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Money Matters for Generation X.

Investing can be structured to suit any lifestyle and age. The key is making those first steps count.

FINANCIAL CHALLENGES NEVER END. THEY'RE at the root of every obligation we face--raising children, buying a home and establishing a comfortable lifestyle. To help you face the financial challenges ahead and guide you to a secure future, we've set up our first feature series, the BLACK ENTERPRISE Lifetime Planning Guide. Part One walks recent college graduates, Generation X, as they've been labeled in the media, through the steps of gathering enough money to participate in the stock market's well-spring of wealth. Later installments will be tailored to those from young families to 60-year-olds on the threshold of retirement. Throughout the series, we'll present not only advice and insight, but also worksheets to help you come to grips with your current financial state, needs and goals. Whether you're a 20-something or wise grandmother, we invite you to look through the entire series to glean great investment tips and basic strategies that we all can use along life's travels.

Alexandra Burrell feels that she's planted in the center of a financial crossroads. A finance attorney practicing for the city of Chicago. Burrell logically knows what financial steps to take. She's saved several thousand dollars, searched for the "right" mutual fund, and has even collected a dozen or so prospectuses that lie in wait on her living room floor. The next step, however, has the 27-year-old in the financial equivalent of a catatonic state. "Whatever I look at that part of the room where I've gathered all that material, my eyes start to glaze over," she confesses.

Burrell's condition is not that uncommon among Gen Xers. Having finished school with a freshly minted degree in hand, they've begun to stake their claim in the business world. At the same time, they've focused on a future full of goals. Unfortunately, most times they've neglected to lay out a solid financial plan that will make those goals attainable.

There are steps anyone can take to get on the right road to a bright financial future. It starts with assessing your financial picture, deciding on a regular amount to save, amassing enough to put into a few mutual funds that will spread the risk between blue chips and aggressive growth stock--then, diving in

Just three short years after completing her law degree at the University of Michigan Law School, Burrell found herself in a comfortable job with a salary in the low $40s. All the while, she had aspirations of someday returning to graduate school for an education degree and starting a family. And she was a prime candidate who needed no coaching on the value of saving; currently, she salts away about $500 a month. Still, as she frets about making that first big investment move, her money languishes in a bank savings account. "I know that's measly, but I just can't make up my mind," Burrell admits, referring to the pile of prospectuses that sit neglected.

Burrell's first step--a rigorous savings regimen--is a sound one. But the sorrowful fact is that scrimping alone isn't enough. By parking her money in a savings account, Burrell is getting the lowest interest rate. Her money will grow sluggishly at best, and perhaps not at all on an inflation-adjusted basis.

To get a better idea, look at the raw figures. Start with $10,000. After compounding 3% interest on the initial investment over 10 years, you've amassed $13,439; over 15 years, that total moves up to $15,580. But when you take that return to the stock market--for our example, we'll use the 12% annual return posted by the S&P 500 as our benchmark--you'll notice a sizable difference at the end. In 10 years, your treasured $10,000 savings has grown to $31,058, and in 15 years, you've amassed $54,736.

Generation Xers admit that the first step is the scariest. They know that the stock market--where the S&P 500 has averaged annual gains of 12% for the last 20 years--is the place to be. They may also know that mutual funds are the best way to take the investment plunge. Yet, they linger. "If African Americans are going to start matching their academic gains of the last few decades with progress on the financial front, it's going to require that more of us get down to the business of capital formation in our 20s and 30s," says New York City CPA and financial planner Brian S. Carr.

By now, it's clear that for the long run, stocks--equities, as they're called in investing circles--are the best vehicle around. To best play the market, we advise you to look at mutual funds, which spread your money across a well-diversified portfolio of 30-50 stocks. That is one way to safeguard the savings you've worked hard to get. With that in mind, your investments should be spread across three to five mutual funds.

There's an initial hurdle to mutual funds that must be conquered before you can enter the market: most funds require that you ante up $ 1,000-$2,500 or more to start. Of the 8,090 funds listed in the Principia Plus database compiled by Morningstar, the Chicago firm that tracks mutual fund performance, roughly 5,500 have an initial minimum outlay of $1,000 or more; but 1,648 other funds charge less than that. That may be more than most Xers have available, especially if you're strapped with student loan payments and a car note to boot. Stay calm, though. Even if you're still a ways from that initial deposit, there are several paths that can get you there.


No matter what your age, there's no escaping one very basic first step: scanning your present financial condition. The first worksheet of this series is designed as a way to survey the landscape before you proceed toward your goals. In the future, you can retrace the simple sketch of assets and its measure of your cash flow to determine just how far you've gone and how much further remains. The remaining worksheets in the series are designed to help you come toe grips with other investment issues, such as asset allocation and portfolio strategies, no matter what your age.

We suggest that you first tally your assets and debts to pinpoint where you stand. From there, move toward your goals--what you're aiming for and how soon you plan to get there. If you see that any part of your savings plan needs tweaking, then you'll have time to do so.

One sore spot is debt. And if truth be told, you've probably already heard that paying off credit cards and other high-interest lenders is a good goal to aim for. Other obligations such as student loans bearing a 7%-8% interest rate can be paid off in time on schedule. The worksheet will make any waste clear.


Now that you've got a budget that sets out your financial goals, we all know the way to get there is by saving or setting aside some cash. Financial planners recommend you save and invest a minimum of 10% of your income, although 25% or higher is a better figure to aim for.

If you're now charging head-on toward your first mutual fund application you'll first need a safety net of sorts--in other words, money you can dip into in this world of uncertainty and layoffs. As Deborah Breedlove hammers home in Wise Words (Moneywise, this issue), it's a good idea to stash away three to six months' salary just in case your world is upended and you're forced to siphon off your savings. Depending on your salary and expenses, it might take a while for you to amass this amount, but you'll find it well worth it. Saving any more than that in an easily tapped-into fund won't be a worthwhile use of your funds.

Where do you stash it away? There's no getting around the fact that your local bank has its sights on things other than giving you the highest possible interest rate. Instead of a bank account with a wee 3% interest rate, your savings will do better in a money market mutual fund. Money market funds are designed to keep your principal--the amount you've put into the fund--intact, and in essence function as a souped-up checking account. They pay a healthy amount of interest--currently as high as 5.8%--and allow you to draw down on your savings by check, if the need arises. That kind of liquidly separates the money market mutual fund from bank CDs, which assess heavy penalties for withdrawals prior to maturity.

You'll be glad toe know that there are money market mutual funds out there that don't charge $2,500 or more to get in. The problem: while you won't need as much up front, you'll be giving up something in interest. According to IBC Financial Data Inc., a firm that monitors money market funds, the highest yielding funds, which required as much as $25,000 as a first investment, paid out 5.96% annually (as of June 17). Nations Prime Fund (800-321-7854), which had a $500 minimum, doled out 5.14%. By raising your investment to $1,000, you would recover much of that difference with the Transamerica Premier Cash Reserve Fund (800-892-7587) at a 5.47% rate.

One final consideration in choosing a money market fund is access to a larger fund family. Vanguard (800-662-2739), Fidelity (800-544-3902) and Strong (800-368-3863) all offer good money market funds, and by tapping into one of the established firms in the business, you can set up a pipeline into their larger variety of funds. This allows you to move money back and forth, a good first step in building your portfolio.


Once you've set aside your cushion, it's time to broaden your horizons and take on the stock market. Hakim I. Fajardo, 25, is at that very threshold. Upon graduating from the University of Vermont two years ago, Fajardo landed a job at MSNBC, the online news organization, with a salary in the mid$30s. having moved back home with his parents in New York City, Fajardo found his bank savings account fattening nicely. He quickly launched into making new plans. An apartment all his own topped the list, but Fajardo kept his head enough to realize that long-term savings are key--especially since he hopes to start a family in the next five to 10 years. That prompted him to dive headlong into investment books of all types, get well grounded in the basics of stocks and mutual funds, and even take an interest in options. What he hasn't done yet is move his money out of the low-interest savings account and into the market.

"I'm still in the process of deciding what investments are right for me," says Fajardo. "I'm trying to pace myself as a beginner learning to play basketball; you've got to get down the basics before you copy Michael Jordan's moves."

Knowing that mutual funds are the best way to begin a budding investment portfolio is one thing, but picking the right fund takes a little work. At its core, selecting a fund is essentially deciding on a fund manager, who acts as a stock picker. Your money is handed over to that portfolio manager, who decides when to buy and when to sell.

With that in mind, the fund manager should have a solid long-term track record of at least three years for that specific fund--and preferably five, so you can see how he or she fared in good years and bad. Morningstar provides a wealth of such material in its publications, many of which are available at the local library.

A major consideration to bear in mind is whether the person at the helm actually beat the market. Remember: index funds that simply buy all the stocks in the S&P 500 or Dow Jones Industrial Average need no management and do reasonably well mimicking the market. A manager worthy of your investment needs to do better than that to earn his or her keep.

You'll want to examine how the fund is run as well. We suggest you avoid mutual funds that require you to pay load fees either when you invest (called front end) or when you sell. Load fees, money paid for the sale of the fund, are nothing less than a bite out of the gains your investment has made.

Then there's the fund category to mull over. What's in a name like growth or aggressive growth? By and large, there are no hard and fast rules. Your best insight into a fund's strategy is found in its prospectus or by checking Morningstar ( There you'll find a synopsis of funds with an overview and summary of their performance. You'll see a list of the stocks and other investments the manager has bought into, and you'll also get a sense of what strategies are being used to invest the fund's money.

As for the type of funds a Generation Xer should gravitate toward, we suggest sturdy high-end mutual funds that hold blue-chip stocks, which can weather the many ups and downs of the years ahead. From there, the more aggressive, the better. You have years ahead during which the ups and the downs of the market will even out. With that in mind, we scanned Morningstar's databases for very basic no-load growth funds, which would tap into larger stocks in the Dow Industrials or the S&P 500. With a second screen, we fished out aggressive growth funds that could add spark to a portfolio.

For good, core large-cap funds, we looked to those with strong management, no-load charges and a solid five-year record of total returns. Fidelity Blue Chip Growth (800-544-8888) comes up as a fund honing in on stocks with good earnings-growth prospects. We like the fact that the fund has averaged 17.12% in total returns over the past five years. Other strong candidates include Franklin Mutual Qualified (800-553-3014), which posted 18.47% in total returns, and T. Rowe Price Equity Income (800-638-5660), with 17.49%.

Among aggressive growth funds, you're in for a rougher ride but potentially greater returns. PBHG Growth (800-809-8008) heads our list with a 29% average annual return, followed by Aim Aggressive Growth (800-347-4246) with a 26% return, and Acorn (800-922-6769) with an annual average of 17.69%.

There you have your first steps in building a solid foundation for your future. Our next installment will look at young families and their special needs.

RELATED ARTICLE: Financial Rx For Generation X

After completing our first worksheet, you may feel that you're light years away from having any spare money to invest. You've got loans--plenty of them--and somehow your money vanishes into thin air every month. For you, the overwhelmed, we've gathered up a few tips to help you start your investment program sooner rather than later.

There are plenty of ways that Gen Xers' hard-earned cash gets sucked down the money drain month after month. Of course, any student loans are going to cut a sizable chunk from your take-home pay, but they must be repaid on time to protect your credit rating. But consider simple ways to cut your bills. Eat in, not out. We all know that restaurant meals cost more than cooking at home. Living expenses can be cut by moving I back in with your parents a couple of years once you finish college. A simple $400 in rent a month adds up to $4,800 in the matter of just one year. Look twice before you lease that snazzy car; payments can sap your financial base.

We can't stress too much the need to pay off credit cards. These days, a lot of students tap into special offers and credit lines only to run up balances in the hundreds, if not thousands, of dollars. Worse yet, they're strapped with interest rates on the order of 16%-18%. Look at it as an investment: by whittling down your large credit balances, you're automatically earning 18% a year on your money.

Get a second job if need be to invest $2,000 in an IRA every year. That's around $167 a month or just about what you spend on lunches each month. An IRA is a critical part of your investment program because it reduces your taxable income by $2,000; and any interest or dividends that you may earn are not taxable until you retire or cash in. This is one of the few remaining tax freebies offered by the government, so take advantage of it.

If your company offers a 401(k) plan, take advantage of it for the simple reason that your employer is agreeing to match your savings up to a specified amount each year. This means a free boost to your salary, so don't leave it on the table. In addition, any contribution you make is deductible from your taxable income.

Remember to pay yourself first: no matter how much you earn, we suggest that you save at least 10%. If you have not found your dream job and are still struggling to make ends meet, fear not. You don't need to earn the big bucks to construct a solid financial base, provided that you spend your earnings wisely. Time is your best friend while you are young. Just $100 a month consistently invested will go a long way and place you firmly on the path to financial freedom. So press on.
COPYRIGHT 1997 Earl G. Graves Publishing Co., Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1997, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:B.E. Lifetime Planning Guide, part 1; includes financial management tips for people in their 20s
Author:Aidoo, Judith
Publication:Black Enterprise
Date:Sep 1, 1997
Previous Article:Ringing up a career in retail.
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