His Interest in Savings Is Going Only so Far

James Mohon is facing a welcome dilemma for the first time in his young career: What to do with money left over after paying rent and monthly bills?

Until late last year, finding a place to park savings was not a concern, because Mohon’s salary was consumed by living expenses. But a series of raises--and the elimination of a sizable credit card debt--have changed that, leaving him with spare cash for the first time since he graduated from Loyola Marymount University in 1995.

Since October, Mohon, 26, has been stashing about $1,250 a month in a no-interest checking account, where he has $6,000 saved.

“I know that almost any place would be better for my money than where it is now,� said Mohon, an analyst for a commercial real estate company. “But I’m kind of risk-averse, and I don’t want to have to worry about whether the money will be there when I need it.�

And Mohon will need that money quite soon. He intends to start graduate school in about 18 months, making him reluctant to test his luck in the stock market. “I don’t want to lose money that I will need for MBA school,� he said.

With such a short time horizon, Mohon is right to avoid the stock market, said Timothy J. Wallender, a fee-only financial planner with offices in Manhattan Beach and La Quinta. A downturn in stocks could wipe out some of his principal, and the 18-month window may not be long enough to allow for a rebound.

But that doesn’t mean he should settle for saving without interest. “You can earn about 5% with little or no risk,� Wallender said.

While finding a new place for savings, Mohon should examine his entire financial picture. Tackling issues such as budgeting and retirement planning at a young age can pay big dividends later, Wallender said.

So far, Mohon has given little thought to either.

He has let his income dictate his spending, for example. When he was earning just $1,500 a month directly out of college, that’s what he spent. He led a comparatively austere existence: renting a studio apartment and eating virtually all meals at home. When his income more than quadrupled, his spending grew. He moved into a bigger apartment in Westchester, joined a gym and started going out more for movies and dinners with his girlfriend.

As for retirement, Mohon figured he would tackle that issue somewhere down the road. “It’s not as if I have some big goal to retire in my 40s and just play golf,� said Mohon, who attended college on a partial golf scholarship.

Wallender acknowledged that few people give much thought to retirement 40 years before it arrives. But getting an early start can save a lot of money and reduce anxiety later. By delaying retirement planning until their 40s or 50s, many people are forced to devote a substantial portion of their income to retirement savings.

Waiting to save is especially risky now that the structure of the U.S. job market has changed. It may eventually become common for someone to earn less money in their 50s than they do in their 30s.

Finding a Place for His Emergency Fund

Before getting further into those issues, though, Wallender addressed Mohon’s primary concern: finding a new place for his savings.

“The $6,000 you have in your checking is a good amount for an emergency fund,� Wallender said. “It would cover two or three months of your expenses if you were to lose your job or face some other unexpected situation.�

A money market fund is a sensible place for that cash, Wallender said. Most yield between 4% and 5%, which would provide about $450 of interest in the 18 months before Mohon heads to graduate school.

As for the $1,250 Mohon saves each month, Wallender suggests investing in a short-term bond fund, such as the Vanguard Short Term Corporate Fund (three-year average annual return: 6.10%). This investment carries a slightly higher risk than the money market fund, but delivers a higher return. Wallender often suggests Vanguard funds because their low expenses make for a higher return for investors, but there are many similar funds.

If Mohon saves $1,250 a month in this account for the next 18 months, he could have about $25,000 by the time he starts graduate school. Adding his $6,450 emergency fund to that figure would give him $31,000--enough to pay for one year of tuition and living expenses at a still undetermined graduate school. Mohon expects to pay for the other half of the two-year program with college loans.

Meanwhile, Mohon wondered if he should pay off a portion of his $11,000 in college loans early. Wallender said that although those loans charge a higher interest rate--7% to 8%--than he’d be earning in short-term savings, Mohon should pay them off on their regular schedule. Paying the modest interest-rate difference is worth the security of knowing he’ll have enough money to get through graduate school.

To ensure that Mohon stays on his savings plan, Wallender urged him to make the $1,250 savings an automatic monthly deduction from his checking account.

“This makes it an unavoidable part of your monthly budget,� Wallender said. “If you have a lean month, it forces you to trim your expenses somewhere else rather than reducing savings.�

In fact, Wallender thinks that Mohon could save more than $1,250 a month if he were to set up a budget. Mohon spends about $450 on entertainment each month, mostly on restaurant meals and movie-going. Wallender suggested that this is one area that could be reduced, although Mohon is not so sure.

“Maybe I could cut that a little, but I don’t spend a lot of time with my girlfriend so we like to enjoy ourselves when we do go out,� he said.

Wallender says other areas of Mohon’s budget could be reduced as well, such as a $70 monthly cable television bill that includes several movie channels and $60 a month in cellular phone expenses.

But Wallender didn’t press Mohon to establish an unrealistic budget that might soon be discarded. Instead, he encouraged him to at least be certain not to let his current expenses grow, even if his income does. “You’ve got to be careful about letting expenses creep up and eat up your savings. Your finances won’t get any better if your expenses rise right along with your income,� Wallender said.

Mohon vows not to let that happen and said he is mindful about overspending because of his experience with credit card debt, which grew to $10,000 two years after he graduated from college. About half of that resulted from spending during his college days and the remainder from furnishing his apartment, buying work clothes and making other smaller purchases.

While the debt took him more than a year to pay off, it did have a silver lining--the experience convinced him to stop using credit cards in favor of cash or a debit card that draws money directly out of his checking account.

Wallender would like to see Mohon wedge a spot for retirement savings into his budget. Mohon said his company has told him he is not eligible for its 401(k) plan because part of his salary is based on commissions he receives working with the firm’s brokers.

But Wallender questions this, pointing out that Mohon receives a W-2 form each year, meaning that he should be eligible if the program is offered to other employees. Mohon and his company should review the IRS rules about participation and commission income.

It’s Not Too Early to Save for Retirement

Wallender points out that there are other vehicles for retirement savings as well. Mohon should at least establish a Roth IRA, using a fund designed for young investors with a long time horizon, such as the Vanguard LifeStrategy Growth Fund (three-year average annual return: 19.65%), which is a fund made up of other Vanguard funds. Although his contribution would not be tax-deductible, a Roth IRA would enable Mohon to set aside $2,000 annually to grow tax-free. He can withdraw it without any taxes or penalties after he turns 59 1/2.

Assuming that his investment grows at a relatively modest 8% annually, setting aside $2,000 would give Mohon $40,000 when he turns 65. And contributing $2,000 annually could provide Mohon almost $440,000 at 65, thanks to the long time period for compounding.

To come up with the initial $2,000 contribution, Mohon has two options. He can use some of the savings earmarked for his MBA fund, or he can cash in a collection of sports trading cards that he accumulated as a teenager. Coincidentally, the set, which includes the rookie cards of several current baseball stars such as Frank Thomas and Ken Griffey Jr., has been valued at $2,000.

“Personally, I would sell the baseball card collection unless it has a lot of sentimental value,� Wallender said, noting that he expects the value of stocks to rise faster than sports cards. Besides, holding a mutual fund eliminates much of the worry that comes with a trading card collection, such as losing it through theft, fires or other accidents.

An editor of a card industry publication agreed that there are wiser investments.

“This is really a hobby first and foremost, so it’s not something you would want to use to fund your child’s college education or base your retirement on,� said Jeremy Zucker, assistant price guide editor for Tough Stuff magazine in Richmond, Va. “It tends to be a very volatile industry.�

Mohon notes that his collection holds sentimental as well as financial value. And, while he’s receptive to Wallender’s other suggestions, he’s not sure that he’s ready to trade a chunk of his childhood for a slice of his retirement.

In that case, Mohon may want to make sure they are covered when he buys insurance that covers renters’ possessions.

But he’s much more receptive to Wallender’s other suggestions.

“I’m definitely going to open the money market account and the bond account, as the returns are much better than what I’m receiving now,� he said.

Graham Witherall 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.

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This Week’s Make-Over

* Investor: James Mohon, 26

* Occupation: Commercial real estate analyst

* Gross annual income: $75,000

* Financial goal: Save for MBA school

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Current Portfolio

* Assets: $6,000 in checking account

* Other assets: $2,000 in sports card collection

* Debts: $11,000 in student loans

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Recommendations

* Move $6,000 from checking account into a money market account, and put future savings into a bond fund.

* Consider selling baseball card collection.

* Begin making contributions to a retirement account using a Roth IRA.

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Meet the Planner

Timothy J. Wallender, a certified financial planner and registered investment advisor, has offices in Manhattan Beach and La Quinta. He runs a fee-only investment advisory firm specializing in retirement plans and portfolio management.