Meet my friend Ali. He is a late twenties guy who owns his own home and runs a profitable landscaping business. He is a single guy with no wife or kids , dependents or girlfriends. His family is well off and they are tight knit. When landscaping season is over he does video production work during the winter. He owns his own home and has multiple tenants renting out rooms which pays for his monthly mortgage fees and home bills. His landscaping business is quite busy and he can ultimately work as many days a week as he wants as their is no shortage of business. He takes home about 5k net a month from it minimum and that could easily reach 6-7k some months.
He will drop anything to help a friend and will often put himself second. His generosity is often abused as many friends and family take advantage of him. He gives people rides all the time , he helps people move move all the time since he has a truck even during work hours and other random selfless tasks.
Well Ali is in severe debt. It started many years ago and it has just been getting worse every year. He is at a point of near bankruptcy. He has borrowed whatever he could from the banks and did not adjust his spending habits. He has long avoided his debt problem and I recently found out how bad shape he really was in so I decided to help. Since his credit is beyond tapped out he initially asked me for a loan but I denied him because it would be useless to fix the debt without fixing the real problem HIM !!! So I have spoken to him many times to get a handle of his whole debacle of a situation.
First was to analyze his debts.
Total Debt $50,000
$30,000 Maxed Credit Line 8% interest
- He started with a 10k credit line and kept asking for more where the bank cut him off at $30,000.
- Due to his poor credit the best rate he could get unsecured is a very high 8%.
- Total interest a year for 30k would be $2,400 or $200 a month
$18,000 Credit Card 20% interest rate
- He has 3 maxed out credit cards at 20% interest
- Total interest a year for 18k would be $3600 or $300 a month
- No other banks will give him a promotional rate to switch over due to his credit
2k Overdraft in Bank Accounts at 22%
- He has started overdrawing from his bank accounts to stay afloat!
- Along with the 22% interest rate the bank imposes several monthly fees while he is in overdraft
- Total interest a year and fees would be around $530 or $44 a month
From this combined total $50,000 debt he is paying $6530 a year in just interest which is $544 monthly.
So seeing the the debt all laid out there is a few problems really stick out.
The overdraft firstly. The interest rate is higher than credit card rates and their are monthly fees associated with being in overdraft further compounding the problem. Its scary because the bank will only loan so much before they cut him off and at that point he is pretty much bankrupt.
The big chunk of his high interest is in credit cards and he often struggles to pay the monthly minimum payment.
Also during my financial interrogation of him I found a huge other problem. His mass spending habits. He spends more than I do for my family of four! He is the ultimate consumer and service user. Unbelievable the amount of monthly bills he gets and it boggled my mind. You know what they say "Death by a thousand cuts!" This guys is bleeding out!
To cut down his extreme spending and get him out of overdraft and credit card debt asap.
First we cut out some needless expenses.
Monthly Charge Bills
- Internet- $100 down to $75. $25 a month savings. (Big plan still needed to suit tenants needs in his home)
- Gym membership- $45 a month cancelled as not needed especially during landscaping season.
- Phone plan cut down from $95 a month to $65. $30 a month saving from downgrading plan
- Life insurance policy $40 a month cancelled. He has no dependents and is in good health and also his family is well off to cover any crazy circumstances
- Business association dues - $21 a month cancelled. This served no purpose to him
- Young entrepreneur association fees - $22 a month cancelled. This served him no purpose
- Costco membership- $10 a month cancelled. He rarely shopped there so it didn't justify the cost
- Garage rental for landscaping equipment $225 a month cancelled. He has now made space in his own home for the equipment.
- Bank fees- $38 a month saved from switching to low fee accounts
- Insurance rates - $80 a month savings from switching home, car and business policies to slightly less coverage and increasing deductible amounts
$536 a month $6432 a year
Also we cut down his daily spending habits
- $150 a month savings by cutting down on outside eating and eating more at home.
- $100 a month savings by cutting down on him going out drinking at the bars.
- $100 a month savings in impulse online shopping.
- $200 a month savings by cutting down concerts, hotels travel
$550 a month or $6600 a year
With these two areas of monthly charge bills and spending habits cuts it will total to $1,086 a month or $13,032 a year in paying down the debt.
We also are trying to bring in more money to tackle this debt head on by selling his unused items
- Cashing in air miles for cash
- selling his multiple giftcards
- changing his credit cards from air miles to cash back
- selling his life insurance policy
- selling landscape equipment he no longer needs
- downsizing his vehicle and landscaping trailer to a cheaper fuel efficient truck and smaller landscaping trailer
- selling other random unneeded house items
With this plan I think he will be in good shape to eat up this debt. It should be easily gone within a year but I am pushing to get it off his back sooner. I want to see this debt repayment snowball into financial prosperity. By this time next year I want to see investments in his Tax Free Savings Account earning him money by the power of dividends!
The plan has already started and he has cut down most of the expenses but there is some still to go. He is in the process of wrapping his head around everything. I do my best to keep him motivated to stay on the task as he has problems staying focused. I send him random text messages that are somewhat abusive and praising to remind him of his debt and current state.
All depends on him and his commitment. He has to stop being such a consumer. Buying all this stuff does not make him happy as this debt has taken its toll with the stress he endures from its lingering dark cloud. Yes we have taken away quite a bit but I am not opposed to him bringing back a few things he would like a gym membership once his debt is paid for.
Along the way i hope to educate him on spending habits and a long term financial outlook. I have directed him towards Dave Ramsey debt podcast and numerous other sites to get his head on the right track.
So what do you guys think of Project Debt Ali?
Any suggestions to the current plan?
If I missed anything just ask away!
I plan to update Project Debt Ali monthly and let you know how he is doing.