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Savings for a 20something
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May 8, 2000: 6:03 a.m. ET
A systems administrator knows she should make more of her pay. But how?
By Staff Writer Alex Frew McMillan
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NEW YORK (CNNfn) - Checks & Balances runs weekly on CNNfn.com. People with questions about financial planning are invited to write in explaining their financial picture and short- and long-term goals. See the bottom of this article for specifics. For those selected, financial planners will review the details and suggest ways to meet those goals.
Stephanie Phillips has a pleasant problem. She makes more than she needs to live on. She figures she should do something constructive with the extra money.
But the 25-year-old spends the majority of what she makes. Frankly, she isn't too sure what she should be doing with the rest of her paycheck, beyond paying into her 401(k). "I'm stuck," she said.
The private sector pays off
Phillips left the Air Force last September when her four-year tour ended. She landed a job as a systems engineer, running computer networks at a telephone company in Seattle.
 The work is similar to what she was doing in the military. She first learned about computers in the Air Force, working in the computer-network office at McChord Air Force Base in Tacoma, Wash.
But the pay in the private sector is much better. "I make quite a lot more now doing the exact same thing," said Phillips. "I feel like I make an incredible salary."
She makes a little under $60,000 a year. Even after an 8 percent payment to her 401(k), her take-home pay is still a good $1,000 more than the $1,800 a month she made in the Air Force.
As a result, she has worked her way out of $4,000 in credit-card debt. She can easily meet her living expenses. What's more, she still lives in the same $325-a-month Tacoma apartment she rented while she was a senior airman.
Searching for realistic goals
Problem is, she is unsure what to do with the money that is left over.
"I'm completely lost on how to make some good financial decisions before I get 'used' to how much more money I'm making," Phillips said. It's the first time she has earned this much. What's more, her parents had her when they were just reaching their 20s, so they had less flexibility.
 "I don't have any kids, so my priorities are a whole lot different than theirs were," Phillips said. "I'm not even sure what realistic financial goals are."
Phillips was born in Spokane, Wash., but grew up in various places with her father, who was also an airman, and her mother, who worked in a department store.
After stints in Illinois and Germany, she graduated from high school in Victorville, Calif. She got married five months later and followed her husband to Seattle. After working in fast food for $6 an hour, she followed him into the Air Force after he developed a hyperthyroid condition. They were worried he would be discharged and they would lose their main source of income.
That didn't happen, but they ended up separating in August 1998. They finalized their divorce the middle of last year. "Marriage just made me think I was there," she said. Now everything has changed.
Time to plan for herself
She got an associate's degree in technology and computer-information systems in the Air Force. She also took some other tech-related certifications, which now stand her in good stead professionally.
Based on conversations with her friends, she wonders whether she shouldn't be saving and investing a little more of her money. "I've been doing my best not to purchase anything good and expensive. I convinced myself that with some small exceptions ... I've been successfully surviving with what I have for quite a while," she said.
She spends a little under $1,000 a month on day-to-day living, besides her car payment. Her main luxuries are aikido classes and a $70 haircut once a month. "I don't really know where the rest of the money goes," she said. "But if it's in my account, it's gone."
Mainly she has a good time -- eating out a lot, buying clothes and going clubbing. She has saved $6,000 in the bank.
Since she feels like she wastes a lot of her pay, she tries to "hide" money from herself. For instance, she doesn't allow for the "extra" paycheck she gets twice a year because she is paid every two weeks instead of monthly. Instead, she doubled up her car payments.
She wrecked her car recently and needs to buy a new one. She used to pay $1,000 on her Plymouth Neon. So she figures she might spend a similar amount on a Honda or a Saturn. She owes $3,000 over the insurance on the Neon, so that will have to come out of her savings.
Other than that, she isn't too sure what goals to have. Retirement seems a long way off. She doesn't see the need to go back to college, though that's a possibility in a few years since the Air Force will subsidize it through the G.I. Bill.
"I want to play the stock market, but I don't know how much is good, or how much is too much to put into it," she said. She knows her 401(k) is invested in mutual funds but she isn't sure how and doesn't track it. Likewise, she has some life insurance and disability coverage through work, but isn't too sure of the details.
Maybe she will stay in Seattle, where she likes the temperate weather. But then again maybe she'll move. Maybe she'll stick with computer networks. However, with 30 or 40 years to work, she figures maybe she'll switch jobs, too.
"I suppose I should buy a house sooner or later," Phillips said, for the tax break on the mortgage. "But I don't really want a house." What is a 25-year-old who doesn't spend that much time at home going to do with a house? Probably ruin it, she quipped.
"I don't even know where to start. I need some serious help," she said. "Point me in the right direction, please."
What the planners say:
"It took a lot of hard work on your part, but you are now in a very good financial position with a career in an excellent field," said Eileen Dorsey, president of Money Consultants Inc. in St. Louis and a certified financial planner. "Congratulations on your recent good fortune."
Phillips should use this time to get a grasp of her costs, according to Dorsey. "You do need to get a little better handle on your expenses," she advised.
But it's just as well to stay flexible at 25, according to Scott Kahan, president of Financial Asset Management in New York and another CFP. "Goals and objectives will probably change," he pointed out.
The best way to keep track of where Phillips' money is going is to track all expenses and divide them into three categories, according to Dorsey: necessities, "must-have" luxuries and the "can live without" real luxuries. Be honest about what falls in the last category, the planner cautioned.
Phillips can then budget for the necessities and must-haves. If she finds her spending is getting out of hand, she can cut the luxuries first without too much of a change in lifestyle.
By tracking her expenses over a set period, at least the last 30 days, she may be able to wring out some extra savings, Kahan said. Put that toward a mutual fund, he recommended.
Both planners suggest that Phillips consider tracking all her expenses in a notebook. So she sees where the money is going, "write checks or use a debit card," Kahan said. When you spend cash, it is tougher to track, the planners pointed out.
Build the emergency fund back up
Phillips should then focus on paying monthly into an emergency fund, according to both planners. Build that back to at least $6,000, Dorsey recommended -- around 10 percent of gross income is a good emergency threshold. Kahan thinks her threshold should be higher, closer to $7,500.
Rather than investing that money, Phillips should keep it liquid in a money-market account at a bank or mutual-fund company, Dorsey says. She could also consider a savings account at a credit union, which often pays good interest rates, Dorsey added.
Phillips can use the money to pay irregular expenses. "You cannot definitely plan for financial emergencies, but you know that you will have financial emergencies -- everybody does -- so you have to be prepared," Dorsey explained. But she should pay any expenses back with a check, like any other bill, Dorsey said.
Time to get a new car
Since she was paying $1,000 a month before, a new car shouldn't be a problem, Kahan pointed out. On a $25,000 car, she would end up paying around $600 a month on a four-year loan, he added.
She could consider buying a used car instead of a new one, Dorsey said. With a good mechanic to check it out, she could pick a good used car up for $10,000, according to the planner. Phillips could then take out a three- to five-year loan.
She should continue making payments into the emergency fund once the payments end, Dorsey said. That way she could be saving for her next car.
"Do not feel pressure to buy a house," Dorsey cautioned. "Wait until you are ready. You will know when you are ready."
Phillips could start saving for the down payment, though, in her emergency fund. She will likely need to make at least a 20 percent down payment. That way she will avoid mandatory private mortgage insurance and will have at least some equity, Dorsey pointed out.
Investing means getting more involved
As far as playing the stock market goes, "I would recommend that she spend a little more time understanding her plan," Kahan said of her 401(k). It will be a big part of her future, he pointed out -- even at her current rate of saving, it has the potential of growing to $2.3 million by the time she hits 65, he says.
If possible, Phillips should max out her 401(k) contribution, according to Dorsey. Dorsey suggested putting 25 percent each into a balanced fund, a large-company growth fund and a large-company value fund. The rest she could split 15 percent in an international fund and 10 percent in a small-company fund. Kahan simply recommended a 70-30 split between domestic and international stock funds.
She should also shoot to set aside another 10 percent of her gross income for retirement, according to Dorsey. Phillips could have the money deducted direct from her checking account each month.
She should invest it in index mutual funds, according to Dorsey. The planner suggests putting half the money in a fund tracking the S&P 500, such as the Vanguard 500 Index fund (VFINX), and half in a fund tracking the whole stock market, such as the Vanguard Total Stock Market Index fund (VTSMX).
Kahan liked the idea of Phillips achieving that extra retirement saving by setting up a Roth IRA. The money will be tax-free when she retires. To reach the $2,000-a-year maximum on a Roth, she would need to set aside $166.67 a month.
He, too, recommended putting that in an S&P 500 index fund. Start right away and try and make up lost ground to hit $2,000 this year, Kahan recommended.
To learn more about investing, Phillips should consider taking classes at her local community college or college, the planners both pointed out. "Just be wary of any sales pitches that may come along with the education," Kahan warned.
In any case, she should make the most of the G.I. Bill and finish a four-year college degree by studying part-time, Dorsey thinks. "It will dramatically increase your earnings over the very long term," she says.
The vast majority of 25-year-olds have little clue where their money is going and tend not to plan very much, if at all, the planners point out.
So Phillips may not feel she is dealing with her finances well. But she has a head start on her peers. It's commendable that she is "a seemingly well-balanced person who appears responsible, with a keen eye on her future," Kahan said.
Got questions about financial planning? Need some advice? CNNfn.com has organized a panel of outside experts to answer your questions. If you want to be considered for the "Checks & Balances" column, where professional planners suggest ways you can manage your money, send us an e-mail at checksandbalances@cnnfn.com. Include information about your age, occupation, income, assets and monthly expenses -- imagine you're providing a full income statement and balance sheet. Also, share with us any short-term and long-term financial goals you may have. And don't forget to leave your phone number.
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