Shopaholic Finds Best Bargain in Exercising Control
A lot of things are going right for Brandan Wilburn.
At the age of 23, she’s making almost $46,000 a year as a clinical assistant at biotechnology giant Amgen in Thousand Oaks. She’s athletic enough to play on two company soccer teams and ambitious enough to want to pursue an MBA in her spare time--with her employer picking up the tab.
She loves to travel--Paris last year--and dreams of buying a condo and giving more money to her church.
But Wilburn has a nasty habit that is threatening her dreams and financial well-being: shopping.
“I can convince myself to go shopping in a heartbeat,” said Wilburn, who spends $250 a month on clothes.
“I’ve tried to put myself on a budget, but I get tired of doing it and stop.”
The result: Balances totaling $3,000 on three credit cards with interest rates as high as 22.8% and a consolidation loan of $3,000 (at 19.5%) in charges from two other credit cards. Coupled with a $1,900 loan for her computer, $12,300 in student loans from Spelman College in Atlanta and the $404 monthly payment on her 1999 Nissan Altima, Wilburn spends $950 a month on debt repayment--more than a third of her monthly $2,604 take-home pay.
“I’ve got to get my life together,” she said, “but I need help.”
Actually, Wilburn’s financial situation isn’t that bleak, said Tim Wallender, a Manhattan Beach certified financial planner.
If Wilburn can control her spending--a big “if”--she should be able to pay off most of her debts within two years and still have money available for an emergency fund, retirement savings and other goals.
“This ‘shopaholic’ behavior is really a common thing,” he said. “She’s got to eliminate all but one card, and keep it in her desk for emergencies. She should pay for everything by cash or check, and when she goes shopping she should have a list, and buy only what’s on the list.”
Wilburn should also realize that paying with plastic makes all her purchases much more expensive. For instance, Wallender said, Wilburn’s $3,000 credit consolidation loan, at 19.5%, will cost her $1,417 in interest if she waits until August 2002 to pay it off.
And if Wilburn still gets the urge to shop? “She should go work out instead, or pick some other activity, because this is a kind of compulsive behavior,” Wallender said. “She needs to break the cycle by channeling her energy into something else.”
To get down to one credit card, Wallender suggested Wilburn transfer her balances to her lowest interest card, a USAA Visa at 13.8%, and direct as much money as she can into paying off that $3,000 debt.
“If you concentrate on just one card, you’ll know you have that balance facing you every month and it’s less temptation to charge,” he said.
Wallender also recommends that Wilburn figure out all her mandatory expenses for the year and then divide that number by 52. Then she’ll know how much money she has left over each week for nonessentials.
“She can just take a cash withdrawal from her ATM every week and say, ‘Here’s what I have to spend on dining out or clothes or anything extra,’ ” he said.
Wilburn’s mandatory monthly expenses now total about $2,200, including $700 for half the rent on her Sherman Oaks townhouse (she has a roommate), about $750 on her car loan and insurance, $161 for her student loan, $155 for her consolidated credit card loan and $80 for her computer loan. She also spends about $150 a month on her remaining credit cards, paying a little more than the minimum required.
Wallender said she should funnel any spare cash toward paying off her highest-interest debt first--her 19.5% consolidation loan, which has an outstanding balance of $2,500.
For example, last February Wilburn received a company bonus of $2,500, which she used to pay for her trip to Paris. This year’s bonus probably will be smaller, but Wallender said whatever the amount, Wilburn should skip the travel and use it to pay down that loan.
He also suggested she sell her tiny holdings of 10 shares of Amgen and five shares of PepsiCo stock and apply the $900 or so from the sale to paying off debt. Those two actions alone could wipe out her consolidation loan--freeing $155 a month to pay off her remaining $3,000 in credit card debt. If she can concentrate $300 a month on that debt, she’ll have a zero balance in less than a year, assuming she doesn’t add any new charges.
At the same time, Wallender said, Wilburn should start building an emergency fund and contributing to her 401(k). Once she stops her compulsive shopping, she’ll save the $250 she usually spends on clothes every month. She can also give herself an extra $60 to $80 a month by stretching out the $161-a-month payments on her student loan from five to 10 years.
Wilburn should also try to extend the payments on her USAA car insurance, which costs her $353 a month, eight months a year. She’ll pay the same amount annually, but by paying monthly, her payments would drop to about $238, freeing $115.
Another source of 401(k) cash: Divert into her 401(k) the $35 now deducted from her biweekly paychecks to buy company stock.
If she contributes 5% of her salary--about $88 a paycheck--her company will match the 5%, so she’ll be doubling her savings with relatively little pain, just $53 per paycheck more than what she’s deducting now for the stock purchase plan.
Wilburn also needs to build a “rainy day” fund to cover at least a month’s worth of expenses, Wallender said. She has $80 deducted from her paycheck for a passbook savings account at her bank. But the money is easily accessible and she usually empties the account every month.
Wallender recommended that Wilburn have her $80 savings put into her dormant USAA savings account because it will be less convenient to raid. Once she saves about $2,200 in her emergency account, which should take about a year, she can temporarily divert the $160 into paying off any remaining debt, then go back to building her emergency fund to at least four months’ worth of expenses--about $8,800.
She can move the emergency account into USAA Money Market fund (USAXX) when it reaches $3,000, the required minimum. Wallender said Wilburn can set up sub-accounts under her main account to start saving small amounts--even $10 a month--toward her other goals of buying a condo and travel. Those amounts can increase once she pays down her debt, and she’ll be developing the good habit of saving toward a goal.
Wilburn can also start giving a small amount to her church every week for the same reason, “even if it’s only $3,” and increase the amount as she can.
When her debts are paid, she’ll have an extra $385 a month. Wallender said Wilburn should use that money to increase her 401(k) contribution to the maximum 15% of her salary.
Wilburn could use salary increases and her bonuses to build an IRA, Wallender said. With her company’s 5% match on the 401(k), she would then have about $10,900 going into retirement savings every year, which would give her more than $3 million at age 68, assuming an annual 7% gain on her investments.
Wallender’s recommendations will be a big change, but Wilburn said she’s ready to do whatever’s necessary to get out of debt.
“I’ve got 30 pairs of shoes and a closet full of clothes, so I don’t really need to buy any more,” she said. “And if I know what the end result is going to be, I know I can stop shopping.”
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Jeanette Marantos is a regular contributor to The Times.
To be considered for a published Money Make-Over, send your name, age, phone number, income, assets and financial goals to Money Make-Over, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012 or to money@latimes.com.
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This Week’s Make-Over
* Investor: Brandan Wilburn, 23
* Occupation: Clinical assistant at biotech firm
* Annual income: $46,000
* Goal: Get control of shopping habit; get out of debt so she can travel, buy a condo and give more money to her church.
Current Portfolio
* Retirement accounts: $1,500 in her 401(k), contributed by her employer.
* Other assets: 10 shares of Amgen stock, five of PepsiCo.
* Debt: $16,000 on her 1999 Nissan Altima, $12,300 on her student loan, $3,000 on a credit card consolidation loan, $3,000 on three credit cards and $1,900 on a computer loan.
Recommendations
* Get rid of all but one credit card by transferring the outstanding balances to her lowest-interest card, USAA Visa. Use any extra money, including cash from selling stock holdings, to pay down credit card debt.
* Extend her student loan payments from five to 10 years and pay her car insurance monthly rather than eight times a year.
* Continue saving $80 a paycheck, but transfer to a less accessible savings account. Build an emergency fund of at least $2,000 and use the money to pay off debt. When debt is paid, resume building emergency fund.
* When the savings account reaches $3,000, transfer the money into a money market fund.
* Invest at least 5% of her salary in her 401(k). When debt is paid off, increase her 401(k) contribution to 15% of her salary and start a traditional or Roth IRA.
Meet the Planner
Tim Wallender is a fee-only certified financial planner. He is president of Strategic Index Money Management-Wallender & Associates, an advisory firm with offices in Manhattan Beach and La Quinta.
