Advice on paying debt and investments

Question: You're a 30-year-old sales professional with $38,000 in debt ($25,000 in loans, $13,000 in credit card debt) resulting from past gambling habits. You earn about $6,000 monthly after taxes and are seeking advice on how to effectively pay off your debt while balancing investments and future financial security.

Answer:

Here's my tailored advice:

  1. Debt Repayment Strategy:

    • Prioritize paying off high-interest credit card debt first using the debt avalanche method.
    • Aim to pay at least $2,000 monthly towards debt, as you've calculated.

  2. Investment Adjustments:

    • Temporarily reduce your work investment contribution from 12% to 6% (assuming no employer match above this).
    • This frees up about $500-600 monthly for debt repayment.
    • Maintain the $600 monthly investment through your investment company for now.

  3. Budget Optimization:

    • Review and cut non-essential subscriptions and expenses.
    • Track all spending for a month to identify areas for potential savings.

  4. Emergency Fund:

    • Ensure you have at least $3,000-$5,000 in an easily accessible emergency fund.

  5. Debt Consolidation:

    • Consider consolidating your credit card debt with a personal loan at a lower interest rate.

  6. Additional Income:

    • Explore opportunities for overtime or side hustles to accelerate debt repayment.

  7. Avoid New Debt:

    • Stick to a cash-based budget for discretionary spending to avoid accumulating new debt.

  8. Debt Repayment Timeline:

    • With $2,500-$3,000 monthly towards debt, you could be debt-free in 12-15 months.

  9. Post-Debt Plan:

    • Once debt-free, immediately increase your retirement contributions back to 12% or higher.
    • Build a more substantial emergency fund (3-6 months of expenses).

  10. Ongoing Support:

    • Consider working with a financial therapist to address any lingering gambling-related issues.
    • Set up regular check-ins with a financial advisor to stay on track.

Remember, this aggressive debt repayment plan is temporary. By focusing intensely on debt repayment for the next 12-15 months, you'll set yourself up for much greater financial freedom and reduced stress in the long term. Stay committed to your plan, celebrate small victories, and don't hesitate to seek support when needed.