Her Young Finances Appraise Well, but How to Keep Value?
Ah, youth. The world is new, responsibilities few and--what? Taxes?
Amanda Matzkin, 24, stumbled upon a disagreeable reality of adulthood when her fledgling $600 emergency fund was wiped out this year by a $707 tax bill she neither expected nor understood.
“I was floored,” said Matzkin, a senior representative at Christie’s Auction House in Beverly Hills.
But the source of the tax bill--an investment nest egg seeded by her parents when she was a child--is also Matzkin’s ace in the hole, says Mitchell Freedman, a certified public accountant and financial planner in Sherman Oaks.
Thanks to her parents’ generosity and foresight, Freedman said, Matzkin can instantly achieve her goal of having an emergency fund while saving for retirement, and still have a little breathing room as she completes the transition from subsidized daughter to a financially independent working woman earning $30,000 a year in her first full-time job.
Freedman suggested that Matzkin move $6,500--about four months’ worth of take-home pay--from her $33,000 mutual fund nest egg into a money market account and make that her emergency fund.
“Amanda isn’t meeting her monthly needs yet with her income, and she’s putting more pressure on it by trying to build an emergency fund,” he said. “She’s got this great asset [the mutual fund], so why not utilize that to get her principal goal: an emergency fund?”
Freedman also recommended that Matzkin start doing her own taxes. They were handled this year by her father’s accountant, but he said she can learn a lot by filling out the return by herself.
“I do feel that many young people today are not prepared for the financial decisions they need to make in dealing with credit cards, checking accounts, investments, taxes. They’ve never really been trained for life,” Freedman said.
“But at 24, Amanda has already developed some excellent habits. And she’s also fortunate to have parents who are supplementing--not supporting--her, so she isn’t required to do it all at once. As she matures and her income goes up, she can wean herself further and further from her parents’ support.”
Her parents--an ophthalmologist and an elementary school teacher--have definitely made life easier for Matzkin. They gave her a new 1996 Honda Civic in college and have paid her car insurance, although this year she paid nearly half of the $1,200 bill. They also give her small gifts of money periodically--about $800 total last year, and take her out grocery shopping now and then.
She has a roommate, so the rent on her Brentwood apartment is just $605 a month and her telephone and utilities about $100 a month. She puts $100 a month into her emergency savings account, and the rest of her monthly $1,650 take-home pay goes to groceries, eating out, entertainment, gifts, yoga lessons and clothes.
“I am very lucky to have such a generous family,” she said. “I have an older brother who’s finished school and a twin brother still in school, and because my parents have been supporting them, they’re still helping me. But because I’m becoming more independent, I’m trying to become more responsible.”
Although her estimated spending exceeds her income by about $200 a month, Matzkin has shown some savvy, Freedman said. In addition to the $100 a month she’s saving in her emergency fund, she is putting $92 a month, about 4% of her salary, into a 401(k), which her employer is matching with $73 a month.
She has also started a Roth IRA, although she couldn’t afford to make a contribution this year, and she has no credit card debt, which is unusual for someone her age. Typically, Freedman said, college students get into credit trouble almost immediately.
“Mom and Dad bail them out once or twice and after a while they aren’t bailed out and they have to stand alone. The bankruptcy rate among young people is extraordinarily high. They see bankruptcy as a solution to their credit problems, but they don’t realize how long it will stay on their record.”
Matzkin tries to charge most of her purchases to build points for free air travel, but she usually pays her balance off at the end of the month.
“I guess I learned from the good habits of my parents, because we always grew up knowing that you pay your bills in full,” she said. “I know I can’t afford Armani suits, so I don’t buy them, but I know people who do. I’ve heard of people who, for wedding gifts, get their parents to pay off their credit card.”
Matzkin likes traveling, and hopes to get in a trip to Greece this summer. But she also has a long list of goals: starting an art consulting/brokering business, owning a home, marriage, raising a family, “the whole fairy tale,” she says.
Luckily, she seems to thrive on challenges. In high school, for instance, she ignored the advisors who told her to try junior college because she couldn’t be accepted at her dream school, UC Santa Barbara. “It was really a blessing in disguise,” she said, “because it made me work that much harder and prove them wrong.”
At UC Santa Barbara, she majored in art history and became fascinated with auction houses. She researched the top houses, interviewed with three in San Francisco, got job offers from all and chose Christie’s, even though the work was part-time. She transferred to the Beverly Hills office in 1998 when a full-time position opened there.
Matzkin enjoys her job, but she’s also exploring other careers. She’s taking wine classes and just completed a course in writing press releases. She volunteers at galleries and the Museum of Contemporary Art and works on the side trying to track down hard-to-find art and wines for clients. She even got her real estate license recently.
“I’m just looking at all my options. I know the money’s not great right now, but I believe if you do what you love, the money will follow, and I’m paying my dues until I figure out exactly what I want to do. It’s exciting, but it’s also scary because I know the next step changes my path.”
Establishing an emergency fund is an excellent way to pave that path, Freedman said, because it gives Matzkin some fallback if she decides to change jobs, go back to school or start her own business.
Matzkin is already doing well saving for retirement, he said, and she’ll probably need the mutual fund money in the next 10 years, when she decides to buy a house.
Freedman also believes that Matzkin needs to diversify her investment, because it’s currently all in USAA’s Science & Technology (USSCX). Tech stocks, of course, have done very well in recent years, but they’ve plunged since mid-March.
Freedman suggested that Matzkin diversify to broad index funds, even though there will be a tax hit from selling her USAA fund. Matzkin should take enough money out of her fund nest egg to cover the taxes after the sale and transfer, he said, and put it into a money market account to be sure it will be available when she needs to pay taxes.
It was Matzkin’s sale of the fund her parents chose, and reinvestment of that money in the USAA fund, that triggered the capital-gains tax bill she didn’t expect.
Matzkin said she chose the USAA fund group after doing some research, because she preferred their customer service. Freedman said USAA has some good funds, but he recommends that when she diversifies she move to a fund group, such as Vanguard, with lower management fees.
“The expense ratio for the USAA fund is 1.33%, and Vanguard’s is about a quarter of a percent,” he said. “That means this [USAA] fund would have to beat the Vanguard fund’s performance by 1% a year just to be even, and that’s a lot.”
As for diversifying from an all-tech fund to broader index funds, Freedman noted that although tech stocks have far out-performed the broad market in recent years, over time the differences narrow.
Freedman also recommends that Matzkin buy tenant insurance, for about $200 a year, to cover the replacement costs of her clothes and other belongings, in case of theft or fire, and spend another $200 a year on umbrella insurance, an additional layer of liability coverage that would pay for her legal defense and damages above the coverage in her automobile or tenant insurance.
“Umbrella insurance is a coverage I think everyone should have because we live in a terribly litigious society,” he said, “and California in particular is one of the most litigious.”
Finally, Matzkin needs a budget to start living within her income “so you can cut the umbilical cord between you and your parents,” he said. “There are not only economic reasons but personal growth reasons to get into a position of being self-sufficient. It’s all a challenge, but Amanda has an asset a lot of people don’t have: very supportive parents who can assist her, so she doesn’t have to do it all tomorrow.”
“My parents are awesome,” Matzkin agreed. “I should send them flowers. Hey, maybe I could take that out of the fund too!”
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Jeanette Marantos is a regular contributor to The Times. To be considered for a published 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 or to money@latimes.com. You can save a step and print or download the questionnaire at https://www.latimes.com/makeoverform.
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This Week’s Make-Over
Investor: Amanda Matzkin, 24
Annual income: $30,000
Goal: Build an emergency fund and live within her means without subsidies from parents
Assets
* About $33,000 invested in USAA’s Science & Technology (USSCX) mutual fund; about $2,000 in a Roth IRA in USAA’s First Growth Fund
* A 1996 Honda Civic, paid in full
* About $1,037 in a 401(k) retirement fund
Recommendations
* Take $6,500--equivalent of four months’ salary--out of mutual fund to create an emergency fund.
* Move $33,000 out of USAA’s Science & Technology fund into more diversified, less expensive index funds, such as Vanguard Growth Index Fund (VIGRX) and Vanguard Small Cap Growth Index (VISGX).
* Put $100 a month into mutual funds to rebuild the account.
* Buy tenant and umbrella insurance.
* Keep Roth IRA where it is.
* Work out a budget that’s within her income.
Meet the Planner
Mitchell Freedman is a financial planner and certified public accountant in Sherman Oaks. He has co-authored personal finance guides for entertainers and athletes for the American Institute of Certified Public Accountants.
