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Reality Check Single male seeks financial footing He's a young New York executive about to get a modest inheritance. In addition to goals of saving and investing, he hopes to travel the world and buy a home. Can he have it all? By Nancy Frank Marques is taking his first steps away from living paycheck to paycheck. He's 29, he's got a new public relations job in New York City and he wants to move toward financial responsibility while still leaving room for a little fun. His goals are a mixed bag of the pragmatic and adventurous: He wants an investment plan for an upcoming $25,000 inheritance and he would like to figure out how to help his 5-year-old nephew with college savings. (Having faced the difficulty of paying for his own schooling, Marques would like his nephew to be less restricted by cost when it comes time for him to pick his college.) He wants to own his own home and retire from his current career by the time he's 50 so he can teach junior-high English. But he also wants to take an around-the-world trip while he's still young enough to manage the low-rent tour, opting for frugal hostels rather than five-star hotels. Marques' first stop on his financial journey was at my financial-planning office in New York City. Here is his Reality Check: Name: Marques City: New York Occupation: Senior account executive at a large public relations firm. Income: $50,000. Assets: Average checking-account balance of $500; cash value of whole life insurance, $6,000; Individual Retirement Account, $2,065; 401(k), $1,375; household belongings and clothing, $5,500. Marques also is about to inherit $25,000 after taxes from his late aunt. Total: $15,440 now; $40,440 after his inheritance (which he was scheduled to receive in a few weeks at the time of this writing). Liabilities: A $650 balance on his credit cards and $7,400 in student loans at an 8% interest rate. Total: $8,050 Living Expenses/Net Cash Flow: Bills consume most of Marques' take-home monthly pay of $2,300 (after taxes and 401(k) contributions). These include $960 in rent for his studio apartment; $150 in utilities; $200 for his health, life and disability insurance policies; and a $98 student-loan payment. He estimates he spends another $780 per month on expenses such as food (restaurants are his main vice), credit-card bills, dry cleaning, his weekly subway pass and clothing. Marques also pays an average of $30 per month in banking fees due to liberal use of his debit card. He is usually left with little to no money at month's end to put toward his goals. Adviser's recommendations: Make a budget and stick to it As he stated in his initial e-mail to MSN MoneyCentral, Marques admittedly is "awful at budgeting and saving money" and seems to live from paycheck to paycheck. | |||
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Marques is best at saving money when he doesn't see it. |
After going over his bank statements, I think Marques would be better served by changing banks to lower his monthly fees and exchanging the combined ATM/debit card for a regular ATM card. He is charged 50 cents for each use of his card, which makes the cost of $10 in groceries, for example, rise 5% or a $4 video rental rise 12%. Several banks in Manhattan offer free checking for a $500 minimum, so shopping around easily could save him almost $400 a year. I also suggest Marques go to the ATM once a week, take out an "allowance" of $160, and then spend only this cash on his discretionary expenses -- no debit cards for videos, dry cleaning, etc. This will be a challenge, but if Marques can manage this, he should have about $50 left over at month's end. Since Marques is best at saving money when he doesn't see it, Marques should have this $50 automatically withdrawn from his checking account and deposited into a mutual fund. He should start the automatic withdrawals once he's been able to stick to his budget for at least six months. This way, he can build up a portfolio with as little pain as possible. Insurance Marques' insurance needs are well covered by policies provided by his employer and an additional life insurance policy he established to provide for his nephew in the event of Marques' death. The one area of concern is Marques' lack of renter's insurance, which he should purchase immediately. This should cost him less than $200 a year, and could prove invaluable if his belongings are damaged or stolen. Despite its higher premiums, I recommend a policy that reimburses at replacement cost, rather than actual cash value of the damaged or stolen items. | |||
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I recommend Marques immediately establish a savings cushion or emergency fund of about $5,000, which represents three to four months' worth of expenses. |
How to apply his inheritance The inheritance will indeed be a springboard for Marques to meet his goals. But to satisfy the itch to spend a little of the newfound money, Marques should take a small percentage -- 1% or less -- and make one special purchase, something he'd ordinarily dismiss as "too expensive." That way, he should be less tempted by what could be unwise big-ticket extravagances or investments further down the road. In addition to that initial special purchase, I also recommend Marques immediately establish a savings cushion or emergency fund of about $5,000, which represents three to four months' worth of expenses. Marques should keep these funds in a money market account at a non-bank/discount brokerage institution, such as Fidelity or Vanguard. This way, the money is liquid, but it is in a separate account from the money he uses for day-to-day expenses. Also, Marques has estimated it will cost him about $11,000 in today's dollars to take six months off for travel five years from now. Because of this time frame, I don't recommend investing this portion of his inheritance in the stock market. Instead, I suggest a short-term bond fund like Vanguard's Short-Term Corporate Fund (VFSTX), which is rated five stars by Morningstar and has an expense ratio among the lowest in its category. This fund will have preservation of capital and consistent income as major objectives. The remaining money from the inheritance (about $8,750) can be applied to Marques' goals of owning his own home and helping his nephew with college savings. He should consider a couple of different equity funds, each with a different objective, for this money. For a large-cap blend fund, I like T. Rowe Price Growth Stock (PRGFX). For a mid-cap blend, I like the four-star-rated Gabelli Asset Fund (GABAX). I suggest dividing the money into separate bond funds and stock funds vs. using what's called a "balanced" fund, which contains a combination of stocks and bonds. This way, Marques can keep track of how his investments are doing more easily. | |||
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R E L A T E D R E S O U R C E Create Your Retirement Plan Step-by-Step Guide |
Retirement planning The mutual funds in which Marques' 401(k) is invested -- Fidelity Growth and Income (FGRIX) (65%) and Fidelity Balanced (FBALX) (35%) -- are both well respected. But to be more aggressive, Marques should get out of or decrease his contribution to the four-star Balanced Fund, which contains about 35% bonds, and invest that money in the five-star Growth and Income Fund. It is primarily a large-stock fund with returns exceeding those of other funds in its category over the last 10 years. Marques also has an IRA he set up nearly two years ago but doesn't currently contribute to. The account, worth $2,065, is in a money market fund with Fidelity. This money also can be invested more aggressively -- purely in equities -- and can help diversify his retirement portfolio. Two options from Fidelity are: Fidelity Diversified International (FDIVX), a four-star foreign stock fund with a good track record, or, Fidelity OTC (FOCPX), a mid-cap growth fund with a four-star rating and a low expense ratio. Can he meet his goals? Marques should be able to buy a condo in seven or eight years for about $200,000 (in today's dollars) although he may have to borrow from his 401(k) to do it. He also should be able to retire from his current career at about age 51, and start teaching. These goals are only attainable by assuming that Marques' income increases by $15,000 about every four years until it levels off above $100,000, and he continues his 401(k) contributions as scheduled. Marques thought the raise schedule could be met at his current job and plans to continue contributing 15% of his pretax income to his 401(k). Marques also will need to earn at least $30,000 annually as a teacher from age 51 until expected retirement age at 65. This does not take into account any discretionary profit-sharing Marques may receive -- which will become part of his retirement savings. Finally, Marques should have a will drawn up and should designate beneficiaries for his life insurance, IRA, 401(k) and his personal belongings. Update: Marques was happy to hear his goals were all deemed attainable. He understands, though, that he must change some spending habits before he can reach them. | |||
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Marques was happy to hear his goals were all deemed attainable. |
"I didn't realize how much money I was going through every month," he said. His efforts to stay on a budget thus far are working, although he finds it easier to do so when he works more and has less free time available to go out and spend money. Marques also is looking for a new bank and a renter's insurance policy. The only disappointment for Marques was my estimate that he wouldn't be able to buy a home for seven or eight years. In fact, if his current lease were not renewed and Marques was faced with a much higher rent of $1,300 or more, he thinks he would opt to buy sometime in the next five years. As for his retirement investments, he likes the idea of taking a more-aggressive approach with his investments and may implement some of my recommendations for his 401(k) as early as next month. He thinks he may be a little uncomfortable switching all of it into one fund, but says in light of his inheritance investments, he probably will do so eventually. Though his around-the-world trip is still about five years away, Marques is already mapping out all the possibilities. "I've been to England already, about five years ago, so I'd like to check out other parts of Europe and the Middle East," he said. "Turkey has always been a place I've really wanted to go to." About the adviser  Nancy E. Frank of Frank Advisory Services is a fee-only certified financial planner in New York City. She is a member of the National Association of Personal Financial Advisors and the Institute of Certified Financial Planners. She received a bachelor's degree in English from Vassar College and a master's degree in history from New York University. She has been quoted as a resource in "The Inheritor's Handbook: A Guide for Beneficiaries," (Bloomberg Press, 1998) as well as in the national media on various financial-planning topics.
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