Breaking up with Debt: A tale of two Sara's

3/15/2013

We all have goals in life. Whether it’s to buy a home, get married, have children, pay off student loans – or all of the above. Unfortunately, most of us also have debt. And the trouble with debt is that it tends to get in the way of our dreams for the future.

While it’s easy to acknowledge that debt is getting in the way of your hopes and dreams – ultimately, your future, it can still be easy to think of it as something that will just “take care of itself” one way or another. I’ve been guilty of that, and I’m sure at some point in your life, you have been as well.

And this is where I’ve really seen the difference our services here at MMI can make in the lives of our clients. When our clients say, “Thank you for giving me my life back!” I now know what they mean.

Freedom from debt is truly like getting your life back. When debt is no longer a barrier to making your goals a reality, it’s a truly incredible feeling. And all of the sudden, it feels as though your hopes and dreams are attainable. They are no longer things that you wish would happen some day, they’re things you can plan and save for, because you no longer have that huge barrier standing in your way.

Now this may sound great in theory, but we all know it’s really about the numbers — and the numbers really do tell the story best. So let’s take a look at a debt breakup through the eyes of "Sara":

*Note: Numbers are based on the average MMI client in 2012.

Name: Sara
Age: 33
Job: Communications Manager
Salary: $35,000
Number of credit cards: 5
Credit Card Debt: $19,290
Average interest rate: 18.2 percent

Sara's debt troubles began innocently enough. When Sara graduated from college, she didn’t have a job immediately, so she relied on credit to make ends meet. However, once she did find a job, rather than focusing on paying off her debt, she was determined to live the life of a 20-something in New York City. She went out for drinks with coworkers, spent her Saturdays shopping with friends and ordered out for dinner almost every night.

Before she knew it, Sara was looking at bills that seemed to triple each month – and she wasn’t sure how it had gotten to that point. After all, she wasn’t living frivolously. She was simply living the life of a “normal” person her age.

Sara quickly realized that she couldn’t continue to maintain this standard of living. She was only making minimum payments on her credit cards, most of which were already maxed out. So Sara made a decision that changed the course of her future. Sara decided to break up with Debt.

Scenario No. 1: Sara joins forces with MMI to break up with Debt

Sara knows that she wants to get rid of debt, but isn't sure how to tackle the issue — so she calls in the experts. Sara reaches out to MMI and with the help of our trained, certified counselors, enrolls in a Debt Management Plan, wich allows her to make one manageable payment per month that would then be dispersed to each of her creditors.

In addition, Sara’s counselor reviews her budget and helped her customize a reasonable spending plan, so she has easy-to-follow guidelines to help guide her spending throughout the month.

Debt prior to starting a DMP: $19,290
Average interest rate prior to the DMP: 18.2 percent
Average interest rate on a DMP: 8.5 percent
Average drop in interest rate: 9.7 percent
Average monthly payment via DMP: $484

Three years later...

Sara successfully completed her DMP four months ago, and now that she has paid off all of her credit card debt, she has shifted her focus to saving. She puts $300 a month in her emergency savings account, and $200 in a 401(k) that her company matches 100 percent.

So where is Sara now?

Debt: None
Savings: Because she completed her DMP in 32 months, Sara has been taking her former debt payment and putting it toward her savings accounts. Here’s what she has:
- Liquid: $1,200
- Retirement: $1,600
Sara went from -$19,290 to $2,800 in just three years!

Scenario #2: Sara decides to handle it on her own — after all, things aren’t that bad.

With $19,290 in debt and an average 18.2 interest rate, Sara finds that in order to pay off her credit cards in three years, it will cost $765.35 a month — which is far more than she can afford. So Sara decides to stick with making the minimum payments, which equal about $300 a month.

Then, another stark realization sets in: If she sticks to this plan, it will take Sara 242 months to pay off all of her debt – which is a little more than 20 years! Knowing that she doesn’t want to wait until she’s 53 to finally be free of debt, Sara considers making the same payments she would on a Debt Management Plan — $484 a month.

Using this tactic, it takes Sara a little more than five years to pay off her debt.

Five years later...

As we just learned, Sara from the second scenario is finally debt-free! She's thrilled and is now ready to start building a savings fund.

Sara's financial snapshot: