Paraisia Winston is weighing a life-changing decision: “Do I do what matters most, or do I take a six-figure job at a law firm working 13-hour days?” In considering her future employment options and what they might mean for her financial success, one of her primary goals is to get rid of debt.
Winston is a second-year law student at the Loyola University Chicago School of Law, and after earning her degree, she expects to have added more than $150,000 in student loan debt to the $29,000 she already owes for her undergraduate degree. “I sometimes wonder if I’m in over my head,” Winston says.
But come graduation, Winston is counting on her education to begin bearing financial fruit. She was recently offered a job that will pay an annual salary of $145,000-which, no doubt, would quickly begin to cure what ails her finances-but she is also considering pursuing criminal defense work in the public sector, where she would earn much less.
While education is priceless, that doesn’t mean it comes without a price tag. In addition to her student loan debt, the 24-year-old has a little more than $20,000 in credit card debt. It’s
a sizeable amount that, at the moment, is offset by an annual income of only $26,000. Winston works part time as a law clerk and as a substitute teacher in Chicago’s public schools.
Before attending law school, Winston spent a few years working full time as a development coordinator for a nonprofit social service organization in Evanston, Illinois. With her earnings, she was able to buy a one-bedroom condominium in Chicago for $160,000 with a 30-year, fixed-rate mortgage at 5.75%. While working full time, Winston made progress in paying down the credit card tab she had racked up as an undergraduate. However, once she went back to school and began working part time, she turned to credit cards to bridge the salary gap-using her cards to pay her cell phone bill, car insurance, and medical bills not covered by insurance. She also admits that she charged trips, such as one to Las Vegas to see her grandmother, and other activities that weren’t emergencies.
In terms of additional assets, she has more than $2,000 in an IRA, nearly $4,000 in savings and checking accounts, and $9,000 in a money market account. Winston thought about tapping into her money market funds to pay down some of her debt, but with a mortgage to pay and only a part-time job, “I have to hold on to my safety net,” she says.
Winston says debt is stifling her financial growth. Though she contributes $30 per paycheck to her money market account, she would like to save at least $200 a month. But her mortgage, combined with $600 monthly credit card payments on her four credit cards, hampers her ability to save. Student loans, part-time jobs, and scholarships have not been enough to meet her financial needs.
Winston is debating whether she should try to find yet another source of income while in law school to help reduce her eyebrow- raising debt. Realistically, she knows there are only so many hours in a day, and despite her youth, only so much energy to draw from. However, she’s looking forward to the future. In five years, she hopes her credit card debt will be gone, her car will be paid off, and school loans will be under control. She is optimistic: “It’s just about getting from here to there. After law school I’ll be on my way.”
THE ADVICE
Gwendolyn V. Kirkland, a certified financial planner with Kirkland, Turnbo & Associates in Matteson, Illinois, reviewed Winston’s finances. While Winston’s situation is not dire, Kirkland says Winston will have to be “focused and purposeful” in adhering to a stringent budget to reach her goals.
Take control
of finances. Winston’s basic expenses are in excess of her take-home pay. Based solely on those earnings, she faces at least a $1,656 deficit every month from the remaining items in her budget, which include a car note of $450 and the $600 she is paying on her credit cards. Winston pools together roughly $2,750 to pay her bills each month-between earnings from her part-time jobs and what she receives from student loans and takes from savings. Kirkland says it’s not enough.On the plus side, Winston’s not extravagant with her spending. She doesn’t have cable TV and eats some meals with her parents to keep her grocery expenses low. To help make up for the income gap, Kirkland recommends that she seek another part-time job, or look for ways to earn extra cash.
Chip away at debt. Some of the funds in Winston’s money market account could be used to pay off her American Express card-which carries a balance of more than $7,500 and a 17.24% interest rate, the highest rate of her four cards. This will help reduce her monthly deficit by roughly $250. After graduation she should revisit her financial plan and develop a prudent budget to pay off her debts-systematically paying off her highest-interest credit card debt, then her car loan, while starting to pay down school loans. Law students who pursue public interest work may be able to participate in loan repayment assistance programs to help manage their debt.
Maximize existing savings. Winston is expecting a friend to repay a $1,500 debt before the year is up. Kirkland says that money should be put in her money market account, as should tax refunds and any unexpected sums of money, such as significant gifts. Furthermore, Winston must maximize what savings she has. For example, Winston should review the gift IRA from her grandparents to see if she can improve the returns, which Kirkland says are minimal at about 3%. Winston should also work toward building an emergency fund to cover six to nine months of expenses. And, when she is eligible with her new employer, she should enroll and contribute the maximum to the employer-sponsored retirement plan.
Kirkland says the outlook is promising: “What’s most critical will be discipline-to stay focused and not overspend. When her income increases, I hope that she does not reward herself with material goods and acquire debt to buy new clothes, travel, and live the young lawyer lifestyle.”
Financial Snapshot: Paraisia Winston
Chicago
|
HOUSEHOLD INCOME |
|
| Gross Income | $26,000 |
| ASSETS | Â |
| Condominium | $160,000 |
| 2005 Chevy Equinox* | 11,025 |
| Money market account | 9,000 |
| Savings account | 3,447 |
| IRA | 2,175 |
| Checking account | 509 |
| Total | 186,156 |
|
LIABILITIES |
|
| Mortgage | 144,199 |
| Student loans | 131,830 |
| Credit cards | 20,178 |
| Car loan | 9,730 |
| Total | $305,937 |
| NET WORTH | $-119,781 |
*ACCORDING TO KELLEY BLUE BOOK