At Brooklyn’s 99th precinct, Jake Peralta is known as a perpetually broke man-child. Advisor to Client asked two experts to explain how Peralta can grow up financially.
Subject: Jake Peralta, Brooklyn Nine-Nine
Problems: Debt, budgeting
Scenario: Jake Peralta, a thirty-something detective in Brooklyn, New York, spends all his time on the job, and no time organizing his life. His apartment is a mess, and so are his finances. He’s living paycheque to paycheque, and is in what he calls “crushing debt.” Until recently, he owed several co-workers thousands of dollars. He sold his car to settle some loans, but couldn’t pay many of them back, so he traded menial labour – like washing a muddy motorcycle – for debt forgiveness.
Jake nearly ruined his finances completely in season one, when the building he lives in converted into a co-op. He considered taking $500,000 from a loan shark to buy his apartment. Instead, a sensible friend talked him into finding a new place to live. Now, with a serious girlfriend and an immaturity problem, it’s probably time for Jake to stop putting his bills in his “mail tub” (literally a bathtub overflowing with mail) and to take his personal finances seriously.
Concerns: How should Jake pay off his debts and learn better financial habits?
Assumptions: For this series, we use Canadian planning strategies. In New York City, the average detective salary is $82,320. The average thirty-something U.S. college graduate has $20,000 of student loan debt. (The average Gen Xer has $100,000 in debt, though that includes a mortgage, which Jake doesn’t have.)
Part one: Easing his debt
In season two of the hit comedy, we find out that Jake owes his colleagues $8,000.
It’s not a good idea to borrow money from friends, says Ottawa-based financial planner and money coach Janet Gray. “That’s not a good money strategy but it’s also not a good friend strategy,” she says. “But if he has done it, he should have a discussion with his friend on the [repayment] strategy so there’s no misunderstanding.”
That may mean creating an agreement with the friend, ideally on paper. “It really depends on what the amount of it is, and it might depend on the type of relationship you have with your friend.” The larger the amount, the more important it is to have documentation.
Crucially, the debt should be treated like any other bill. “The big thing is to not pay all your bills and say, ‘If I have any left, [it goes to my friend.]’ No; [the friend] becomes a payee. Set it up in your online or mobile banking and say, ‘As soon as I get paid, $20 is going to e-transfer to this person’s account.’”
Automation can help pay off all Jake’s debts, says Toronto-based financial planner and founder of Caring for Clients, Rona Birenbaum. “When people are that disorganized, automating things is the key. He’s likely the type of person where, like many Canadians, whatever’s in their bank account they spend. He needs to create an automatic payment towards his debts because he’s not going to make it happen himself.”
When his friends confront Jake in season two about his debts, Jake pays them back with menial labour and even sells his beloved car to make up some of the $8,000.
Birenbaum says Jake could have used a simple formula to determine whether selling an asset to pay off debt is a good idea. “You compare what the debt is costing you in real and tangible terms and what the asset that you’re holding onto is getting you, and you make a sensible, unemotional decision.”
In Jake’s case, though his colleagues weren’t charging him interest, “there’s a cost of not paying your friends back, and that’s the cost of potentially their friendship. Costs come in many different colours,” she says.
Luckily, Jake’s friends have steered him in the right direction on more than one occasion. When his apartment building was converted to a co-op at the end of season one, Jake considered taking a $500,000 loan from a loan shark to buy his place, but his coworker dissuaded him.
Birenbaum says, “When you start paying off debt with more debt, it becomes a vicious cycle of debt dependence. And it becomes the reverse of the power of compound interest.”
Gray calculated the cost of a higher interest rate if Jake were to go the loan shark route.
Interest Rate: 3%
Amortization: 25 years
Total Interest: $209,000
Interest Rate: 12%
Amortization: 25 years
Total Interest: $1.04 million
The loan shark’s loan costs twice as much interest as the original house price, points out Gray. “That’s just the interest, never mind where he busts your knee caps or something. Debt is a current decision that has a lot of future consequences.”