Staci and Dave Erickson are good-natured, hardworking members of the middle class with steady jobs, a house in the suburbs – and a relentless cash-flow crunch.
“Every week we’ll bring home our respective paychecks, and they’re gone in a matter of minutes,” Staci Erickson said.
Shortages of cash often force the Seattle-area couple to triage their credit-card bills by paying some every other month. A few old medical bills have gone to collections.
“It sometimes feels like there’s no way we’re going to get ahead of this,” Staci Erickson said.
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Seeking relief, the couple asked for free financial advice, and the Puget Sound Chapter of the Financial Planning Association found a volunteer planner to help them.
Matt McKellar, senior partner and CEO of consultancy MyICON, examined their finances and discovered that the Ericksons are weighed down by more than 30 separate debts.
“It’s a mess,” he said. “But the nice part is, there’s a good outlook.”
McKellar then came up with a plan that could, among other things, eliminate most of the family’s debt in about 12 months.
The Ericksons were surprised. “I wondered what he’d been smoking,” Dave Erickson recalled.
In many ways, the Ericksons are still contending with the consequences of the Great Recession.
Dave Erickson, 56, has worked for years as a trucking-equipment foreman for Demolition Man, a Seattle demolition contractor.
Staci Erickson, 49, changed careers and landed a job earlier this year as a staff accountant at Cascade Designs, the outdoor-gear manufacturer based in Seattle.
Combined, the two earn about $124,000 a year from their jobs. Staci Erickson also earns an additional $5,000 a year by managing an apartment building.
They owe about $179,000 on their home, which has an estimated market value of $284,000.
Their reserves are meager. The household’s savings consists of Staci Erickson’s individual retirement account and a 401(k) with her current employer. These add up to about $4,600.
The family’s debt picture is complicated, and a direct result of the recession.
Staci Erickson worked as a residential real-estate broker for years until her business dried up after the financial panic of 2008.
At that point, she shifted gears and began working toward an accounting degree by enrolling at Highline College, a community college. She later earned her bachelor’s at the University of Washington’s Tacoma campus.
During the transition, the couple lived on Dave Erickson’s income and used credit cards to make up for the shortfalls. They now owe approximately $13,800 on about a dozen credit cards.
Both have children by previous marriages, and Staci Erickson’s two youngest children were growing up at home at the time.
Staci Erickson also accumulated about $35,400 in student loans. And, to top it all off, she got hit with some medical bills when she was in between careers and without health insurance.
The couple currently owe about $8,600 in medical and dental bills. Approximately $1,200 in medical debt has gone to collections.
All of this trashed the Ericksons’ credit scores, which are now under 600.
McKellar, the financial planner, zeroed in on the consumer debts.
He advised Staci Erickson to roll her IRA into her 401(k), then borrow about $2,000 against it at an interest rate of 5.25 percent.
She could then use that money to pay off the most costly credit cards, notably those with interest rates greater than 20 percent. She could retire the 401(k) loan with payroll deductions.
To free up more money for debt reduction, McKellar suggested changing Staci Erickson’s repayment plan on her student loans.
She currently pays nearly $400 a month on a 10-year plan. By switching to a 20-year plan, she could pay $172 a month at a slightly higher interest rate, freeing up more than $200 a month for other debt payments.
The Ericksons would then use the “snowball” strategy to erase other debts. That consists of concentrating on paying off one account while making minimum payments on the others.
When the priority debt is gone, the freed-up money is applied to the next liability, and so on, in a growing “snowball” that directs ever-larger installment payments at each succeeding debt.
Under this plan, McKellar said the Ericksons should be able to wipe out 33 debts by the middle of 2017. At that point, the couple’s only liabilities would be their mortgage and the student loans.
The Ericksons are ready to erase the balances on their credit cards. “Then,” Dave Erickson said, “we’ll cut them up!”
The Ericksons are charging ahead with McKellar’s plan. Staci Erickson has already changed her student-loan repayment schedule, and she is working on combining her retirement accounts.
Once their consumer debts are gone, the Ericksons will tackle another pressing issue with McKellar — planning for retirement.
After several difficult years, the couple are feeling more hopeful about the future.
“The light at the end of the tunnel,” Dave Erickson said, “might not be a train.”