It’s not the best financial path, so unless she needs to do it to preserve new responsible spending habits (which may indeed be the case) then she should rather put the $1000 to her CC balance and use the CC responsibly in the event of an emergency. Setting up the emergency fund is a tool many people find useful in becoming more responsible with their finances, but it’s hardly an axiomatic truth.
We just finished working with an agency like this (CCCS, now I believe known as Clearpoint). For us, it was a good experience. We have come out of our predicted five-year plan right on time and with an excellent credit rating. The advice we got - no more credit cards at all, cutting down our spending, budgeting - was excellent. We voluntarily paid a $40/month fee, but it was always made clear to us that this was completely voluntarily, that we didn’t have to do this, and we would still have all the benefits of the service if we didn’t.
The one thing I will say about these services, they are not for people who want to sit back, make a payment, and expect the service to do it all. You still need to keep on top of interest rates, the statements, where you are going, who you are paying off, your credit rating, all of it. There are sometimes opportunities to renegotiate rates lower if a company sells their credit card business to another company. We ended up paying Sears off early because of something like this.
It worked for us, was definitely NOT a rip-off from our point of view, and has not adversely affected our credit rating. We actually saw our credit rating improve the further we got into the plan and paid folks off.
We learned so much from this. Right now we have no credit card debt and it feels good!
Boy, you said it, brother.
Someone making $100K+ who isn’t building home equity needed financial counselling a long, long time ago.
Sam Stone speaks great wisdom, I see on preview.
I think it’s already established the OP’s cousin is not responsible with credit cards. She would do best to operate on a strictly cash basis from here on out. People spend less when they have to open their wallet and hand over a few dead presidents vs a piece of plastic.
Geez Louise, people, how lucky for you all to live in cheap areas of the country.
The OP says the lady under discussion lives in SF, and pays $2300 a month for rent. Yes, she could move a couple hours outside of SF and cut that rent down by $500 to $1000 a month, which she’d then pay in time (i.e., lost opportunities to do other things or work longer hours) and in transportation cost.
If she’s making $100K a year, she’s bringing home (after taxes, insurance, etc.) around $60K at most, and paying at least $36K for housing (including utilities). Which leaves her around $2K a month for transport, food, paying off debt, saving, etc.
A small condo in SF is going to run in the neighborhood of half a million. So that requires a $100K down in this environment. (And, of course, with her debt, she’ll not qualify for a loan anyway.)
How long would it take you while living in SF, even making $100K a year gross, to save $100K (not to mention the other costs involved with buying a house)? Your answer is likely to be eight years, at least, and that will still involve no small amount of discipline and luck.
And, to give you an example – eight years ago, I was making just over $100K a year, and had debts in the neighborhood of $100K as well. So I’ve been where she is, and it’s not fun, particularly in LA.
So, frankly, I don’t see the grounds for the disdain based on her salary. For those of us that live in the more expensive areas of the country, yes, I’ll admit – there are a ton of benefits to living here that come along with the higher prices, and I wouldn’t trade those advantages for anything. But we do pay for them; and that’s one of the reasons some jobs pay more out here.
To answer the OP, I think the Dave Ramsey method makes sense. There is psychological value in paying off smaller debts first (even though in a purely fiscal sense it’s better to pay off the higher interest rate cards first). But if this were solely about fiscal sense, she might not be in the debt she’s in.
Wow. How high are taxes in California? Forty percent for deductions?
And they say we pay a lot of tax.
That’s a ball park figure (based on what my deductions were before I owned a house and could take the interest deduction). State and federal taxes (some places have local taxes, too), medicare, social security, and then there’s your insurance premium if you take the employer-offered insurance (which is likely a better deal than you can get on your own, unless you want to gamble that you won’t need medical care).
And people wonder why Obama’s tax plan scares me.
Why do you assume it’s luck? I know plenty of people who have moved because the area they live in was too expensive for their chosen career. Living in a beautiful but expensive city is just as much a luxury as driving a BMW.
When I was younger, I left my home city because I realized that the career I wanted couldn’t be followed there. I would have done the same thing had my city been far too expensive for my career. Lots and lots of people make the same choice.
That too is a luxury.
She’s single - she could also take a roommate. Or, she could find a cheaper apartment. A poster earlier said there were apartments available for $1000-$2000/mo in SF.
A good friend of mine worked in Silicon Valley and earned significantly more than $100K, and he managed to find an apartment for $1300/mo - and shared it with someone else. He had to drive over an hour each way, but he chose to do that so he could save money. In five years he saved enough to move back to Canada, put a down payment on his home, and have enough left to help pay his way through grad school.
It’s easy to talk yourself into an expensive lifestyle by immediately taking the most expensive items off the table as ‘necessities’. When you lose your job, everything is on the table.
Do utilities for an apartment in SF really run $700/mo?
$2K a month for a single person with no children seems like a pretty substantial amount of money. $300 for food, $200 for entertainment, $200 for transportation, $300 for various sundries, and you’ve still got $1000/mo to play with.
$1000/mo, invested for 10 years at 10% interest, will return $200,000. Even with only 5% interest, it’s still $150,000.
If your goal is to save 25% for a down payment on a condo that’s worth $500,000, you should be able to do that in less than 10 years on a $100,000 income. Start early, and you can own a condo before you’re 35.
But frankly, I think you should be able to save more than that, if you really want to. $2K a month is more than a lot of people’s entire gross income before taxes and housing.
That’s why people are saying that if you have that kind of income and aren’t building a serious nest-egg, something’s wrong.
She not only didn’t save, but she also racked up $120,000 in debt. Someone like that needs serious budgeting help, and also needs to learn that when you lose your job, it’s an emergency situation. Your credit cards aren’t a license to continue merrily on your way, racking up debt. You lose your job, you immediately cut out every non-essential expense. You start pounding the pavement for another. If you can’t find one with the salary you are accustomed to, you take a temporary job to make ends meet. If you can no longer find a job that pays you enough to live in one of the most expensive cities in America, you leave.
Reality has a way of intruding on your desires. Sometimes you have to make hard decisions.
Some good advice here. She really needs to figure out WHERE her money is going. A single person with no dependents and she racked up that much debt? There are serious entitlement and “I want it” issues going on there–I don’t care where she lives.
Let’s say she doesn’t get a cheaper place or a roommate. She still is clearing at least 2 grand a month for her lifestyle. Introduce her to buying in bulk and freezing stuff. Tell her about not dining out more than twice a month. Check books out of the library or buy them at a second hand bookstore. What kind of clothes does she wear? Surely she can save there. What about hair and spa type stuff–manis and pedis? How often and how can she change that?
She has got to have several places she can drastically cut back and still not feel like she’s being punished or unable to live “well”. She needs to start acting like she lives in the poor house, frankly. Every available cent should be going to pay down debt–AFTER she’s figured out where she is bleeding money and changed some of her habits.
I spend $200/week on groceries to feed a family of 5. Surely she only spends half that, if even that much. She can cut coupons, buy house brands, DO WITHOUT.
I agree she needs a cushion against future problems, but I cannot see how this is not straightforward for her.
You know I got your back, buddy. 
No, she can go and meet with a debt counselor without any fear of it harming her credit. Any good organization will be very strict about maintaining her confidentiality. There is no potential damage to the credit score until she signs on the dotted line, and before she does so the counselor better be upfront about the risks and disadvantages as well as the benefits.
I will PM you the organization I work for.
Only a counselor assessing her individual situation would know that. There is generally a fixed percentage agreement with the creditors. I will say I’ve heard of it being lower than what she’s getting.
Where I work, we don’t strike an agreement unless a person has proof of income and has shown in their budget where they will be able to make the payments. They are also often automatically deducted from clients’ checking accounts. I’m not saying people never lapse, but there are ways to avoid making commitments you can’t keep.
Before I worked for my company I consolidated my debts with them; it was my positive experience with them that led me to work there. There is absolutely no indication on my credit report that I was on a debt management program. There are delinquencies. It has been 2 years since I ended my program and my credit is good (not perfect, but good, high 600s.) To be perfectly honest, though, it was wrecked before I got on the plan…about 500 when I met with the counselor. My credit score began to improve steadily from the point I signed on the dotted line. I was up until that point paying over half of my income toward credit cards, and those payments were cut in half when I consolidated.
I don’t suggest consolidation is appropriate for everyone. As a general rule it isn’t the best option for people who have perfect credit and have managed to work out lowered payments on their own. But I do maintain that it IS possible to meet with a credit counselor and find out what is the best option without necessarily having the wool pulled over your eyes. There are scammers, but we’re not all scammers. Anyone certified by the NFCC is required to meet certain qualifications that include doing a full budget analysis, discussing ALL possible options, disclosing pros and cons of each option and being upfront about the way debt management programs work. If you do your homework you will not get scammed–you will get free financial management advice from a certified financial counselor, whether you choose to consolidate or not.
Campion
She can do what everyone other not-filthy-rich person in the Bay Area does- move to the East Bay. An identical apartment in Oakland will cost half the price. Restaurants, groceries, entertainment, etc. is all cheaper. It’s still big-city living with all the restaurants, nightlife, arts, parks, libraries and events you’d find in SF. And the commute to downtown SF can sometimes even be faster than from farther flung parts of SF, especially if you live near a BART station or a transbay-bus line.
Sure, it’s less sexy than living in SF. But a one bedroom apartment in a decently nice area of Oakland should cost around $1,200 or so. If she’s willing to take a room in a shared house she could probably find something nice at around $700 a month. Once again, it’s still a big city and it’s not a drastic change in lifestyle or a move to the suburbs or something. Millions of people do it and it works out fine.
I managed to live sparely but not spartanly in Oakland on $10.00 an hour. I promise she can find a way to live in a way that allows her to save money. Find cheap rent, pack a lunch, take your friends out to Vietnamese sandwiches instead of sushi, learn to enjoy parks and libraries…it can be just as fun and if she works at it she can get out of debt in less than 3 years.
The Mercury News Consumer Advice Dude suggests : Consumer Credit Counseling Service at 800-777-7526 or www.cccssf.org
Using credit cards can be an addiction just like gambling. If this woman continues to live beyond her means, she will need help in controlling the compulsion. That’s the bad news.
The good news is that it may be easier than you might think. When my shrink gave me a medication to control compulsive eating, it also ended my compulsion to shop. Topamax (or is it topomax?) was originally used to treat seizures. The people who took it lost their appetites and lots of weight. So it is used no to treat eating compulsions. In the meantime, I finally have a savings account and I haven’t charged anything in over four years.
I did get a consolidation loan from a bank at a fixed interest rate of 7.5%. I am paying i t off each month at considerably more than the minimum. And the more I pay, the more I want to pay. I still enjoy the luxuries of later life, but the best one is going to be freedom from debt.
If I had it to do all over again, I would live a much simplier lifestyle. The real luxuries of life (the ones that I have discovered in my sixties) are being able to support a friend who needs my help, treating a kid to something special, putting money to good use. Then from time to time I treat myself to something outrageous that my young self would think I didn’t deserve.
Your cousin needs to take on a second job. Seriously. Not only will that help her crawl her way out of the hole she’s dug, but it will keep her out of the malls. And since she’ll only be home to sleep, moving to a less swanky apartment won’t matter as much.
A $2300 apartment with that kind of debt level and income is NUTS.
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I can’t imagine what the minimum payments are on a $100k debt. I doubt she’ll be able to do better on the interest rate with a consolidation loan, but at least she’ll only have to make one payment, with perhaps more going to the principal each month than if she were spreading the same amount of money over 4 or 5 different cc’s. Certainly it’s worth a look.
I don’t think that’s entirely established. Part of the debt she’s accumulated was because the cards were her only means of support while she was out of work. I’ve been in that position, which is part of the reason that my CC balances are what they are.
Hence, the need for an emergency fund, cash in a savings account, instead of credit cards.