How to Keep a Good Financial Start Going

At 24, Jhanay Harris is a poster child for getting off to a good start. On her laptop she has an Excel spreadsheet of her budget, where she dutifully tracks her rent, groceries, and other expenses. She has $100 automatically taken from each paycheck and funneled into savings. She has no credit card debt. And because she had a full athletic scholarship to play basketball at Central Connecticut State University, she has no student loan debt.

“My parents were both teachers. They always taught me to save and the value of the dollar,” says Harris, who lives in Wallington, New Jersey. “I’ve heard the horror stories. It’s hard to get out of debt when the interest piles up,” Harris says. “My mom sat me down and talked to me about these kinds of [things]. You have to be smart and be conscious of how debt hinders you in the future.” She’s not trying to go down that road. Her credit score is just more than 700. Harris is so squeamish about debt that she wants to pay off the five-year loan for the 2007 Honda Accord she purchased in 2010 early.

Harris, who earned a Bachelor of Science in marketing in 2009, joined the New Jersey Nets right after graduation, working part time in their inside sales department. In June 2010 she was promoted to the full-time position of group sales assistant and about a year later, promoted again to a marketing assistant. She currently makes $32,000. She has more than $3,500 combined in her checking and savings. Though after her expenses she has around $350 left over from each paycheck, she hasn’t gone to the next step–investing. “I’m not sure how much I can contribute if I were to start saving in my company’s 401(k). If I put money in the 401(k) it will mean I have less to put in my savings and I don’t want that account to go too low. You can’t easily pull out money from a 401(k) if you have an emergency.”

She’s interested, but hesitant. Harris would also like to invest outside of a 401(k). However, she says she doesn’t have much appetite for risk, especially after having watched the stock market the last couple of years. “I want something relatively safe,” she says.

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Another thing at the top of her to-do list is buying a condo. With the Nets moving from New Jersey to Brooklyn, New York, Harris is not sure if she will look for a new place in New York City or stay where she is. Ideally, she would like to buy a condo within the next 18 to 24 months. Her dream locale would be Brooklyn or lower Manhattan. But with a budget of $50,000 or so, she knows it will be a challenge.

The Advice
While Harris has good financial instincts, she needs direction. Dawn Brown, a senior financial adviser with Altfest Personal Wealth Management in New York City, and black enterprise came up with a plan to lead her to the next level.

– Learn more about investing. “When I asked Jhanay why she hadn’t participated in her company’s 401(k), she said she had heard about the stock market and was afraid to invest because the stocks might go down to zero but was interested in government bonds because the money would be there in 10 years,” Brown says.

What got Brown’s attention though, was

Harris’ interest in mutual funds. “She didn’t seem to get that mutual funds are in the market. There can be mutual funds with stocks, bonds, or a combination of the two,” Brown says. She was also surprised when Harris told her that she wouldn’t want a stock like Apple because she was afraid she might lose her money. “Apple had just recently hit a new high,” says Brown, who took all this as a clue that Harris needed more information about investing basics. She proceeded to give her an investing 101 mini-session, preaching the merits of diversity, asset allocation, and the difference between large, medium, and small-cap stocks.

“I reminded her that at 24 she won’t be using the money she would invest for 40 years or more. That’s a long time to ride out any market gyrations and to recover from losses. When you buy continuously when the market is down you’re buying at much lower prices so that’s a great benefit,” Brown says. Harris’ homework was to find out more about her company’s 401(k). Harris’ company holds an annual meeting to go over 401(k) plans and other benefits, but those meetings don’t offer personalized advice.

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-  Participate in the company 401(k). Brown recommended Harris take the 401(k) plunge. Ideally, at her age she should have an aggressive asset allocation of 80% stocks and 20% bonds, but given Harris’ risk tolerance Brown suggested 65% stocks and 35% bonds. She should start by putting 5% in her 401(k), about $150 a month, which leaves around $200 of discretionary income.

Investing early and often is a recipe for a strong financial foundation because your money has time for maximum growth. “The power of compounding over 40 to 50 years–it doesn’t compare to anything else,” says Brown.

For example, if at age 25 Harris saves 5% and has a 65% stock, 35% bond portfolio, by 65, she should have about $340,000, Brown estimates.

When she is ready to invest outside of her 401(k), Brown recommends a Roth IRA because she is in a low tax bracket now. “It’s better to pay taxes at lower rates now, compared to later when she is in a higher tax bracket. Also, Roth contributions can always be taken out without penalty, which makes that money accessible if needed,” Brown says.

– Research the real estate market. As much as homeownership is a laudable goal, Brown says Harris’ dream of getting that accomplished in two years at the price she’s looking for is unrealistic. Harris found listings in New Rochelle, New York in the $39,000 to $50,000 range that were 300 to 500 square feet; the least expensive one was a foreclosure, and the listings in this price range were co-ops, not condos. “I’m not sure she understood they are different. When I went online for condos in the area, they were more like $199,000 and up for 700 to 800 square feet,” Brown says.

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If Harris went for a $250,000 condo, she would need 20%, or $50,000 for a down payment. “It’s just out of her price range right now,” Brown says. “She doesn’t have enough current savings for a down payment and it would just be very difficult for her to save that amount of money for two years. She might have to look at a different area or a different size place.”

-  Build emergency fund. Harris should focus on building her emergency savings of at least six months’ expenses, plugging an additional $150 of her discretionary money into her savings account each month. She should also use her $2,000 contest winnings to shore up that account. While she continues to save she can educate herself on the home-buying process.

“There are all sorts of programs. In New York City there is a lottery for houses that have been rehabbed that are sold at special prices or set aside for lower-income people.” n Don’t fret about the car loan. Brown says there is no reason to rush to pay off the car loan early. “She’s just irked to pay $350 a month because she’s so unaccustomed to debt, but it’s her only debt, so I don’t have an issue with it.”

However, since her interest rate is 5.99%, she could likely refinance to 2% given Brown’s research. It might give her an additional $30 a month. Instead of worrying about paying off the car loan faster, Brown prefers Harris build her emergency fund. When she has built that emergency fund she can bump up her 401(k) contribution to 10%.

What impresses Brown is Harris’ maturity. “She is trying to put herself on the right track early. At 24, she’s thinking of things some people don’t until 44.” Her priorities, Brown says, should be studying up on investing so she’s comfortable being more aggressive, and to learn more about purchasing a home. “She has great goals,” Brown says. “She just needs to be more realistic about timing, because when people set unrealistic goals and can’t reach them, they stop setting them.” And Brown doesn’t want anything to slow down Harris’ great start.