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Money mismanagement adds to financial woes

The average amount of debt per American is roughly $60,000 as of the third quarter of 2023, according to the Federal Reserve Bank of New York. That means Michael’s debt isn’t unusually high.

However, his income is erratic. All of his income is commission-based, which means he only gets paid when he makes a presentation to a potential buyer or sells a solar roof installation. In the first few months of 2023, his monthly income ranged from just $630 to $3,220.

However, he says he’s gaining more traction and his income in May was roughly $9,000. He believes he can realistically generate between $7,000 to $10,000 a month.

His industry is growing. A record 210,000 residential solar systems were installed in the third quarter of 2023, 35% higher than the same quarter last year, according to a report from the Solar Energy Industries Association and research firm Wood Mackenzie.

Nevertheless, Michael’s earnings are volatile, which makes it difficult to manage debt consistently.

It also has tax consequences that Michael is struggling to stay on top of. He says he owes taxes but decided to pay off loans he owed to his parents and roommate instead.

“I have to keep my house in order,” he said.

His spending habits are another drain on his cash flow. Michael regularly spends money on snacks at convenience stores while traveling for work. He also makes large purchases he can’t recall. For instance, he spent $742 on a Best Buy purchase but couldn’t remember what the item was.

“How do you not know what you walked into Best Buy and spent three-quarters of $1,000 on?” Hammer asked.

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Stabilizing a commission-based income

Michael wants to eliminate his debt burden as fast as possible and “get out of debt, all of it.” But Hammer wants him to slow down and develop a more practical strategy.

Due to the variability of his income, Hammer suggests accumulating some funds to stabilize his finances. That means going beyond an emergency fund and creating a separate fund that can be used to top up his monthly income if needed. If, for instance, Michael earns $4,000 in a slow month but needs $5,000 for essential expenses, he can withdraw $1,000 from this fund.

He also recommends setting aside a portion of earnings for taxes.

“You don’t want [owed taxes] to turn into future debt, and the IRS is not someone to f— with,” Hammer said.

The next step is to minimize spending. Instead of buying food at convenience stores, Michael can buy groceries in bulk and keep food and drinks in a cooler in his car. He also should consider cutting unnecessary subscriptions like streaming services and swapping his expensive phone plan for a cheaper one.

After stabilizing his finances and following a strict monthly budget, Hammer believes Michael will be in a better position to pay off debt. Depending on his sales volume, Hammer estimates it could take anywhere from one-and-a-half to three years for Michael to pay off a substantial portion of his outstanding balance. But it’s a goal that’s well within his reach if he makes the effort.

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Vishesh Raisinghani Freelance Writer

Vishesh Raisinghani is a freelance contributor at MoneyWise. He has been writing about financial markets and economics since 2014 - having covered family offices, private equity, real estate, cryptocurrencies, and tech stocks over that period. His work has appeared in Seeking Alpha, Motley Fool Canada, Motley Fool UK, Mergers & Acquisitions, National Post, Financial Post, and Yahoo Canada.

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