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.
The Bad.
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.
The Ugly.
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!
The Plan.
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
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
The Hope.
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.
I think you nailed it here A-G. I wish I made that kind of money. I know you mentioned he had a family. Is the wife or kids working? They could probably be helping with some bills. Sometimes it is the spending habits of our significant other that puts on in further debt. I have been down that road before. Best of luck to Ali!
ReplyDeleteSorry I didnt make it quite clear and I have updated my post to clarify that he has no wife or kids or any dependants what so ever. Now if I can get my wife from her organic spending spree for items for the kids. So far I am losing the battle :(
ReplyDeleteGood job helping your friend, AG. I hope he sincerely embraces it. One thing I'm not clear on - if he has $50K in debt but is now saving about $13K / year and has about $6500 in interest, how does he become debt free in one year? Where does the extra money come from? I assume you are using a debt snowball calculator. I would love to see the debt list and timing of when each one should be cleared, but that's just the voyeuristic me talking there.
ReplyDeleteHey Debs! A good chunk of his debt will be eliminated when he sells or downsizes his useless stuff which will be the toughest task for him to embrace which I am slightly nervous about. I have roughly valued his sell or downsize value of stuff at about $20,000. The rest will take care of itself if he continues with his income and has his spending habits in check. I am working with him on a more exact debt list but he has been very busy working and its been hard to get him focused on the particulars on some things. Problem is Ali is autistic and certain things are a struggle for him. I will have updates on what debts get paid and progress. Stay tuned! also thanks again for the mention in your blog!
DeleteGreat job, A-G. There was a lot of room for improvement that you made it clear to him. If he sticks to the plan, he should be able to dig himself out of this hole. Give yourself a pat on the back :)
ReplyDeleteR2R
I dont want a pat on the back but a $100 steak dinner at the end of this lol! I want side too, cream of corn, garlic mash, olive bread and a few shrimp!!!!
DeleteWow, $5-7K a month net is pretty much a six figure gross income. Ah, if only I made that much. Maybe one day. That's very nice of you to help him AG :) I'm sure he's very grateful. Maxing out on his loans can hurt his finances in more than one way because it lowers his credit score which makes it harder and more expensive to carry other debts. But this path that you've got him on will change everything for the better :) Maybe he can even renew his mortgage at a lower interest rate, once his credit score improves. Do you think your wife would be a little jealous of you helping him if Ali was your female friend? lol.
ReplyDeleteYa the plan is to repair his horrible credit score in the process and then renegotiate all his current debts to better rates thus increasing the debt repayment snowball. Of course my wife would be jealous if Ali was a girl! She would blow a gasket!!!!!!!!!!
DeleteExcellent job on reducing expenses. I would now focus on increasing income. Hello 14 hour work days 7 days a week for the next year. If he can't fill the week with landscape work, which sounds like he can, look for part time graveyard shift work anywhere else he can find it or spend that time marketing the landscape business. The added benefit of working massive hours is if he did that, the bar, eating out, concert travel and entertainment bills would all go to zero.
ReplyDeleteAli is a very hard worker and often works 10 hour days 6 days a week during peak landscaping season. He has a problem with accounting though so that means he has trouble collecting the money he works for from his business. I told him to take a day a week off to focus on his accounting to get it in order and collect what is owed before he tackles on more work. He has to work smarter and not harder I feel. I hope he hunkers down and stays indoors in his off time. Dude is woman crazy which is the biggest expense in the world lol!
DeleteWondering if there would be a way to outsource the accounting side of the business. If he could focus on the work and pay someone to do the accounting and collect what is owed, he could be $$$ ahead.
DeleteI never even thought of that! Thanks its a great idea. Turns out he has quite of outstanding business debt with some dating back last year! LOL. This is such a nice guy he works for free. There are several customers he has that are quite elderly and quite behind on his payments. Is accounting is horrid and he has the fix the problem asap. Would be a good idea to hire someone on for a few days to get him on track with it all. Communication has been rough with Ali as he just had a week long power outage due to the hurricane in the east coast.
Delete