This is a request for help that was recently posted on the finance forums, and what I would do in this situation.  I am not a licensed financial advisor, and my solution is just one of many available to Jonothan

“Hello my name is Jonothan and I am in a huge debt at 21. It all started when I couldn’t finish college and started paying my school loan without a degree. My school loan is currently 40,000. Lucky me I found a fairly decent job at a casino, but I have other problems. I have three credit cards with a total balance of 1500 to pay back, tax forms that need to be paid and an auto loan with a remaining balance of 5400. So my debt is almost 50,000 at age 21! I’m very young but believe I can get out of this debt.  If I keep up with the bad habits then I’m afraid it will get worse. So please if you have advice please PM me. I really need to know where to start.” - www.thefinanceforums.com

Jonothan’s problem is typical…

As far as the numbers he’s given are concerned, they are about equal with the numbers that I have heard from friends and other classmates in the same boat as Jonothan..  I don’t have rates, so I’m basing them off of my own personal rates in similar lending situations.  I also don’t know how much Jonothan makes per hour, so I’m going to assume a take-home of $400 a week ($10 an hour 40 hours a week).

The Debt Breakdown:

  • Student Loan $40,000 at 5.5% interest rate.
  • Auto Loan $5400 at 8% interest rate.
  • Credit Cards (3) $500 each @ 20% interest rate.
  • Assuming $4000 owed to the government.

 Where to begin?

The first thing needed is a commitment on Jonothan’s part to become wealthy, and this involves cutting unessential expenses and creating a Basic Budget:

 http://www.financingyourfamily.com/2007/06/29/easy-cheap-and-quick-basic-budget/

The budget is made, now what do I do?

  • Pay back the government - they can take your money out of the bank, so you might as well pay them right away.
  • Pay off your smallest debts first while paying minimums on the larger debts (do a search for Dave Ramsey for more info on this strategy) 
  • Any extra money should be applied to debt.  Remember, you have a negative net worth, live like it, eat ramen noodles for every meal, mooch food and rides off of friends, walk to work if you can.
  • Do not use your credit cards anymore, this will only put you more behind.
  • When each of your credit cards are paid off, reward yourself by taking a day off of work, and doing something free that you enjoy.

How are the numbers going to work out?

After you pay off the government, this is how fast you should be able to take care of everything else, assuming you can put an extra $100 a month towards debt elimination.

Credit Card 1, 2, & 3: Minimum payment $30 ($90 total per month)

Car Payment: $209 per month

Student Loan payment $200 per month

With your $100 extra (and assuming an extra $200 in X-mas money) your credit cards will be paid off 8 months after you start, with your first card being paid off in nearly four months time.  In April 2015 you should be debt-free with no pay increases or other unusual circumstances.

Other things to consider:

  • With that much student loan debt, you are probably close to a degree, while you’re in school those loan payments can be put in deferment.
  • Talk with the IRS about the money that you owe them, see if you can’t work out some kind of repayment schedule.
  • Pick up a second job to earn more income and pay the debt off faster.

Well Jonothan, I hope this helps you on your way to becoming debt free.  If you wish to add anything else to this please post a comment for the readers.