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High tide of spending, debt swamps pair

McClatchy-Tribune Information Services

December 14, 2015


SEATTLE ó Jason Newquist had a good job with a six-figure salary, and Kristin Mueller was building her mental-health counseling practice, but something was amiss with the coupleís household finances.

They were running in the red every month, and the cash-flow deficit was getting deeper.

Newquist covered the shortfalls by tapping the familyís savings. At first, he could make ends meet by transferring $500 a month. Then he needed to move $1,000. When the monthly subsidy from savings hit $1,500, alarm bells went off.

Newquist, an engineer, reached a troubling conclusion: Weíre sinking.

The coupleís household finances ran the risk of getting swamped when a drop in their income coincided with a mountain of debt bigger than they realized.

Following the advice of a volunteer financial planner, the couple charted a course that should ease the cash-flow crisis and put them on a stronger footing for the future.

The experience taught Newquist, 38, and Mueller, 42, that household finance is about much more than spreadsheets. Itís also about communication and awareness of the different ways people think about money.

"We really do have to have two brains on it," Newquist said of the familyís finances.

On the surface, Newquist and Mueller are living the American dream.

Newquist earns about $102,000 a year before taxes as an electrical engineer with the engineering firm of Gray & Osborne in downtown Seattle.

His income includes an annual bonus he puts into the familyís savings account.

Mueller is working part time as a mental-health counselor for a Bellevue clinic while she establishes her business, Work and Play Therapy, in West Seattle.

She expects to earn about $30,000 this year before taxes and expenses. Thatís down from the $38,000 she earned last year, when she worked more hours at the Bellevue clinic.

The couple and their 3-year-old daughter live in a West Seattle town house worth about $430,000, on which they owe about $285,000. They have a net worth of about $121,000.

But the familyís finances also contained time bombs that were more serious than the couple realized.

They didnít curtail their spending to match their reduced income. Newquist and Mueller also had separate credit-card accounts and were unaware of each otherís spending habits.

Their credit-card debt ballooned. They currently have outstanding balances totaling about $26,000 on four accounts.

Also lurking was an even bigger debt bomb: outstanding student loans.

After earning a bachelorís degree from Washington State University, Mueller enrolled in a doctoral program at Argosy University. She didnít earn the doctorate, although she did graduate with a masterís degree in clinical psychology.

It was an expensive degree. Mueller accumulated four student loans from banks and 15 student loans from federal programs. Combined, her outstanding student loans add up to about $208,000.

She is paying $400 a month on her private student loans. Her federal loans, which total about $156,000, are in forbearance.

That means she doesnít have to make payments for now, although the interest on the debt continues to accumulate.

Mueller paid little attention to the loans and admits her casual approach to money made it difficult to see the consequences.

Newquist, who is more practical, also knew about the loans, although he underestimated the size of the projected monthly payments.

With the credit cards, student loans, the mortgage and a car loan, the coupleís monthly debt payments add up to about $3,700 a month. The debt, combined with diminished income, was dragging them down.

Newquist and Mueller took the initiative by sitting down with scissors on their living-room sofa and cutting up their credit cards. They even deleted their credit-card information from shopping websites.

"That was uncomfortable for a couple of weeks," Mueller said.

Meanwhile, Amy Shappell, a certified financial planner with Juetten Personal Financial Planning, reviewed the familyís finances and came up with several recommendations. Easing the coupleís cash-flow crisis was her first priority.

Working with Shappell, the couple agreed to borrow money at a lower interest rate to pay off their high-interest debt, saving money in the process.

Under the plan, Newquist and Mueller will borrow $50,000 with a home-equity line of credit on their town house at an estimated interest rate of 4.75 percent. Theyíll use $40,000 to pay off credit-card debt, an auto loan and a private student loan. The average interest rate for all that debt is 12 percent.

Then the couple will put the remaining $10,000 into their savings account, where it will provide a cushion until they can stabilize their finances. Newquist and Muller will pay off the home-equity loan in five years.

To increase their household income, Newquist will reduce his 401(k) contribution at work to 3 or 4 percent from 14 percent, boosting his take-home pay. Mueller, meanwhile, will continue to build her practice; she expects it to be self-supporting next year.

The couple are also looking for ways to cut their spending. They used to spend about $600 a month on groceries. At Shappellís suggestion, the family is trying to hold the monthly bill to $400 or less.

More work remains. After they fix their cash flow, the couple will work with Shappell on a plan for paying off the student debt and building their retirement savings, among other things.

At this point, Newquist and Mueller are determined ó and somewhat relieved.

"She (Shappell) brought to light a problem that I was only vaguely aware was happening," Mueller said. "Iím grateful that there is a solution."