Financial makeover: Seattle woman gets a plan to cut debt, look ahead

Megan Hunter doesn't live outlandishly. In fact, she describes her life as quite boring.

Nonetheless, in recent years, she'd come to realize that she had a significant problem with debt.

Now, one year after she purchased a one-bedroom condo in Seattle, she's making an effort to get her finances under control and plan for her retirement. It hasn't been easy.

Hunter, 34, took a hard look at her finances and realized she had to make some tough decisions.

"If I lost my job tomorrow, I'd be in trouble," Hunter said. "But if I lost my job and had no debt, I could manage this," she said.

Living alone with her cat, Lucy, Hunter is interested in a plan that will set her up for the rest of her life.

"Relative to the general population she's not in that much debt," said Ken Smith, chief executive of Seattle-based Empirical Wealth Management and a member of the Financial Planning Association's Puget Sound chapter.

Hunter hadn't contributed to her workplace's 401(k) plan outside of approximately $3,000 from the company's profit-sharing plan. And while retirement is more than 30 years off, she didn't know how to prepare for it.

"I have been with my company for five years and I have not enrolled in the 401(k) plan yet," she wrote in an online survey to participate in a free financial makeover. "Every time I look at it ... I just don't know where to begin."

Hunter works in human resources for a local technology firm, making $51,700 a year, which after taxes comes to $3,300 per month.

She's already taken a few important steps toward peace of mind. She received a tax return of approximately $10,000 this year, which she used to pay off a higher-interest credit card. She saved $3,500 from the return, and the rest of her credit-card debt she consolidated on a lower-interest card.

She still owes about $6,800 on that card. She tries to pay $400 to $500 a month on it.

And she also owes approximately $7,200 for her college loans; her mortgage and condo fees come to nearly $1,200 per month, and she estimates spending $400 to $600 per month on groceries, $102 per month for car insurance, $110 for her cellphone plan and $85 for utilities.

Smith's initial recommendations focused on two facts: She hadn't saved for retirement, and she wanted to get out of debt.

Because Hunter's existing credit card from BECU has just an 8.9 percent annual percentage rate, Smith recommended she reduce her monthly payments to $240 from $400, with the difference being deferred into a 401(k) or Roth IRA account. That way the credit card will still be paid off in three years, and she'll make some headway on retirement. Her student loan payments of $123 per month do not change.

At first glance, Smith says, reducing credit-card payments doesn't seem economical, but putting the money toward retirement will have a much greater and more beneficial impact on Hunter's long-term financial health than paying the credit card off a little earlier. And it also establishes an important habit.

"Part of that is getting the discipline of paying yourself first," Smith said.

Setting up accounts so that the money from her paycheck goes straight into the 401(k) plan, or that automatic transfers are made from a bank account to a Roth IRA, means that the money will be less likely to be spent because it's lying around and easily accessible. (Although, Smith pointed out, Hunter does need to build up her emergency savings, for which a Roth IRA also can serve).

More important for Hunter is that once her credit card is paid off, she'll be able to more easily avoid or manage debt in the future.

When she graduated from college in Portland, Ore., she had no credit-card debt at all. But she couldn't get a job immediately, and then she moved up to Seattle to be closer to her mother.

Things started adding up. She'd just paid off a Honda Civic when she got into an accident that totaled the car, necessitating a new one.

But more than that it was small stuff that ended up going on the card.

"It was just poor money management on my part and not living within my means," she says.

Since she bought her condo last year, she's made an effort to get her spending under control. Weekly date night with her partner usually involves a dinner/movie combination, or she and her friends do free activities, like cooking for each other. When the weather is bad, she knits or reads.

Her occasional splurge is something on the order of $75 tickets to see "Billy Elliot" at the Paramount Theatre with her mother. The expenses for a planned family trip to Pennsylvania later this year will likely be shared by Hunter and her sisters and/or mother.

But she'd prefer being more in control, not just for being able to spend more. She'd like to go back to school for a masters in business or organizational psychology, but not until she's out of debt. She'd also like to take up yoga, but the money hasn't been there.

The plan that Smith drew up for Hunter has her contributing 15.3 percent of her gross annual income, or about $7,900 toward retirement savings. After the credit card and school loans are paid off, her contributions will increase to 23.7 percent, or $12,274 annually.

Assuming she doesn't need to upgrade to a larger home — not in the foreseeable future, she said — or make any other major investments, she will retire at 67 with her condo paid off and will be able to enjoy the same standard of living for the rest of her life.

Hunter is excited that she'll be able to chart her financial future so closely. She's even talked to Smith about using his services in the future as well, to help her keep on track.

She likes what she sees, although would like to set aside a little money to take a vacation in the near future.

But even then, she prefers visiting friends rather than expensive trips to Europe.

"I've done some things on the cheap for so long that going away for a week is a big deal for me," she said.

Learning about managing her money has been an important lesson she wished she'd taken years ago.

"We as a society don't teach how to do these things; you don't learn this in school," she said. "To me, it's important."