Question

Bruce has found himself in a difficult situation as his rent has risen to $460 per week. He owes $22,000 on his credit card (5% of the balance to be paid each month), has a study debt of $20,000 and makes monthly repayments of $350 on a personal car loan (principal balance of $25,000).

His basic living expenses are currently about $14,000 per annum, but he often exceeds this amount by overspending on luxury items. Bruce is finding it hard to pay his bills. In addition, there has been an interest-rate increase, meaning that the rate on the credit card is increasing to 22% per annum (interest calculated daily). Bruce has only $600 in his bank account. His only assets are his car, furniture, jewellery and clothes. Bruce is 32 years old and earns around $75,000 before tax.

Bruce has come to you for financial advice. What recommendations can you make?

Answer 1

Let us begin by preparing the Yearly budget so as to get a clear picture of the expenditures that Bruce had to borne. This will help us to analyse each expenditure individually and decide the deciding factors.

Particulars	Amount ($)	% of the income
Cash	600	1%
Income	75,000	99%
Funds	75,600.00	100%
Expenditures:
Rent ( 460*52)	23,920	32%
Credit Card Payment (WN1)	10,112.08	13%
Loan Payment (350*12)	4,200	6%
Study Debt	20,000	26%
Living Expenses	14,000	19%
Interest On Credit Card Dues [11,887.92*(1 + 22%)^365]	14,812.28	20%
Total	74,847.42	115%
Net Income	-11,444.36	-15%

WN1 Credit Card Payment Schedule
Month	Balance	Payment (5%)	o/s balance
1	22,000	1,100	20,900
2	20,900	1,045	19,855
3	19,855.00	992.75	18,862.25
4	18,862.25	943.11	17,919.14
5	17,919.14	895.96	17,023.18
6	17,023.18	851.16	16,172.02
7	16,172.02	808.60	15,363.42
8	15,363.42	768.17	14,595.25
9	14,595.25	729.76	13,865.49
10	13,865.49	693.27	13,172.21
11	13,172.21	658.61	12,513.60
12	12,513.60	625.68	11,887.92
	Total	10,112.08

Now it can be seen that Bruce has no savings at all and 99% of the funds are generated from his regular income. This is fine as he is still young, but in few years this income will stop and thus he needs to start investing in stocks and other investments, which would then generate return in his old age days.

All of the funds are utilised by the year end leading surplus expenditure.Thus, expenditures are required to brought down. Some of them necessary and cannot be evaded such as Rent and living expenses. But it is to be made sure that the living expenses are required to be kept to bare minimum possible and not to be spent on luxury items. Study debt accounts for a big portion of the expenditure, but it is not required to be paid lumpsum and thus not required to be considered. Biggest issue is the credit card dues and interest on them. It charges 22% on the balance amount, which Bruce can't pay. he needs to save more to utilise this savings towards credit card payment.