Her Next Challenge: Getting Financial House in Order
Courtney Chapman, a single, 32-year-old Georgia native, enjoys a challenge as much as the next person. Move across the country when a job transfer is offered? No problem. Find a new job when she is laid off six months later? Piece of cake.
But ask Chapman about her long-range financial goals--or even her budgeting plans for next month--and an anxious look crosses her face. She admits that for years she has been financially paralyzed by her lack of knowledge.
“I grew up in a small town, and my parents were middle-class people who never really talked about money,” she said. “There were never any discussions about retirement, the best way to save your money, interest rates--none of that. And I never really learned about those things on my own.”
But as the first day of 2001 dawned, Chapman was thinking long and hard about her finances. She wanted to devote more of her paycheck to both short-term and long-term goals, possibly save for a small condominium and set up a solid retirement plan.
“I decided that I just needed a push in the right direction,” she said.
That attitude, coupled with Chapman’s positive financial situation, bodes well for her future, said Margaret Gault, a San Francisco-based certified financial planner.
“She is a financial planner’s ideal client,” Gault said. “She is young, not encumbered by debt and is eager to contribute to a retirement savings plan.”
Unlike many who have put off planning for their future, Chapman already has a lot going for her. Her job as an account manager for KCBS-FM Marketing, a TV and radio advertising and promotions company, pays her a base salary of $45,000 annually, and in her first year there she racked up $21,000 in commissions.
She also keeps her living expenses modest. Chapman shares a house in Santa Monica with two other people, paying $700 a month for her share of the rent.
“I’d really like to move out and get a place of my own, but I don’t think I can afford it right now,” she said. “I do like the area where I’m living, though, and I think I’d rather live there and have to share a place than buy something in Timbuktu and have to drive a long way to work.”
Chapman’s only other major monthly obligation is a $341 car payment for her 1998 Honda Accord.
Best of all, Chapman, despite her confessed lack of financial acumen, has already managed to assemble a modest portfolio--starting with an emergency fund of about $5,000 in a low-interest passbook savings account.
She has accumulated about $10,000 in her 401(k) plan, most of it contributed in the last year after picking up some coffee-break advice from co-workers as well as suggestions from her boyfriend.
The account is fully invested in stocks--50% allotted to shares of Viacom Inc., a media giant that owns the CBS television network; 20% to MFS Emerging Growth Fund; and 30% to Barclay’s S&P; 500 Index fund.
Chapman is trying to commit 10% of her income to the 401(k) account, but worries about maintaining that level if the commissions she earns for setting up marketing campaigns or selling naming rights to events fall short of her first-year level.
“I was very lucky with some of my first projects,” she said. “But it’s not going to be that way all the time.”
As a safeguard against a lower income, she tries to keep her spending in check. She still winces at the memory of the $3,000 balance she ran up on her very first credit card while a student at the University of Georgia.
“I had no business even having a credit card,” she said, laughing about it now. “I had no money! I was only able to pay enough each month to keep the balance at $3,000, but it stayed there for about five years.
“One day, I looked at some of the papers from the credit card company and saw that I was paying 28% interest. I didn’t know if that was good or bad, so I asked my boyfriend at the time, and he told me I could get a card at 8% or so. I was amazed.”
Chapman ended up calling the company and threatening to take her $3,000 balance elsewhere. The company blinked, offering a 12% rate that helped her eventually pay off the balance.
“Now I just have a good old American Express card, and I pay off that balance every month,” she said.
But the spending urges are still there.
“Out here, you get so caught up in having to have a name-brand pocketbook or dress or something,” said Chapman, who had never ventured outside Georgia until the job transfer brought her to L.A. in December 1998. “I had my hair colored out here and it cost me $175. I never would have done that back home.”
Gault, the financial planner, said Chapman doesn’t have to live like a pauper to realize her financial goals.
“She is young and enjoying being footloose and fancy-free, so it’s OK that she is paying rent right now, especially if she wants to continue living in a very expensive area,” Gault said. “But if she utilizes discipline, intelligence, patience and perseverance, she should establish a substantial retirement savings account by the time she reaches her 60s.”
Gault advises Chapman to consolidate her 401(k) account into a single fund--Barclay’s S&P; 500 Index--and to make the maximum contribution (currently $10,500) each year.
“I like indexes, as distinguished from actively managed mutual funds, because historically, [most] actively managed funds [under-perform] index funds, particularly when one factors in the lower expense ratio of indexes,” Gault said.
“There’s nothing really wrong with her stocks. Viacom is associated with the company she works for, and MFS Emerging is a good fund, but quite risky.”
Gault said Chapman can consider other investment choices when her 401(k) account grows to around $50,000 or so, giving her a deeper asset pool to work with.
“At that point, if she wants to buy a place of her own, she can start diverting money from the 401(k) for a down payment,” Gault said.
The planner also said Chapman should shift her emergency fund from passbook savings to a money market fund such as Vanguard Prime Money Market, which pays a higher rate of interest.
“She should have at least $10,000 to $12,000 in that emergency fund,” Gault said.
Chapman has no marriage plans on the horizon. But Gault said that if she does marry, she should keep her retirement plan and other investments separate and not commingle them with her spouse’s assets.
Chapman hopes to use her income tax refund to jump-start some of the strategies Gault has laid out for her, although she admits the recent market turbulence has given her pause.
“I’d really like to keep things the way they are until things improve, but I realize that it’s a long-term investment, and that the new plan should work out in the long run,” Chapman said.
Gault encouraged Chapman to stay focused on the big picture and not get too caught up in temporary market trends.
“After all,” the planner said, “she has youth on her side.”
Youth, and the courage to make things happen on her own.
“It’s like when I moved out here. I didn’t know a soul but I knew that I wanted to see this side of the world,” Chapman said. “I knew that if I didn’t get out and do it that I would end up still in Georgia, married, having kids, and saying ‘I wish, I wish, I wish,’ for the rest of my life.
“I just didn’t want to be that person.”
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(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
This Week’s Make-Over
* Subject: Courtney Chapman, 32, promotions specialist with KCBS-FM Marketing
* Gross annual income: $45,000 base pay, $21,000 in commissions in 2000
* Goals: Save more money for emergencies and slow commission periods; maximize investments for a comfortable retirement; possibly purchase a condo.
Current Portfolio
* Cash: $5,000 in a low-interest bank account
* Retirement savings: $10,140 in 401(k) account, with $5,784 in Viacom Class B stock, $2,818 in Barclay’s S&P; 500 Index fund and $1,538 in MFS Emerging Growth fund
* Debt: $11,000 loan on 1998 Honda Accord
Recommendations
* Consolidate 401(k) assets into Barclay’s S&P; 500 Index fund and contribute the maximum amount ($10,500 currently) each year.
* Move bank savings into a money market account.
Meet the Planner
Margaret Gault is a certified financial planner in San Francisco. She specializes in portfolio management, retirement planning, retirement distribution rules and estate planning.
