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Where does the money go?
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December 11, 2000: 10:35 a.m. ET
A software engineer tries to track his pay and break his check-to-check cycle
By Staff Writer Alex Frew McMillan
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NEW YORK (CNNfn) - Raj Kumar landed a good job as a software engineer in May. As a recent graduate, he has way more money than he ever used to. Now if he could just figure out where he fritters it away.
Whenever he calculates he'll have money left over, it's all gone by month end. Kumar, 24, can't work out where it all goes.
 "I am still living paycheck to paycheck," he says. "I don't want to do that for the rest of my life."
He lives with his folks in the Chicago suburb of Mount Pleasant, Ill., which keeps his costs down. He helps out with $900 a month in rent most months.
His other bills run him around $900 a month, too, for his cell phone, car payment, insurance and the like.
College debt carryover
Kumar's main obligation is that he owes about $9,000 on his credit cards. He ran up most of that while he was in college, studying computer science at Northeastern Illinois University.
So he carves out $213 a month to pay off that debt. He worked with a debt-management company in Florida that negotiated with his creditors and got him a reduced interest rate.
He has another $3,000 in loans that will come due soon, but the grace period isn't over. "So I'm not worried about it yet," he says.
He owes $2,000 on his car, too. But Kumar's dream is to buy a sport/utility vehicle sometime soon.
Can he afford that expense, he wonders. It might cost $20,000 to $25,000, he thinks.
An urge to invest, safely
He has been setting aside around $200 a month into a savings account. That's built to more than $1,500 now.
On the one hand, Kumar likes having the emergency money. On the other, he wonders if he shouldn't be putting that money to use, maybe paying down debt.
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He hasn't yet qualified for his 401 (k) plan at work, at Enable Systems, because he only started there this year. But his eligibility kicks in soon. He doesn't know how those plans work. But he's curious.
"All of my friends are into stocks, and they are making money on the side," he says. "I would like to get into stocks, too."
Kumar wants to start with just a small amount he doesn't want to take any chances right now.
A homeland he doesn't want to call home
The engineer would like to have his own apartment by next summer. At some point, he imagines he'll buy a house, settle down with a family.
 Kumar was born in New Delhi, in India. But he moved to the United States as a teen-ager, and he wants to stay. He went back for a vacation when his sister got married.
"It was fun, but I don't think I could stay there longer than I had to," he says. "I have my group of friends [in India], but it's not the same."
Kumar likes to travel, though. Maybe being a consultant could help him fulfill that urge while still getting paid, he thinks. He doesn't want to work until he's 65 if he can help it.
Kumar figures he's not in awful financial shape he calls his situation "about average." But since he can't get a handle on his cash flow, he wants to take steps now to make sure he doesn't end up below average.
"I want to manage my money the right way, or should I say a more effective way," he explains. "Where should I step next?"
What the planners say:
Kumar's question "Where does all my money go?" -- is a common one, according to Janet Tyler Johnson, a certified financial planner with Clifton Gunderson Financial Advisers in Madison, Wis. "This situation cries out for some basic financial planning," she says.
The first step is for Kumar to track every penny over the next 30 days, Johnson continues. He needs to keep receipts. Checks are easy to track, too. But we tend to overlook cash and debit-card charges, she explains.
Chris Dalto, a financial planner with Delessert Financial Services in Newton, Mass., notes that graduates often struggle to track their first regular income. Fortunately, today's technology makes it easier. Dalto suggests Kumar consider putting every expense on a debit card for a while, no matter how small.
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Kumar shouldn't change his habits at first, or make judgments about how he's spending, according to the planners.
But after 30 days, he needs to write out where he spent money, Johnson instructs. "Categorizing these expenditures will then help you get a handle on where you are doing your spending," she says.
Using a debit card would make that easier, Dalto continues. "When he sees that on Dec. 14, he used his debit card to pay for $10.50 at his local gas station, he will easily be able to add that to his other gas purchases during the month." Then Kumar should be able to plot where to cut costs.
Turning cash to debt
Step 2 is to set some targets. Kumar's debt is the planners' first concern. He should take whatever money he has available and devote it to paying off expensive credit-card debt, Johnson believes.
Unfortunately, Kumar would do best to defer any idea of buying an S/UV until he's knocked that out, both planners think. "It will also be easier to get a loan when he can show that he has paid down this debt," Johnson says.
Dalto says that Kumar needs to check his debt-management program isn't hurting his credit. Otherwise he might find the goal of sometime buying a house hard to achieve, the planner states.
Once Kumar's 401 (k) starts, he could save through that while still paying off debt, Johnson notes. To retire at 55 and maintain his current income through age 100, he needs to set aside $200 a month, she calculates, assuming a 10 percent return on investment.
His earnings will increase as he gets older, but Johnson points out that his spending will likely increase commensurately. Kumar should check his rate of savings periodically through his career, the planner says.
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Dalto says Kumar's goal of retiring early will require sacrifices. But if he sets aside 15 percent of his pay each year, he will have around $1.25 million at age 55. Dalto is assuming Kumar's wages rise 8 percent a year and that he gets a 9.5 percent return.
So next year, Kumar should strive to set aside $7,087, Dalto figures. That looks high. But even contributing $200 per biweekly pay period into a 401 (k) would put him at $5,197.
Dalto says Kumar should pay the $1,890 balance into a Roth IRA, where the money will grow tax free to age 59-1/2. Charles Schwab or Fidelity Investments might make good brokerages for Kumar, Dalto says.
Skip bonds, individual stocks
Kumar says he wants to invest cautiously. Still, both planners believe that given his age, he should invest only in equities, avoiding bonds.
Instead he should pick a diversified portfolio, with small-cap, mid-cap, large-cap and international exposure, according to Johnson. "This diversification strategy will help to reduce risk and increase his chances of financial success over time," she says.
Dalto says Kumar should avoid investing in individual stocks, too, though, until he has a broadly diversified base of mutual funds.
Time is on Kumar's side, Johnson says. But since he has a family and a home in mind, he needs to fight his debt now. "It becomes that much more difficult to save money when you have a home and a family to provide for," she notes.
His idea of working as a consultant might require a nest egg, too, particularly if he is independent. He might have to pay his own insurance and take care of other business costs he doesn't worry about now.
So eliminating his debt should be his priority, she believes. "With proper planning, he should have no problem attaining his goals, if he is willing to live within his means and budgets some savings for retirement," she says.
* Disclaimer
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