At Age 25, He Has a Head Start on Financial Security

Darren Jay Golden isn’t doing bad for a guy who went to college just for the parties.

The 25-year-old, who used to lose money peddling souvenirs at Grateful Dead concerts, drove a delivery truck for a while after graduating from high school. He enrolled in Northern Arizona University only after a friend convinced him that college was a blast.

“I wasn’t the greatest role model when I was younger,” he said sheepishly.

Now two years out of school, the Los Angeles resident earns more than $60,000 a year working for Natural Data Inc., a Los Angeles headhunting firm. And he runs his own motivational-speaking business, called Motive Tek, on the side.

Golden’s new lifestyle comes complete with expanded expectations. His goals now include buying a house and taking steps to ensure his future financial security.

These goals are achievable if Golden reins in his spending enough to start saving some of his ample income, said Sheryl L. Rowling of Rowling, Dold & Associates, a fee-only financial planning firm in San Diego.

First, Golden should set up a safety net that includes an adequate stash of cash, disability insurance and renter’s insurance--none of which he has.

Despite earning about $62,000 this year, Golden has only $3,500 in a savings account. The rule of thumb is to have an emergency reserve equal to three to six months’ expenses--$10,000 to $15,000 in Golden’s case. And the money should be invested where it’s accessible, such as in a money market fund.

Disability insurance is also a must. Because Natural Data doesn’t offer it, Golden should contact an insurance agent and get a policy that would pay him about $3,300 month (equal to his monthly disposable income) if he’s unable to work because of illness or injury. The premiums are based on health, age and profession.

There’s about a one-in-three chance Golden will be disabled during his work life, Rowling said, and it can cause financial and emotional disaster.

“You will feel it, but it is something that’s critical,” she said of buying the insurance.

Also, Golden needs renter’s insurance to cover the contents of his apartment. Renter’s and disability insurance combined probably will cost between $1,000 and $1,500 a year.

Setting up his safety net won’t be cheap, but Golden has the ways and means. For starters, he expects his income to go up soon. He anticipates getting equity in the company this month and is due for a performance review next month, after which he expects a raise. Rowling urged that the additional money be used for savings rather than spending.

Also, he spends only about half of his monthly disposable income on fixed expenses such as rent, car payments, insurance and debt service. That leaves more than $1,500 available for disability and renter’s insurance, save for a home down payment and fund his 401(k).

Golden conceded that he easily could cut back by eating out less, taking fewer weekend trips to San Diego to visit his folks and just generally watching how he spends his money.

It may not take much to yield easy savings. For example, one area he might want to look at is dining out, which can cost two or three times as much as preparing meals at home. Even if Golden still goes out to eat, drinking water instead of a soda could save him hundreds of dollars a year, said Rowling.

But if sticking to a budget is too tough, then Rowling suggests Golden set up an automatic savings withdrawal plan--which he can do through his bank or credit union, for example--so that the money is taken directly out of his paychecks.

To get started on the right track, Golden should record his spending for a month or two, then review it and decide where to make cuts.

“Look at the numbers almost like a third party and decide where you are happy spending your money and where the cuts can be made,” Rowling said. “It doesn’t mean to live like a pauper. It definitely means enjoy your life to some degree but take care of the future as well.”

As for the future, Golden is off to a good start. He puts 10% of his monthly salary in a 401(k)--about $500 a month or $6,000 a year. At that pace, assuming an 11% average return in 20 years, he could have more than $400,000. The $500 is taken out of his paycheck before taxes, so it feels like only $300 to $350 a month out of his pocket, Rowling said.

Opening a 401(k) would help Golden with a major problem area: tax planning. Between California and federal taxes, Golden pays a combined tax rate of 34%.

“That means if we can lower taxable income, we are saving $1 out of $3 on every tax-planning strategy we can come up with,” Rowling said.

Lack of tax planning last year will hit Golden hard come April, when he faces an unexpected $4,000 to $5,000 bill. A big part of Golden’s income is based on commissions, which fluctuate and make it hard to estimate withholding. Also, his income is up more than $20,000 this year over last year.

That’s a double whammy that could have been at least partially avoided if Golden had retained a certified public accountant to evaluate his tax situation and make suggestions for adjusting the amount withheld from his paycheck.

Here’s an example of how tax planning could help: Currently, Golden’s income includes a $350-a-month car allowance that’s taxed as ordinary income. Because Golden takes the standard $4,400 deduction, the allowance costs him more than $100 a month in taxes. He should drop the car allowance and have his employer reimburse his car expenses, which wouldn’t be reported as income to the IRS.

On another tax note: Golden needs to carefully document that he is trying to turn a profit with his motivational speaking business, even though it brought in only $300 in 2000. Otherwise, the IRS may classify it as a hobby, making it difficult for Golden to deduct expenses connected with the enterprise.

Golden also should try to fund a Roth IRA. Roth IRA contributions are made with after-tax dollars, so it lacks the upfront tax advantage of a 401(k) plan. However, the money is withdrawn tax-free in retirement, whereas withdrawals from a 401(k)--including investment gains--are taxed as normal income.

Again assuming an 11% return, annual contributions of $2,000 a year in a Roth IRA--the maximum allowed for an individual--would grow to $128,000 in 20 years.

Rowling also wants Golden to contribute $500 to $800 a month to a “house down-payment fund.” With a 6% return, he could save $35,000 to $56,000 in five years. He currently can find that kind of return in short-term certificates of deposit, although interest rates are dropping and he may have to adjust his expectations to account for lower returns.

Golden is young and can afford the risk of investing his retirement savings aggressively, so Rowling recommends a diversified global equity strategy: 80% of his money allocated to U.S. stock funds and 20% to international stock funds.

But as he gets older and faces shorter-term financial needs in retirement, he’ll need to rethink the strategy and switch to a more conservative allocation, probably to bond funds. In other words, Golden will need to reevaluate his investments periodically to be sure specified financial goals are being met.

“The natural movement of the markets causes asset allocation to drift away from the original mix and a [fund] manager’s performance may deteriorate over time,” Rowling said.

*

Susan J. Marks is a regular contributor to The Times.

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This Week’s Make-Over

* Investor: Darren Jay Golden, 25

* Gross annual income: Around $62,000 (includes base salary, commissions and $350-a-month car allowance)

* Goal: Save for house down payment and invest for future financial security.

Current Portfolio

* Assets: $3,500 in savings account; $500 in checking account; $2,000 in a 401(k); $1,300 in technology-related stocks

* Debts: $380-a-month lease on 1999 Infinity G20T; $2,800 interest-free loan from parents

Recommendations

* Meet with a certified public accountant to discuss tax strategies, including increasing tax withholding to reflect fluctuating monthly commissions. Meet regularly to avoid future withholding shortfalls.

* Get control of spending.

* Set aside 10% of annual income in an emergency cash fund.

* Purchase disability insurance.

* Boost 401(k) contribution to the maximum $10,500 annual amount.

* Save $500 to $800 a month toward a house down payment and additional emergency funds.

* If possible, fund a Roth IRA for the maximum $2,000 annual amount.

Meet the Planner

Sheryl L. Rowling is a fee-only certified financial planner with the San Diego firm of Rowling, Dold & Associates.