With a Consultant Salary, Here’s How I Got Out Of Debt

To be perfectly clear, I am not telling you what to do. I am telling you what I do. This is largely based on a personal finance class that I didn’t attend in college, a diagram I found on google, and a book that I swear I will finish. Now that the jokes are out of the way, I want to reiterate, this is simply what I found has found that has worked for me. Now that the disclaimers are out of the way, google best stocks of 20— kidding. Presented with a regular salary for a consultant, here is how I handle personal finance.

Let’s get started.

My personal finance story began when I found myself in roughly $10,000 worth of credit card debt. About one month before I started my job, I realized two important things for someone with a salary of a consultant. One, that for someone to live in New York City (yes, I was in debt when I moved to the city and I had a month to go before starting my career) paying $2000 a month in rent, have debt, and owe money, I needed to travel for work to survive – this is important. If you aren’t on a traveling project and want/need to be, check out this article [insert hyperlink]. And two, I needed to get a handle of my personal finances.

First off, out of almost everything I have read and subsequently research, the best resource I have found is Ramit Sethi’s book, “I Will Teach You To Be Rich” and surprisingly enough a diagram I found online. Note, I tweaked my strategy to prioritize debt. Because I believe something we all need to know and understand is that we will never be free of the burden of money if we are in debt. That is why all great finance gurus tell you to pay off your debt. Some more aggressively than others and I’d agree but we’ll get to how I paid my 10k debt off in 3 months – save that sign on bonus it will come in handy later – while still affording to eat and have the lights on.

But before we even begin to talk about debt, we need to talk about, realistically, your biggest expense: living. Specifically, rent while you are young. There are many thoughts on how much you should pay for rent or save on rent or in some cases not pay for rent. What do I mean? You live at home. I highly recommend you avoid this option. While it’s a good way to save money, it’s not realistic and you might not learn how to really save.

But for the sake of this article, let’s rule that out. Now, we are left with three options: living in a city (most expensive clearly), living near a city, or living in the middle of nowhere ($$$). Of these 3 choices, this is simply preference and clearly, I chose to live in a big happening city even though I was in debt.  I highly recommend against this until you are debt free, but I’m proof – on a regular salary for a consultant – that it’s manageable even if it’s significantly more debt than I moved with or you can’t pay it off as quickly as I did.

Let’s break down the obvious for a second, depending on the tier of the city, the more affordable it is. While it’s normal that you get paid less in a lower tier city, it’s not always obvious that your lower consultant salary may go farther in a less expensive city. Let’s just say it’s not proportional. A realistic amount for rent is to take your income and divide by 40 – financial conservatives would say post tax and others with looser financial morals would say pretax. I’m guessing by now you’ve picked up on a pattern and realize I fall in the “other” category.

Now that rent’s taken care of, we need to elect you in the correct benefits to make the most of what your company offers. Let’s start with healthcare, I chose high deductible medical, dental, and vision. Take the time to read about the pros and cons of the varying types of insurance or skip the line and read about it here (BLOG IDEA). Now, it’s time to invest in yourself. Most companies offer a 401k match and it is imperative that you take advantage of it up to the max (if not more). What does that mean? If you’re company offers a 1:1 match (unlikely but you may come across it) up to 6%, that means that for every dollar you invest in your 401k up to 6% of your PRE-INCOME is matched by your company. However, it is more common to find companies that match 25 or 50 cents on the dollar or a tiered match. Regardless, it’s free money and extremely important that you start now – if you don’t know why, look up compounded interest of $500 per month at 8% over 40 years vs. 20 years. It’s shocking.

Great, we have insurance and have started a small investment in our future. Now, using any online after-tax income calculate from google (remember to account for the 6% annually you are investing and the monthly benefits you’ve elected for), you can calculate your paycheck fairly confidently. Next, you will account for your fixed expenses Fixed expenses are things like rent, car payments, Wi-Fi, predictable utilities, spotify – things that change very little from month to month (heads up, variable expenses aka spending that can change dramatically month to month will be covered later). For those in debt, budget your payments and consider them fixed expenses. I knew my first paycheck was going to show up in my bank account August 30 and I could not wait to finally start the path to financial freedom! Do you want to know how I was debt free by November? It’s more obvious than you think – again, on a regular consultant salary.

PSA the next part is for those in debt, if this doesn’t interest/apply to you skip down to the *****

I get paid bi-weekly, but my first check was a full month’s pay. For the sake of the article and not sweating the minutiae, let’s say that check was $4000 after tax. Instantly, I put $2000 to in my checking for rent (as you can assume I do every month). Remember when I said I traveling projects were crucial? Here’s why –  I budgeted based on the number of weekends I will be home in the given month what the absolute bare minimum was that I needed to eat, get around, and live. For months that I was be home 4 weekends, I needed $600 to survive. And for months that I’d be home 5 weekends, yep you guessed it, I needed $750 to survive. Can you guess what I did with the rest of the money?

So, for that year, September and November were 4 weekend months and October was a 5 weekend month. Here’s the math on how much of my debt I paid in 3 months. Let’s start with $12,000 post tax income. Subtract rent and we’re left with $6000. I needed weekend money to survive, subtract $1950 and we are left with $4050. I said I paid off $10000 dollars, but I only have $4050 available to me, how? -need joke about bonus – that’s right my signing bonus. I moved to a big city and post-tax my signing bonus was a little over $6500. More than enough to cover the remainder of my debt.

Is everyone going to approach debt that aggressively or have everything line up perfectly from signing bonus to salary to travel? No, clearly everyone will be in a unique situation. If I factor out my signing bonus but keep my aggressive approach, with interest, it would have taken approximately 6 months to pay off the entirety of my debt. Again, it’s all about what you’re willing to give up today for tomorrow.

If you are in debt, then saving, investing, and spending are going to be all the more important to budget. Start saving, even it’s a little, this will be for emergency.  $5, $10, $20 a paycheck will add up more than you think. I recommend, if manageable, to save $50 a month.  By the end of the year, you’ll have $600 which can really come in handy if your car breaks down. The rest of the money goes to getting you out of debt aggressively. I’m not saying don’t have fun and go out to dinners or bars with your friend. I’m saying budget for it before hand and make large payments now so that you pay less interest in the long run and decrease the principal loan as quickly as possible.

*****Welcome back everybody.

So you are not in debt, or recently out of debt – congratulations! – now what? Well, let’s recap where we are now: We have elected in benefits, invested in our 401k up to the company match, have a rent at approximately 30% of our income, and can account for both our variable and fixed expenses. Assuming your monthly fixed expenses. Let’s break that down by percent to see what we have used so far:

ExpensePercentage of Income
Employee Benefits (healthcare, etc)0.75%
401k (up to match)6%
Other Fixed Expenses3-20%

Alright, so you can see that properly managed finances (on a consultant salary) that are broken down into simple categories are much easier to understand and tell a bigger story. Here’s the story: you don’t know where the other 40-60% of your income is going and its time to change that. How? Enter your email for part 2: investing, saving, and everyone’s favorite spending.

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