His Trips to ATM Hurt Cash Mileage

You wouldn’t think there’d be much mystery in the financial life of Chris Petrovic.

The 28-year-old lawyer keeps a detailed computer file covering his expenses: Rent, phone bills, student loan payments--they’re all documented. Not so much as a tank of gas or a bag of groceries escapes his record-keeping.

“I guess you could say I’m kind of anal about keeping track of my money,” the Manhattan Beach man confessed with a laugh.

Yet Petrovic, whose annual income is almost $60,000, finds himself living mostly paycheck to paycheck.

“It seems that no matter how careful I am, I can’t save much,” he said.

When Petrovic adds up his assets--about $4,000 in checking, savings and retirement accounts--and subtracts what he owes on student loans and other debts, he--arrives at a negative net worth of about $65,000.

“It’s frustrating,” said Petrovic, who began practicing law two years ago. “I think that I’m making decent money, but I’ve got very little to show for it.”

Actually, Petrovic’s financial situation is better than he thinks, said Delia Fernandez, a Los Alamitos financial planner who examined Petrovic’s situation for Money Make-Over.

At first glance, it may seem he has little reason to feel encouraged, but, Fernandez said, many young professionals start their careers with significant debt.

Indeed, except for Petrovic’s habit of hitting the ATM for trips to restaurants or the movies, Fernandez had few complaints about the way he handles his money. In fact, she said, “the thing I find most encouraging is that Chris is thinking about financial issues at a young age.” For those who can do it, getting a handle on their finances when they’re in their 20s can pay off later in increased security and more choices in life.

Fernandez said Petrovic’s financial future will be bright provided he adopts a more rigorous savings plan and watches the automated teller machine visits.

“For many people, ATM withdrawals can be the black hole in their budget,” she said.

Besides wanting to get on firmer financial footing, Petrovic wanted to know whether, despite his debts, it would be possible for him to buy a home within two years.

The answer to that question goes right to the source of Petrovic’s frustrations. If he expects to have something to show for his income, he’s going to have to determine his priorities.

“I tell people that they can have anything they want. They just can’t have everything they want,” Fernandez said.

Behind that principle is something known as the utility curve. Applied to personal finances, the concept of utility is how much (or little) satisfaction a particular good or service will bring an individual and how much (or little) he or she is willing to pay to obtain it.

But before any discussion of priorities can begin, a client must know where his money is going. In Petrovic’s case, there’s no guessing. He brought a PC disk with almost a year’s worth of records--he uses the Quicken personal finance program--to the consultation.

First, the big expenses. For Petrovic, that’s the $717 for his share of rent for an apartment two blocks from the beach and the $635 in student loan payments. Next is the $325 a month he pays to lease a Ford Explorer and the roughly $325 he spends on entertainment and dining out.

Then there are the smaller items that aren’t necessities--the $40 a month for the cellular phone and the $60 for the health club membership.

Savings have been something of an afterthought. Petrovic, a civil litigator specializing in insurance, recently began contributing $200 a month to his firm’s 401(k) plan but has no other formal system for putting money aside. Savings, he admits, are whatever is left over. That ranges from $500 in some months to nothing if he has, say, visited his sister in Seattle or gone to homecoming at Columbia University in New York, where he earned his bachelor’s degree.

Savings need to as regular a part of his budget as rent, Fernandez told Petrovic. A monthly sum of $400 should be manageable.

Here’s where the utility curve concept comes in.

“You have to accept that people have certain goals or desires and that some stuff is nonnegotiable,” Fernandez explained. “There’s no one-size-fits-all plan out there. You’ve got to find a happy medium.”

For instance, Petrovic theoretically could save $717 a month if he’d move back home with Mom and Dad. But that’s not a realistic suggestion. Petrovic could spend less in rent if he’d move inland, but for him, a beach apartment is a nonnegotiable.

“When I’m sitting in traffic,” he said, “I just think about how nice it’s going to be to get home and go for a run on the beach.”

The health club membership is also something Petrovic won’t give up. He played first base for the Columbia baseball team and briefly for a minor league baseball team and he remains active. He works out six times a week at the gym and participates in triathlons. He gets his money’s worth from the gym, he said.

But there are some cuts he would consider. He uses his cellular phone infrequently, for example, so “I could probably live without that.”

He also could cut what he’s spending for a car.

Fernandez suggested that he buy rather than lease when the lease on his sport-utility expires next year, and she urged him to consider a more modest vehicle that he could plan on keeping at least seven years.

“You don’t want to be putting a lot of money into what is essentially a depreciating asset,” Fernandez told him. “You’ll see that you can build wealth much quicker if you don’t have a car payment every month.”

Fernandez also encouraged Petrovic to attack his entertainment and recreation spending, which consumes more than $200 monthly, on average. Movies, dates and evenings out with friends are typically paid for with visits to the ATM, and it’s the one area of his finances that he hasn’t been tracking.

It would be unrealistic to expect a young bachelor to cut those costs too much, but Fernandez suggested that he set a monthly limit. If he can do that and give up the cell phone, he should be able to reach his $400-a-month savings target comfortably. A less expensive car would allow more, of course.

Because Petrovic is starting out and can expect to earn more, perhaps much more, in the years ahead, Fernandez cautioned him not to let his spending habits become any grander. The key to a secure future, she said, is to maintain a stable standard of living. “Don’t let your lifestyle grow with your income,” she told him. “If you can prevent that, all your bonuses and raises can go to savings.”

As for his investments, Fernandez kept in mind that he wants to buy a home soon.

First, she recommended that he put $2,000 of the $3,000 he now has in a bank passbook account into a money market fund such as Strong Money Market Fund. That fund is currently yielding about 5.4% a year, more than double the interest Petrovic is getting with the bank savings account. The $1,000 would remain there in case he needed access to money quickly.

He should put aside $2,000 more in the money market fund for emergencies, Fernandez said. Once he’s done that, she said, he should start putting his savings into a conservative bond fund, such as Strong Advantage (five-year average annual return: 6.4%), which invests mostly in highly rated short-term corporate bonds. She suggested a bond rather than a stock investment because making stock investments with money going toward a near-term goal would be more risky. Should the stock market take a dive in that time, Petrovic would be stuck paying rent for longer than he would want.

Next, Fernandez suggested that Petrovic tackle the $2,400 balance on his Visa card.

The card’s annual interest rate is 15.9%. Petrovic has been paying more than the monthly minimum, but Fernandez suggested that he use the bonus he expects to get in January to wipe out that debt. If the bonus does not materialize, Petrovic should pay off the debt with money from his bank savings account.

Paying off the credit card debt is just about the best investment Petrovic could make. In effect, he will be earning 15.9% tax-free, compared with the taxable 2.5% he earns on his bank account.

After he pays off the card, that $237 a month should be added to his savings, the planner said.

Petrovic has already stopped using the card in favor of a checking account debit card, a move Fernandez applauded.

Petrovic’s student loan debts, taken out to pay for his three years at Southwestern University School of Law, total about $67,000, with interest rates ranging from 5% to 8.5%.

Petrovic has considered attempting to pay those off early. But Fernandez pointed out that because the interest rates on those loans are so low, he might prefer to use any extra money he can put aside to build up his home-buying fund.

Before outlining a plan that would allow Petrovic to buy a home in a few years, Fernandez asked him some questions about his feelings about real estate.

“Basically,” he said, “it would be difficult for me to feel like I’m really moving forward if I just keep renting. Maybe home ownership is a psychological thing for me that shows that I’m moving in the right direction.”

Fernandez agreed there are some emotional as well as financial advantages to owning a home. The monthly costs of owning a home are often just a little more than renting an equivalent property, because of the tax advantages of mortgage interest deductions.

Owning also offers two big pluses: 1) The mortgage will eventually be paid off, eliminating (except for taxes and insurance) the need for a monthly housing payment; and 2) The owner has an opportunity to enjoy financial gains should the property appreciate.

If housing values fall, though, the owner may find his mobility is limited--something of particular concern to people in the early stage of their career.

Also, it may be that money invested in a home--the mortgage, repairs and improvements--might have a greater financial return if invested in the stock market or elsewhere.

“I’d only make a commitment to buying a house if I knew I’d be there at least three or four years,” Fernandez said.

Petrovic is eager to at least start a home-buying account, even if he ultimately decides against making a purchase.

“If I don’t decide to buy,” he said, “at least I’ll have a good chunk of savings that I accumulated with a home in mind.”

Petrovic was worried that he might have trouble coming up with a down payment, having heard he might need as much as 20% of a home’s purchase price and that perhaps his heavy student loan debt might put lenders off. But Fernandez pointed out that today’s mortgage market is remarkably varied, with some programs requiring smaller down payments, even as little as 5%.

What kind of home might Petrovic expect to be able to afford within two years? Considering his student debts and current salary, he should be able to afford a home payment of about $1,500 a month. At current interest rates, then, and with a down payment of 5% and adding in closing costs, his maximum allowable price would be $180,000.

That would mean a down payment of $11,000, which appears manageable under his savings plan, especially if he gets the bonuses and raises he expects. But, Petrovic acknowledged, $180,000 won’t buy a beach city dream home. Single-family homes in his neighborhood can easily fetch $400,000 or more.

The other options, Fernandez noted, would be to save for a longer period, look for a small condominium or buy in a less expensive area.

“I like this area so much that I think I’d be happier if I had to wait longer rather than to move away,” Petrovic said.

Despite the sobering news on the housing front, Petrovic was encouraged by his consultation with Fernandez, and he pledged to start immediately on a savings plan.

“It’s a good way to get started saving for a home even if it’s not in two years. And even if I don’t buy a home, I’ll have the cash,” he said.

Fernandez was also optimistic about Petrovic’s future.

“He’s got a good career with potential for earnings growth and he seems determined about getting started on his goals,” she said. “Those things bode well for his success.”

Graham Witherall is a regular contributor to The Times. To participate in Money Make-Over, send your name, age, phone number, income, assets and financial goals to Money Make-Over, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. Questions or comments can be left at (213) 237-7288. An array of personal finance topics will be addressed at the Los Angeles Times Investment Strategies Conference, Feb. 7-8. Reservations can be made by calling (800) 350-3211 or online at https://www.latimes.com/isc

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This Week’s Make-Over

* Investor: Chris Petrovic, 28

* Occupation: Lawyer

* Gross annual income: About $59,500

* Financial goals: Save more; buy a home in a few years.

*

Current Portfolio

* Cash: $3,500 in savings and checking accounts

* Retirement plan: $400 in 401(k) account

* Debts: $67,000 in student loans, $2,400 on bank credit card

*

Recommendations

* Make saving a top priority and aim to put aside $400 a month. Get rid of cellular phone and reduce spending on entertainment. When automobile lease expires next year, consider buying something more modest that would be kept for several years.

* Pay off credit card debt, using money from a job bonus or from savings.

* Move most of savings out of bank and into a money market fund, such as Strong Money Market ([800] 368-1030), which will pay a better return.

* Put new savings for a down payment on a home into a conservative bond mutual fund such as Strong Advantage.

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Meet the Planner

Delia Fernandez is a fee-only financial planner and the owner of Fernandez Financial Advisory in Los Alamitos. She has 21 years of experience in the financial services industry and is an instructor for the UC Irvine Extension personal financial planning certificate program.