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Managing a big Web salary
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June 5, 2000: 6:14 a.m. ET
Brian Moco makes a great living on the Net. Now he wants to make sense of it.
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.
Brian Moco does very well working for himself. He works in the San Francisco Bay Area as a creative consultant, designing and strategizing Web site advertisements for start-up companies.
Since he went freelance in March, he's been grossing between $15,000 and $20,000 a month. That means his total annual income will likely be around $200,000. But he admits he's really "pretty ignorant" when it comes to how to handle his finances.
"It's complex, and frankly I don't have time to understand it completely," Moco, 32, said.
Bay Area eats up a lot of cash
Moco got into Web design in late 1995. While he may be an old hand at the Internet, managing his income stream is a different story. He has business expenses such as his Macintosh G4 computer and a DSL line to cover. He also has a Ford Explorer lease at $398 a month, $1,150 in rent for his one-bedroom apartment and living expenses such as entertainment.
 And living in Marin County -- across the Golden Gate from San Francisco -- isn't cheap. "The weekly rounds of golf add up," he said.
Moco doesn't expect a lot of sympathy from people who make a lot less than he does. But he does need financial help. He works with an accountant who realizes his time constraints in dealing with his finances. But Moco has been starting to think he needs financial planning aid, too.
Because he is self-employed, he tends to keep a lot of cash in his money-market account, in case work dries up or he has unexpected expenses. "I'm probably more liquid than I need to be just for safety," he said.
A life less ordinary
Moco, who is single, grew up near Detroit. He moved to California with his parents, who live in Carmel. He studied business, then commercial recreation -- resort management -- at California Polytechnic Institute.
He didn't like his taste of business life and moved into the Web. He figures he'll work in new media "for the foreseeable future," but that all depends.
"I'll evolve as the Internet evolves," he says. "The product I'm turning out today is very different from the product I'll turn out a year from now."
Already the banner ads he started creating when they first took off seem to be dying out, he pointed out. Though he doesn't have to pursue business at the moment -- most clients come to him via word of mouth -- that might not always be the case.
"It's a nice situation, but it's also scary," Moco said. He works a lot for a few clients. If one vanishes or walks away, it can put a serious dent in his bank account. His earnings and expenses are already tough to predict from month to month.
A few options for the future
Moco tries to fund his simplified employee pension, or SEP, plan as much as he can. He has around $6,500 invested there, in moderately aggressive mutual funds, since he is still young.
He also has 9,300 shares he got as options from an Internet company that he worked for as a full-time employee before branching out. That stock alone is worth around $41,000.
He wants to move into a bigger apartment, probably paying around $2,500 a month. He can deduct about a third of his rent as a business expense.
Moco also wants to upgrade to a new S/UV when the lease on his Explorer expires in June 2001. He figures maybe he'll buy his truck this time.
What am I working for?
Ultimately, Moco wants to take a month off at some point to tour Europe. Another goal is to buy a home in the San Francisco area. But real estate prices are steep in the area, so he's not too sure how achievable that is. He wants to retire "as soon as possible."
Moco said he spends most of his time "trying to earn more, but little time in planning how to spend what I earn. I've got goals, but little time or energy to come up with the specific objectives needed to achieve these financial goals."
Because he is self-employed and doesn't have employee benefits, he figures his situation is a little more complex than many of his friends, most of whom have full-time jobs.
"I feel like I need some coaching on how to get a grasp on the personal side of my finances," he stated.
What the planners say:
Moco's concern that his financial life is running on autopilot, without any effort to realize his goals, "is a very common problem today with young people," said Barbara Steinmetz, a certified financial planner with Steinmetz Financial Planning in Burlingame, Calif.
Recognizing that he needs help with financial goals is taking a big step toward realizing them, Steinmetz said. Given Moco's workload, he is wise to be working with an accountant to sort out his business finances, too, she added.
As far as retirement planning goes, Moco should continue to contribute the maximum to his SEP plan, Steinmetz said. He should also consider a Keogh plan, she says, because the maximum contribution for a Keogh is $30,000, compared with $24,000 for a SEP, she explained.
"Both would help you toward your retirement goal, as well as reduce your current taxable income," Steinmetz said. That's valuable since Moco is in the highest tax bracket. Regardless of the plan he sticks with, he should consider making contributions throughout the year rather than waiting for April 15, Steinmetz said. That way he maximizes growth in that money through the year. Given his income, Moco doesn't qualify for a Roth IRA.
How much do you need to retire?
Don Boegel, a certified financial planner in Plymouth, Minn., concurred that the retirement fund is a good idea, particularly while Moco's cash flow is good. Moco can contribute up to 15 percent of his net income to his SEP, Boegel says, with a cap. Moco should step up his payments since the $6,500 he has set aside so far doesn't come close to that, Boegel said.
To make planning for retirement a little more tangible, Boegel ran some numbers. People typically need 80 percent of what they have been earning when they retire, to maintain their lifestyle, according to financial planners.
Boegel projected out Moco's $200,000 a year income at 3 percent interest. Assuming he retires in 20 years, at 52, that would be $361,222, Boegel calculated. Take 80 percent of that and you get $288,978 a year.
Moco needs that every year and will likely, given increasing life spans, live longer than his parents. There are too many variables for Moco to calculate an exact amount, but Boegel figured a good ballpark retirement goal is something upward of $5 million-to-$6 million. "Scary, huh?" Boegel said.
Better get cracking. "He is in a great position to save as much as possible right now," Boegel said. Assuming 12 percent growth in his retirement funds, he needs to set aside $67,000 a year for the next 20 years, the planner figured.
Taking stock of the stock
Common stocks, either directly or through mutual funds, are the right way to go at Moco's age, Boegel said. Moco should also allocate between 20 and 30 percent of his portfolio to non-U.S. markets to diversify, according to the planner.
The large amount of stock that Moco owns in one company "is not prudent," Steinmetz added. But there is little Moco can do about it. Typically, people have to hold stock from options for the greater of two years from the grant date or one year from the exercise date.
As a result, he should use the rest of his portfolio to diversify away from technology, Steinmetz said. A lot of people like Moco make the mistake of not doing that, she explained. "Many people who are in the high-tech arena often have highly 'exuberant' expectations of the potential performance of that sector and tend to become overexposed."
Boegel said that any additional savings Moco can squirrel away over and above his SEP plan should go into tax-efficient mutual funds.
Moco should move the money he is keeping liquid in his money-market account into a double tax-exempt money-market fund, Steinmetz said. That's an especially good move in a state with a high income tax such as California, she explained. The income from such a fund won't count toward Moco's adjusted gross income, the planner said.
Buying a home is a capital idea
When it comes to buying a home, Moco is correct that real estate in the Bay Area is extremely costly, Steinmetz said. But given the rapid appreciation of the market, "this could be a very prudent investment," she added.
Given his plan to spend $2,500 on renting a larger apartment, Moco could afford a mortgage of roughly $340,000 for the same amount of money, Steinmetz stated.
That's not going to buy a mansion on Telegraph Hill, sure, "but the housing market is such that you need to get started sometimes at less than your dream home," she explained.
Because he is self-employed, Moco will need two years of tax returns to substantiate his income, the planner added.
Prepare for an unexpected work stoppage
Moco would face significant hardship if he were unable to work. So he needs to consider disability insurance, according to Steinmetz.
Another way to combat the possibility of not being able to work is to save three-to-six months of income, she said. But disability insurance is better, she thinks. It will protect you for a longer period of not working.
It's not cheap but it's worth it, Steinmetz said. "At your age you have a greater risk of being disabled than dying," she points out.
Hard numbers help you meet your goals
Steinmetz also suggests that Moco work a little closer with his accountant to break out various costs and calculations. For instance, as a sole proprietor, Moco has to pay estimated tax.
Getting a tight handle on exactly how much he needs to pay per quarter could help him avoid the Alternative Minimum Tax (AMT). It will also give him a better grasp on how much discretionary cash he has to meet his goals.
Before he sells any of the stock he owns, Moco needs to apprise himself of the capital gains and AMT consequences, Steinmetz said. Moco's accountant can also highlight the tax advantages of buying a home, according to the planner.
If Moco gets a better grasp of what is happening to his money and what his goals mean financially, he likely will have better luck achieving them, Steinmetz said.
"It is always helpful to get a grasp of the eventual effects of any action that you might contemplate," she said. "Besides, if the numbers make sense you will be that much more committed to making this goal a reality."
* Disclaimer
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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