There was a moment as a college kid when I realized I had no money in my checking account, and I owed $300 on my Mastercard. That might not seem like a lot to anyone nowadays when you can spend that much in a weekend at restaurants and bars, but to a college kid with a part-time job back in the 90’s, it was a lot of money. My stomach and my head hurt every time I looked at the bill on my dresser. And I wasn’t alone. As my industry colleagues Jen Lee and Leo Spanos, Debt and Credit Strategists, says repeatedly in their talks, blogs, and social media posts, many people have illnesses and health-related problems because of the debt and financial stress they are facing. This can manifest both on an individual level, with student loan debts, for example, or with business-related expenses. Either way, sound financial planning and budgeting for nonprofits is an important step for nonprofit employees to reduce the stress that accompanies an unpaid balance.
Nonprofit employees often face unique financial challenges that can lead to significant stress, which increases the importance of thorough nonprofit financial management. I saw the negative implications of debt first-hand with a nonprofit employee who amassed several thousands of dollars in credit card debt across six different cards. When we first met, she alluded to credit card debt but wasn’t exactly sure how much she owed in total and how much the card charged in terms of interest. Luckily, she had negotiated a fixed payoff rate for three cards and wasn’t being charged additional interest on those. The bad news is that the other credit card companies were not willing to negotiate a payoff rate and would not lower the interest rates. And guess what? They didn’t have to.
According to debt.org, credit-card debt totals to $986 billion dollars, higher than the $927 pre-pandemic high! They say on average, each household with a credit card carries an average of over $5,400 in credit card debt.
Nonprofit workers, who are often underpaid compared to their for-profit counterparts, can find themselves impacted deeply by these statistics.
- Credit-card loans reached $986 billion post-pandemic, the surpassing the previous high of $927 billion
~Debt.org
One fall afternoon, we met to review her credit card bills and her monthly household and business budgets as part of the pro bono financial planning service we offer to select clients. I was struck by how nervous she was to discuss and review these documents with me. Her hands were shaking, and her voice cracked while she handed me the documents. I reassured her we were in the “No Judgement Zone” of financial budgeting and advice. While I might have challenged her budget assumptions, household and business expenses over the next two hours, there was no judgment, but rather empathy and support for improving her situation.
So, while many nonprofit employees and nonprofit leaders may have thousands of dollars in credit card or student debt, they are not alone by any means, especially within the nonprofit sector. Instead, this nonprofit employee needed a calm and quiet meeting to assess the situation and create a plan of action.
During our sessions, we encountered moments of defensiveness, frustration, and sadness. Reviewing her personal and household budgets was challenging, especially when it came to potential cutbacks. However, we saw a light at the end of the tunnel after outlining the full amount of her debt, the schedule to pay it off, how long that would take, and the “to the penny” business and household budget we created together. She said she felt relief knowing there was a plan in place to resolve the debt so she could begin saving for retirement and a stronger emergency fund.
The employee’s positive mindset and ability to visualize a debt-free future inspired me. I learned from her the power of creating a daily mantra of the goals and outcomes I want to achieve for my personal and business life. This is where the stress and implications of health come into play. If you’re so worried about finances and debts and it’s causing missed days at work, tension in your relationships and depression about your situation, it can lead to serious health issues. This employee decided to adopt a positive attitude and to visualize the day when she paid everything off.
- 10% of nonprofits are technically insolvent, 35% have minimal cash reserves and 50% have less than one month of operating reserves.
~Nonprofit Finance Fund, 2022
Since we primarily serve nonprofits, foundations and endowment clients, it’s also important to discuss when nonprofits or businesses incur debt, both credit card and lines of credit. Unfortunately, this happens all too often to nonprofits serving at-risk populations and whose funding sources are especially volatile. As we’ve written in previous blog posts, 7-8% of nonprofits are technically insolvent, 30% have minimal cash reserves and 50% have less than one month of operating reserves.
On a personal level, I have had this happen on nonprofit boards where I have served. Unfortunately, Boards and Finance Committees can be woefully underprepared and under-educated on nonprofit finance. They sometimes approve short-term loans or remain unaware of the need for proper operating reserves in place. A “placeholder” in the budget for a reserve is not the same as an actual, segregated “reserve fund”. I learned the hard way a few years ago when I served on a board who had both credit card and revolving fund debts that could not be immediately paid back. Through financial planning which included staff reductions, budget reductions, cuts in spending, the organization was able to pay back the credit card debt and short-term loan. As discussed in an article from US News, there are two methods one can use to payoff debt for both individuals and organizations:
- Snowball: Make minimum payments on the larger debts and pay off the smallest balances first. Once you pay off that debt, you tackle the second smallest debt and so on.
- Avalanche: Pay off the credit card with the highest interest rate first. Then address the next highest and so on.
The Avalanche method is often most logical for the minimization of interest compounding. However, every circumstance and personality is different. A nonprofit, for example, might want to pay the more expensive credit card debt off first so they can begin using the cards again for necessary purchases, while an individual might want to pay off the debt with the highest interest rate first which might be a second mortgage or consumer line of credit and then they’ll pay off the low interest rate credit card last.
While credit card debt remains a significant burden for many Americans, student loan debt represents another large financial challenge. According to the Education Data Initiative, student loan debt in the U.S. totals $1.727 trillion, with the average federal student loan debt balance exceeding $37,000. 2023 was the first year in which student loan debt declined from the year before, with a 2.09% decrease year over year in Q4 of 2023. Still, the rate at which average student loan debt increases surpasses the rise in tuition costs by 167%.
While these statistics are certainly daunting, and can be sensitive for nonprofit workers, there are resources to improve financial planning. Nonprofit sector workers can take advantage of Public Service Loan Forgiveness (PSLF), a loan forgiveness program created in 2007 as part of the College Cost Reduction and Access Act. Through PSLF, eligible candidates who have full-time jobs at nonprofits can be granted loan forgiveness after making 120 qualifying monthly payments. Any remaining balance after this time will be forgiven.
Because of the mandated 120 months, it will take a minimum of 10 years to complete this process, and there are no other ways to expedite the process. In order to benefit from PSLF, one must stanch from a standard payment plan, which pays off debt within 10 years, to an income-driven repayment plan, which is tailored to you based on your income and family. This Forbes article outlines the six qualifying steps for accessing PSLF.
No matter what type of debt you face, or what methods you are employing to tackle it, consider talking to a professional to plan both your debt and credit strategies and then your subsequent savings or “cash reserve” plans. This approach sets the stage for a healthier financial future.
Talk to the financial experts at Fairlight Advisors to learn more about managing your nonprofit’s investments. Schedule a free consultation today!
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