7/18/2005

Advice from Nashville's leading Financial Aid Advisor Dave Ramsey

 
Dave Says
By Dave Ramsey
Author of:
Financial Peace and
The Total Money Makeover

"Graduate wonders what to pay off first?"

Dear Dave,

I’m graduating from college in two weeks with a degree in elementary education. This will be the first time I’ve had a job paying more than minimum wage. My problem is that I don’t have a clue what to do with the money. I’ll probably be earning $28,000 – 30,000 for my first year in teaching.

I owe about $15,000 in student loans; I still owe about $6,000 on repossession from a few years ago and about $3,000 on several credit cards. I’ve been slowly paying on those cards. 

I’m 29 years old. I got an associate’s degree right after high school and then had children and became a stay-at-home mom. Now I’m completing this bachelor’s degree program and I’ll be going to work. The student loan debt I’ve got is a little bit left over from loans for getting my associates degree and then the loans for this bachelor’s degree. Over the past couple of years we’ve been living on my husband’s income as well as about $5,000 of student loan money I didn’t use for tuition. What is our best use of this new income?

Mickie in Watertown, NY



Dear Mickie,

I love this question! How smart of you to recognize that this could be a problem and plan for it.

If I figured this correctly, you can continue living with the same lifestyle you’ve had over the last couple of years – spending your husband’s income plus $5,000 each year – and still have $23,000 left over from your new income. If you’ll apply that to your debts, which I calculate to be about $24,000, you can be debt-free in just over a year. 

You might even be able to talk to the finance company who repossessed your car. It’s possible that they will cut you a deal and consider it settled in full for half of what you owe. Just remember that whatever deal you strike with them needs to be in writing. Make sure all correspondence is sent via mail with return receipt requested so you have a complete record and keep that documentation around the rest of your life. That may pop back up periodically on your credit report and you’ll have to squash it again.

The key is you have to write all of this down. You have to sit down and write up your current monthly budget. You can’t suddenly double your entertainment spending because you have a new job. That will throw off this new plan. You’ve got a debt mess to clean up first before you can go out and start having more fun. And if you don’t start planning where your money will go, it will leave you and you’ll just be scratching your head wondering what happened.

I’d make a list of your debt – smallest to largest. Just let that repossession debt sit there for now. Don’t wake up that monster until your ready to do battle with him. Start knocking out those credit card debts, which you ought to be able to do in about a couple of months once you start your new job. Then address that repossession debt. Finally, take on the student loan debt. You can literally be debt-free in 12 – 14 months. 

-Dave

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