Background: Rocky and myself, are sitting down in my office. Rocky is thirty years old. His dream was to become a professional boxer, but he never made it. His only form of income is through “freelance” work as a loan shark, for local bookie Anthony Gazzo. He lives on his own, in a cheap apartment in Philadelphia. He has come to me, a financial planner, to help get him out of debt.
Tip: When reading the Rocky portion, make sure to speak in your best Italian Stallion accent.
Financial Planning with Rocky Part I
RJ: Good morning Rocky, I understand that you’re here today because you have gotten yourself, into some debt? Can you tell me, what your current situation looks like?
Rocky: Well, you see, it’s not so good right now. I got these credit cards. I thought I could pay them off, you know? Who am I kidding’? I ain’t got no money.
RJ: That’s OK. Many people have the same problem. Would you be able to answer a few questions for me about this credit card debt?
Rocky: I’ll try.
RJ: What I need to know is
- Is this the only form of debt you have?
- How many different credit cards do you have?
- What is the amount due on each one?
- What is the interest rate on each one?
Rocky: Wow. Some tough questions boss. Lets see here. Let me look at these papers.
Rocky: OK. This is all the debt I got. Ain’t nothing else besides these credit cards.RJ: That’s good to hear. How many different credit cards do you have?
Rocky: Three. I got three different cards.
RJ: OK. How about the amount of debt on each one?
Rocky: It changes a lot. Every month, they keep going up though, you know? I don’t get it. I make the payments on time. It’s the minimum, but it’s all I got.
RJ: Lets look at each of the statements. Do you have a current statement from each from each different credit card.
Rocky: Yea, is that what these are?
RJ: Let me take a look. Great, this is what I needed. We have the current statement here, from all three credit card companies. This card here is with Chase. Right now you owe $1,000. Most importantly, it has an interest rate of 24%. Do you understand how interest rates work?
Rocky: Kind of. Well….not really.
RJ: That’s fine, it’s confusing for many. Lets look at an example. Most credit card companies, take your average daily balance over the past month, and charge you interest on that. For example, if your average daily balance was $1,000 over the last month and your interest rate was 24%, you’re charged $20 a month just in interest payments. To get this, I took 24% divided that by the number of months in a year, 12, and multiplied that by $1,000.
Rocky: I think I got ya. So I’m getting charged $20 a month, just for having debt? Rock don’t like that.
Rocky: I got a question. Last month, I made a payment of $50 bucks. Cause I’m tired of being in debt, you know? Why ain’t my debt go down by $50 bucks, than?
RJ: Great question. Your minimum payment always goes to interest first. Let’s look at what happens if you make another payment of $50 this month. Out of that $50, $20 goes to interest and $30 goes to principal. Do you understand this?
Rocky: Sure. Debt ain’t no good.
RJ: That’s the attitude to have. Lets start a plan to pay off those debts. I see here that you have two other credit cards, other than this one. One is with Bank of America, the amount owed is $2,000 and the interest rate is 18%. Third, you have an American Express card. On this card you owe, $5,000. Plus, this card is carrying a 12% interest rate. Does this sound correct?
Rocky: Sure, I guess.
RJ: My next question to you is, after paying for food, shelter, and clothing, how much money do you have left over at end of each month?
Rocky: Well, you see, sir, I don’t know. I don’t keep track of this stuff. It’s hard.
RJ: I understand that it might sound hard, but lets give it a try. From now on, I want you to record every dollar that goes in and out of your life. You have to be able to see how much money you have left over at the end of the month.
Rocky: Well…OK. I don’t spend that much and I don’t make that much. So, that ain’t so hard, I guess.
RJ: Once you know how much you spend and how much you make, see what you have left over. The goal for now, is to get this debt paid off as quick as we can. Do you agree?
Rocky: Yea…This debt is costing me.
RJ: So here’s what we’re going to do. After we know how much we have left over each month after paying for basic food, shelter, and clothing, we put it all towards paying off debt. Understand?
Rocky: Yea…That’s my goal. Ain’t it?
RJ: Right. Looking over your statement, I see that each one has a minimum payment of $20. We will continue to make that minimum payment on each one, except the smallest debt. Since this debt has the highest interest rate, we want to pay this off as fast as we can. So we will take how much you have left over at the end of the month, and put it all towards this. Understand?
Rocky: I think.
RJ: Why don’t we look at an example. Say at the end of the month, after making minimum payments on the other two cards, you have $250 left over. Take that $250 and put it entirely towards the credit card with the highest interest rate, which is the one with the balance of $1,000.
Rocky: The blue one, right?
RJ: Yes. The blue one. In about four months you should have this card paid off in full. Once that happens, you want to move on to the next highest interest rate card, which is the one with the balance of $2,000 and an interest rate of 18%.
Rocky: The red one?
RJ: Yes, the red one. Just to make sure you understand, can you explain to me in your own terms, what your plan is when you walk out of here?
Rocky. Sure. I start tracking my income and expenses. Once I know how much I have left, after paying for those necessities, I put all that towards the blue card. Once I owe nothin on the blue card, I start paying the red card. Once I owe nothin on the red card, I start paying off green card. Until I owe nothin on that.
RJ: As long as the green card you’re referring to is the American Express card, we’re on the same page. If you don’t have any questions now, go out and get started today. Give me a call in a month, to see how everything is going.
Rocky: Sure thing.