I grew up poor and my family knows nothing about personal finance. What is the best plan of action?
Getty Images
As student debt payments resume in October, this question, which someone posted on Reddit, felt particularly timely to us. Furthermore, we hear this type of issue from our own readers a lot, saying they don’t know enough about money and wondering if they can learn it on their own or if they should hire a pro to help get them on the right track (this tool can help match you with an adviser who may meet your needs). So we asked several pros their thoughts on the below question— and whether it was worth forking out cash for a financial adviser.
Question: “I just graduated college this May and I start a brand new job in 4 days. Throughout my 4 years of college I have incurred $46,750.03 in debt. $24,257.75 is in public federal loans with a 4.25% interest rate, $19,009.61 is in private loans with a 15% interest rate, $1,232.67 is on my credit card (not sure what the interest rate is but I bet it’s high) and the remaining $2,250 is debt with people I know. With my new job I will be making $73,000 before tax. I grew up poor and my family knows nothing about personal finance. What is the best plan of action? Any advice would help me.”
Answer: First, congratulations on graduating and landing a well-paying job. You can absolutely pay off this debt with your salary without hiring a pro to give you advice, though hiring one might give you confidence and peace of mind. “Before suggesting a plan to pay your debts, you must start by taking control of your finances, knowing how much you spend each month and checking how much your credit cards charge you,” says certified financial planner Alonso Rodriguez Segarra at Advise Financial.
Have a question about hiring a financial adviser or have an issue with your current adviser? Email picks@marketwatch.com.
For Bri Conn, investment adviser representative at Childfree Wealth, the first step to getting out of debt is to stop taking out debt and create a budget to give you a plan for your money. “This means switching to cash or debit cards and getting rid of credit cards. To help create your budget, list out your total monthly income as well as all bills and prioritize them by labeling them a must, should, could or won’t,” says Conn.
In other words, start with a budget, write down all your debts and interest rates, and try to get a real handle on what you’ll earn vs. what you spend. Then, find ways to cut that spending. Some of the sacrifices you might have to make to lower your expenses include living at home, taking a roommate or not buying a new car. “You might also consider foregoing contributions to your employer retirement plan or company stock while paying down the debt. The 15% and higher interest rates are a huge hole in your financial boat so do everything you can to pay them off,” says Garber. The exception to this, some pros say, is putting in funds up to what your employer matches in your 401(k).
One simple rule of thumb to pay off debt economically: Pay as much as you can each month on your highest interest rate debt, the minimums on all others, and do this until all of your debt is paid off. That said, you might not want to rush to repay those federal loans at 4.25% — a pretty low rate —if that would hinder you from saving for retirement or other important goals like buying a home.
But there are other options too: “With the debt you’ve laid out, I’d suggest the debt snowball approach where you focus on your debts smallest to largest. First you’ll pay minimums on all debts with all extra money going to the credit card. Once your credit card is paid off, focus on your loans to people, followed by the private and then federal loans,” says Conn.
You also should work on savings for an emergency fund (aim to get at least 3 months of income in a savings account for emergencies) and retirement. You’re still young and thinking about retirement probably hasn’t crossed your mind, but starting the saving process early can be incredibly advantageous.
That said, note this: “We generally advise clients to start saving as early as possible, however, knowing the likelihood of achieving a return higher than your private loan and credit card interest rates isn’t great. The advice would be to focus on minimum payments to the Federal loan and private loan so that you can pay off the credit card as soon as possible,” says certified financial planner James Daniel at The Advisory Firm.
Should you hire a financial adviser?
Most likely, you can tackle this debt on your own — and a financial adviser can be pricey. That said, if this is stressing you out, go for it. In a case like this, you’ll probably want to get a one-time financial plan, which ranges in cost from $2,500 to $10,000 depending on the scope of the work and where you’re located.
“A financial plan would go through your retirement strategy, investment portfolio, debt reduction and various other areas to make sure you’re tracking well and help you understand where you need to be each year as you work toward retirement,” says Daniel.
To find a planner who will work on a one-time plan, ask family, friends and colleagues for referrals to professionals they’ve enjoyed working with. Look for a fee-only planner, and you may want to consider a certified financial planner, as they have extensive experience. The CFP Board’s Let’s Make a Plan site lists vetted advisers, the National Association of Personal Financial Advisors has a directory of advisers who work under various payment schedules and XY Planning Network offers a directory where you can search for advisers based on specialty. You can also use this tool can help match you with an adviser who may meet your needs.
Have a question about hiring a financial adviser or have an issue with your current adviser? Email picks@marketwatch.com.
This story originally appeared on Marketwatch
