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Gen Xer crushed by debt
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May 1, 2000: 9:01 a.m. ET
A physician's assistant struggles to free herself from her plastic prison
By Staff Writer Alex Frew McMillan
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NEW YORK (CNNfn) - Checks & Balances runs weekly on CNNfn.com. People with questions about financial planning are invited to write in explaining their financial picture and short- and long-term goals. See the bottom of this article for specifics. For those selected, financial planners will review the details and suggest ways to meet those goals.
Yasmeen Khan has a few credit cards. Four Mastercards, a Visa and store cards from Ikea, Macy's, Bloomingdale's, Banana Republic, Victoria's Secret, The Limited, Express, Fortunoff, Stern's and Office Depot, to be precise. She owes about $8,000 on them in all.
"I went crazy after I graduated," Khan, 26, explained. "My whole life I've never really had much money."
 When she got her degree from the State University of New York-Stony Brook and started working, she found herself flooded with credit card offers. They were hard to resist. "When you don't have anything, you want stuff," she explained.
And they were enticing. "If I went to the store and there was a sale, I'd say, 'Cool, I'll get the credit card, get the 10 percent off,' " she recalled. "Almost every store in the mall that I like I have a card for."
Khan works as a physician's assistant in the emergency room at Queens Hospital Center in New York City. She enjoys her job. But even though it pays her good money -- $57,000 base salary a year plus overtime -- she finds it's all gone by the end of the pay period.
She has cut up many of her cards and has stopped spending like she did. Still, she finds it hard to work her way out of debt. All the cards charge at least 14 percent interest; some charge up to 20 percent.
"I want to find a way to pay off everything and save money as well," she wrote. "However, I have no financial smarts whatsoever."
Tough to cut it on your own
Khan's regular expenses run around $1,900 a month. She rents an apartment in New York's borough of Queens for $800. Through her uncle, who works at a dealership, she bought a used Mercedes 300E. She pays him $500 a month on that. She'll pay it off in December.
Her other main monthly expense is $360 she pays on $30,000 or so she owes in student loans. That was actually well spent, she thinks. "My career is an investment," she said. "I've wanted to be in medicine since I was 3 or 4."
 Khan was born in the United States but grew up in Bombay, India. She makes it back once a year to see her relatives there thanks to her dad, who works as an airport manager for Air India. Her mother died of breast cancer several years ago.
Khan used to live with her father. Before she moved out on her own, she always kept $2,000 in her checking account. But she finds that hard to do now with her debt problems.
She tries to pay more than the minimum on her credit cards. "If the minimum is $10, I try and double it up to $20," she says. But she knows that's a small dent in the amount she owes.
A never-ending cycle
Her situation got particularly bad when her father went out of town around last Christmas and left Khan's sister with her. "She's a wonderful girl who had a lot of medical problems at the time and went into depression," Khan said. "I spent a lot of time and money to cheer her up."
 Ultimately Khan, who is single, would like to buy a home. She also wants to set aside some money for kids, which she imagines she'll have sometime.
"I want to get married and raise a family," she said. She would also like to travel and see a little more of the world.
Khan doesn't really save right now. She isn't paying into retirement plans or IRAs.
Once she pays off her car loan, she will have $500 extra to figures life will get a little better. But right now the debt "seems like a never-ending cycle," she said, and life is difficult.
"I don't care if I'm excessively rich; I just want to be comfortable," she said. "I basically want a happy life with no money problems."
What the planners say:
"Yasmeen may be in the midst of learning the most valuable lesson of her life," said Diane Rolfsmeyer, a certified financial planner in Lincoln, Neb. "It is common for young college graduates to become overzealous spenders in that first job."
Typically they're earning more than they've ever made in their lives. But sometimes it spins out of control. Debt becomes the most prominent relationship in their lives. "Yes, debt can be a 'who,' " Rolfsmeyer said. "After a certain amount and time, it starts to take on a life of its own."
Credit card debt is the most insidious of all debt, Rolfsmeyer said. It's particularly annoying if you have entertainment or food charges, because the benefits have long gone but you still have to pay the expenses," she observed.
At least she recognizes the problem
The positive aspect of Khan's plight is that at least she admits she has a problem, said Kim Dignum, a certified financial planner with Dignum Financial Services in Fort Worth, Texas.
"Many individuals stay in denial for a long, long time," Dignum said. "Recognizing the problem is the first and most important step to solving it."
The next step, Rolfsmeyer advises, is to make a list of all the credit cards and rank them according to their interest rates. Think of it as the "Obnoxious List," Rolfsmeyer said.
Khan should then destroy all the cards except for the one with the lowest interest rate, Rolfsmeyer continued. She can use that, only for emergencies, until the debt is under control.
Targeting the Obnoxious List
Next, Khan should focus on paying off the cards according to the Obnoxious List, with the highest rate first. When the top card is paid off, she should take the amount she was paying to that and pay it to the second card, Rolfsmeyer said.
Instead, most people like to pay off the smallest balances first, according to Dignum, because it gives them a sense of progress. But Dignum agreed that Khan needs to prioritize rates.
Khan should then consider two options, Dignum said: loan consolidation or looking for a card with a lower rate.
Loan consolidation, which involves arranging a loan at a bank and shifting the credit card debt there, will help put all the debt in one place. It will also give Khan a regular payment schedule. "This helps psychologically," Dignum said, because there's some light at the end of the tunnel. The loan may also have a lower interest rate than the credit card debt.
She could also consolidate the debt onto one card and negotiate a payment schedule with her creditors, Rolfsmeyer added. "But she is young, and it takes courage and stamina to organize that effort with one's creditors," Rolfsmeyer explained, adding that at least Khan will find out what she's made of. "It will be success from a position of strength, not a demeaning negotiation for reprieve," Rolfsmeyer said.
If Khan's credit history means she can't qualify to consolidate her loans with a bank, she should consider looking for a lower introductory rate on a new card, Dignum said. She needs to check the small print for the real rate, but she should be able to get a lower rate for six months.
"Ultimately she could transfer the unpaid balance to a new card every six months," Dignum said. But that's only warding off the problem.
The bad news: time to cut back
"The truth of the matter is, she is living beyond her means," Dignum pointed out, and Khan needs to cut back. "Much as we do not like to decrease our standard of living, there are times that this is necessary in order to reach our goals."
To find out what she can cut back, Khan should make a list of all her monthly expenses, Dignum said. Fixed costs such as rent, the car payment and insurance she can only adjust by making a major lifestyle change -- moving, selling her car. So she needs to focus on the variable expenses such as groceries, clothing and entertainment.
Dignum recommended calculating all the costs for the first four months of this year. "The process itself can be very humbling," she said, but it's healthy. "Until people realize where the money is going, they cannot focus on a sound plan," Dignum said.
She then needs to monitor her expenses each month. When she has gone over budget for a month, she has to cut back the next. That's the price to pay for extravagance, Dignum said.
Sane level of overtime
Khan should not count any overtime pay she makes in her budget, the planners agreed. All of that needs to go toward paying extra debt.
Rolfsmeyer thinks Khan should consider working more overtime. Because she has a stressful job, it's not a pleasant prospect. Rolfsmeyer suggested that she not add overtime too often, like every week. But she should do some soul searching about how much overtime she can work safely and consistently.
"She should make a commitment to some overtime each month, perhaps one weekend," Rolfsmeyer said. "Every dime of that overtime should be committed to an additional payment to the top card on the Obnoxious List."
It is good news that Khan will finish her car payments this year, Rolfsmeyer said. Khan might consider asking her uncle if she could reduce her payments by $100 a month, pushing the payments to February. Then she should pay that $100 to the top card.
"I would not push this too far," Rolfsmeyer continued. "Family is very important and this was a gracious thing to do in the first place. If she is comfortable, merely suggest it. If she gets any negative feedback at all, go on."
Austerity, but so the good times can roll
As soon as the car payments finish, she needs to put the money toward her debt, the financial planners say. Dignum also thinks Khan should open a money-market account and cut a check for $100 a month to start an emergency fund. "If she doesn't do this and has something unexpected -- automobile repairs, medical bills -- she could end up in the same situation."
Khan needs to budget for presents and other larger nonmonthly items, according to Rolfsmeyer. Where possible, she should think of creative but free ways of meeting these. Think of making gifts and having friends over for dinner instead of going out, the planner suggested. She could also make presents out of "certificates" to do laundry, run errands or drive around relatives who don't have cars. Khan also needs to explore free entertainment for herself at the park, library and with free shows.
"This may sound austere, but if adhered to, it will be relatively short-lived and the 'never-ending cycle' will cease," Rolfsmeyer said. "Yasmeen will one day be able to give purchased gifts, take friends to shows and eat out again," but with the assurance the cost won't come back to haunt her.
As soon as she is able, she should start contributing to a retirement plan at work. However, "the first agenda is to rid herself of this debt," Rolfsmeyer said.
Dignum agreed that, though Khan has other goals in mind, controlling the debt is paramount. Stick first to eliminating it, controlling monthly expenses and setting up the emergency account, she advised.
"Once these goals are met, and this could take a couple of years, she can focus on her next level of goals," Dignum said.
And Khan is on her own there. "I can't help her with the getting married and children," Dignum joked.
Got questions about financial planning? Need some advice? CNNfn.com has organized a panel of outside experts to answer your questions. If you want to be considered for the "Checks & Balances" column, where professional planners suggest ways you can manage your money, send us an e-mail at checksandbalances@cnnfn.com. Include information about your age, occupation, income, assets and monthly expenses -- imagine you're providing a full income statement and balance sheet. Also, share with us any short-term and long-term financial goals you may have. And don't forget to leave your phone number.
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