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Originally published Saturday, August 7, 2010 at 10:01 PM

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Money Makeover

Financial makeover: New parents take it one debt at a time

A financial planner shows a young couple burdened with a number of loans how to slowly pay them off, starting with the smallest loan and working their way to the biggest by paying a little more per month and sticking with that amount.

Special to The Seattle Times

About this series

THIS IS THE LATEST in a series of monthly "financial makeovers" by The Seattle Times for readers who want to get real about their money.

Would you like some free financial planning?

IF YOU WOULD BE INTERESTED in a free financial makeover in exchange for having your story and photo published in The Seattle Times, answer a few questions at seattletimes.

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When Matt and Lauren Holmes' son, Graysen, was born 15 months ago, they were faced with a math problem familiar to many new parents.

Child care was likely to cost as much as, if not more than, one of their full-time incomes.

Even before their son's arrival, the Eastside couple had been financially stretched, struggling to keep up with student-loan, credit-card and car payments on Lauren's $40,000 annual salary and Matt's wages at his retail job.

With no easy answer in sight, Matt dropped to part-time hours and became a stay-at-home dad while Lauren, 29, continued to teach special-education students full time at a high school.

"We are having trouble making ends meet, paying off our debt or saving any money," Lauren wrote in an online survey to participate in a free financial makeover.

"On top of it all, we had to move in to my mother's house because we could not afford rent," she added.

Striving to boost their earning power, Matt, 28, wants to return to school this fall to complete the last two years of a bachelor's degree in computer science, while Lauren is completing a master's degree.

But they're already making monthly payments of about $200 on about $45,000 in existing student loans and in November, that monthly amount will rise to about $330.

And, overwhelmed by payments on multiple credit cards, Lauren consolidated about $7,000 in credit-card debt with a nonprofit credit-counseling agency in February and now makes one monthly payment of $225 to that agency until the balance is paid off in four years.

Both Matt and Lauren also have monthly car-loan payments — one is $364 a month with about 16 months left on the loan, while the other is $310 a month for another 3 ½ years or so.

Matt said they have thought about selling one of the cars, but the bus schedules to their workplaces are difficult.

"I've looked into it (the bus), and it would take more than an hour," even if the schedules worked, Matt said.

This is about three times as long as his commute by car, which he does three times a week.

With so much of their income committed and plenty of other long-term goals, like college for their son and saving for retirement, Lauren looked for help.

"Our family needs a plan to reduce our monthly expenses, pay down debt and start saving for a home of our own," Lauren wrote.

With that aim, they met with Kim Miller, a certified financial planner with Sweetwater Investments in Redmond.

Miller, a member of the Financial Planning Association — Puget Sound Chapter, spent time with the couple to learn about their goals and create a financial plan for them.

A critical point

Miller told the couple that they are at a very critical point and that any little thing could tip them over.

"You need to grab the budget chicken by the throat and squeeze every last dime out," he wrote in their plan, urging them to examine everything they spend money on and asking themselves if it is a need or a want.

To tackle their goal of getting out of debt, Miller told them that since it isn't possible for them pay off everything — roughly $68,000 — in the short run, they should focus on managing their debts.

He made a chart of each loan they had, including the balance, the monthly payment, the interest rate, the monthly due date and the months remaining.

He then suggested they consider using the "snowball technique" to reduce and eliminate debt, ranking the six loans in any order that seems meaningful to them, such as by interest rate, by balance, by monthly payment or by months remaining.

If they ranked the debt by lowest-to-highest balance, they would pay the minimum payment on every loan except the smallest, on which they would pay everything extra they could scrape together — even if it's only $10 per month extra.

"Once the smallest loan is paid off, add that payment to the minimum payment on the next smallest loan until it is paid off, and so on and so on," Miller told them in the plan, stressing that the "snowball" system requires them to keep the same payment commitment or else they will never be done.

Selling a car

Miller agreed with the thought Matt had about selling one of their cars, estimating that they could increase their monthly cash flow by about $433 including the payment, insurance and operating costs.

If they are able, Miller suggested they take that monthly amount and apply it to the debt on the remaining car to help pay it off more quickly.

"Selling one of the cars will necessitate a change in getting around — particularly getting to work — but you need to take action to reduce fixed expenses," Miller wrote. "You can always buy another car at a later date after you get your situation under control."

Miller advised them not to take on any more student loans.

"If this means waiting to finish educations, then so be it," he told them in the plan.

To boost income in the meantime, Miller suggested they revisit their decision about day care and look into Matt getting more hours, perhaps with a swing shift so they would only have to pay child care for a couple of overlap hours between the time Matt leaves for work and Lauren arrives home.

Another way to free up a little income is for Lauren to change her income-tax withholding for the rest of the year.

The couple received a $4,400 refund for the 2009 tax year because both are having taxes withheld at a single, no-dependents rate.

"We think refunds should be no more than $1,000 (or less)," Miller wrote.

Both can file a new W-4 with their employers, at the very least changing their status to "Married, 1 allowance," Miller wrote.

If Lauren files a new W-4 now to claim six allowances, no further income tax would be withheld from her paycheck for the rest of the year and their refund would be reduced to $750 to $1,000 next year, Miller said.

If she does this, it's imperative that she file a new W-4 in January to something like "Married, 2 allowances," Miller wrote.

One of the terms of Lauren's voluntary debt-consolidation program is that she will be unable to acquire or use credit cards until she's completed the four-year agreement.

Miller calls this a "silver lining," but recommended she contact the credit-counseling agency to ask for a lower interest rate than the 17.8 percent he determined her payment-plan worked out to be.

As for the student loans, Miller wrote that the couple has no choice but to figure out how to repay them or qualify for a loan-forgiveness program, which Lauren may be eligible for as a teacher of the developmentally disabled.

"Student loans are the stickiest kind of debt that exists," Miller wrote. Nevertheless, he told them they should contact each lender to ask about graduated-payment programs or income-based repayment plans.

Savings a fixed expense

Miller also gave the couple the tools to create a pair of budgets, one to get control of what they are doing right now and a second, "aspirational" budget for living on their own that includes expenses they aren't currently paying, such as rent and utilities. Savings should be a part of the budget and considered a fixed expense, he said.

Going forward, after their income and expenses are under control, the couple can then prioritize their wants.

"None of us has unlimited resources," Miller wrote in their plan. "Achieving success requires willpower and diligent spending-plan control."

Miller also recommends the couple have wills made and look into increasing the amount of life insurance they have, and gave them guidance about saving for college for their son and for their own retirements.

Lauren said the couple has started taking some of Miller's advice to heart. Matt, she said, is looking at getting more evening hours at his job and they are contemplating selling his car to save money each month.

"We have been working on creating budgets and reducing our fixed expenses to help up stretch our paychecks further," she said. "I am also not going to be taking out any other student loans."

Lauren added that she and her husband had a good experience working with Miller.

"He was honest and straightforward and really helped us get going in the right direction to get back on our feet," she said.

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