Which Debt First: A 24-Year-Old's Cash-Flow Triage
Marcus is 24 and works 32 hours a week at $14.50 an hour, taking home about $1,540 a month. Rent is $650. His car payment is $310, and he still owes $8,900 at 18% APR. His phone is $95, auto insurance $140, and student loan $85. He carries $2,100 on a credit card at 26.9% APR with a $25 minimum payment and a $35 late fee; he has been 30 days late twice in six months. His car needs a transmission repair quoted at $1,800. A payday lender offers $15 per $100 borrowed, due in 14 days. He is also considering a rent-to-own sectional sofa: $49.99 a week for 78 weeks, with an early-purchase option after 90 days. He has $40 in savings and no emergency fund. His employer matches 401(k) contributions dollar for dollar up to 3% of pay. He asks his former family and consumer sciences teacher, 'Which one do I fix first?'
1. Compute the true cost of the rent-to-own and payday options, rank all his borrowing options, and explain what an APR comparison reveals that a weekly or biweekly payment hides.
Read the worked answer
Run the arithmetic before ranking anything.
Rent-to-own sofa: $49.99 × 78 weeks = $3,899.22 for a $1,299 item. Finance charges total $2,600.22 - roughly triple the cash price, and an annualized rate near 200%. The 90-day purchase option usually requires a lump sum of most of the remaining balance; if he cannot produce it, he has paid over $600 for three months of a couch and owns nothing.
Payday loan: $15 per $100 on $1,800 = $270 fee for 14 days. Annualized: (270 ÷ 1,800) × (365 ÷ 14) ≈ 391% APR. If he rolls it over three times - the common pattern - he pays $810 to borrow $1,800 for six weeks and still owes $1,800.
Credit card: 26.9% is the cheapest unsecured money he has, by more than a factor of ten.
What APR exposes: the weekly-payment frame hides duration and total cost. $49.99 feels smaller than $1,299 because it is spread across eighteen months - that is the entire business model. Any comparison must be annualized and totaled.
Ranking: credit card (already owned, lowest rate) is the right instrument for a genuine emergency; the payday loan is short but catastrophic if rolled; rent-to-own is the worst total cost and should not be used at all.
Judgment point: the sofa is not a problem to finance - it is a want. The transmission is a need, but the payday loan is the wrong instrument for it.
2. Build his monthly cash-flow picture. Is this a prioritization problem or a structural one? Recommend a sequence for the next 90 days.
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Build the picture first.
- Net income: $1,540
- Rent 650 + car 310 + phone 95 + insurance 140 + student loan 85 = $1,280
- Credit card minimum $25 → $1,305
- Remaining for food, fuel, clothing, and everything else: $235
Diagnosis: structural, not behavioral. No amount of coupon clipping makes $235 cover a month that includes an $1,800 repair. The most useful thing the teacher can do is say so plainly - a budget that requires $235 to stretch to $600 will fail, and he will conclude he is bad at money rather than that the math does not work.
90-day sequence:
- Immediate: ask the repair shop about a rebuilt rather than new unit and a payment plan; ask the lender or hospital financial assistance office about charity care or an extended plan. A $270 payday fee buys two weeks, not a solution.
- Attack the car. $310 plus 18% on $8,900 is the largest structural leak. Selling and buying a $3,000–4,000 car with a small loan could free $150–200 monthly - often the single highest-leverage move available to him.
- Phone: a prepaid plan at $35–45 saves $50–60 a month with no service loss.
- Credit card: pay above the minimum and request a hardship rate reduction now, before delinquency worsens the file. At 26.9%, a $25 minimum barely covers interest.
- Buffer: target $500 in a separate account at $40 per paycheck, before any extra debt payoff or discretionary purchase.
Ordering logic: stabilize housing and transportation, then capture the match, then build the buffer, then accelerate debt. Reversing the order is how people end up back at the payday window.
3. He has heard that he should 'always take the free 401(k) match.' Is that advice correct in his situation? Justify with an explicit ordering of operations and address the counterargument.
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Partially correct - right in general, incomplete as stated here.
The case for contributing: a dollar-for-dollar match up to 3% is an immediate 100% return. On roughly $1,900 gross monthly, 3% is about $57, and the match adds $57. Over a year that is about $1,368 in his account for $684 of his own pre-tax money. Nothing else in his financial life pays that.
The case against doing it first: with $40 in savings, capturing the match before building any buffer means the next repair goes on the 26.9% card or to the payday lender. Borrowing at 391% to fund a 100% match is still a losing trade once the loan rolls over.
A defensible ordering:
- Keep the match if and only if the contribution does not cause a missed bill. He is current on rent; protecting housing comes first.
- Simultaneously build a $500 buffer through an automatic payroll split. Behaviorally, automation matters more than willpower.
- Get the vesting schedule in writing. A 3-year cliff changes the calculus if he might change jobs.
- Then raise the card payment above the minimum.
Address the counterargument directly: the maxim assumes liquidity. It is an optimal rule for someone who can absorb a $1,800 shock without borrowing at triple-digit rates. Marcus cannot. The correct formulation for him is 'capture the match and build a buffer in parallel,' not 'capture the match instead of everything else.'
What to avoid saying: a flat 'always take free money.' The exam rewards the candidate who notices the liquidity constraint and sequences around it rather than reciting the maxim.