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Single, young and well-off
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July 4, 2001: 9:23 a.m. ET
Law school grad makes a bundle but wants to be fiscally responsible
By Jeanne Sahadi
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NEW YORK (Money.com) - As a lawyer in a big Chicago law firm, Amy Short earns a big salary – $135,000 plus up to $34,000 in bonuses. That leaves her with plenty of disposable income and lots of options.
Ultimately, her idea of financial independence has to do with professional flexibility.
"It's about not making my career decisions based on my financial situation," she says. And unlike some people who make a big salary when they're young, she doesn't assume a six-figure paycheck is forever. But while she's got one, she wants to make the most of it.
When she graduated from law school two years ago, Amy had $106,000 in student loans with interest rates ranging between 6 percent and 8 percent. That balance is down to $44,000 because for the past two years she has paid more than half her net monthly income – $3,650 – toward those debts.
Recently, Amy has slowed down her debt payments to $1,650 a month – still $1,000 more than the minimum required – and is saving $2,000 a month for a home. Currently, she has about $5,000 in a tax-exempt money market fund and another $4,000 in an S&P 500 index fund.
She contributes a full $10,500 a year to her 401(k) and has a current balance of $16,000. Her employer does not offer any matching contributions.
Even after all she saves, there's still enough left over to meet her monthly expenses, between $2,500 and $2,800, which include rent, food, transportation, clothes, entertainment and travel. Her big expenses are frequent dinners out, vacations and trips to see her boyfriend in San Francisco.
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Amy Short wants her goals to dictate her career, not her financial needs. | |
But she budgets accordingly, so if she knows she has a flight coming up one month she'll cut back her spending on something else.
In the next year or so, Amy would like to buy a 2-bedroom apartment. Ideally, she'd like to put down 20 percent on a $300,000-to-$400,000 home in an upscale Chicago neighborhood, and expects to stay in it for at least five years.
Our experts' advice
Amy's demonstrated commitment to work down her debt will put her in a much better position to obtain a good mortgage, says CFP Janet Tyler Johnson of Clifton Gunderson Financial Services in Madison, Wis. Johnson praises Amy for "maxing out" her 401(k), noting, "it's time she'll never get back; she's got tax issues; and she can afford it."
Johnson's concern was about how much house Amy wants to buy – and when. Amy, like everyone who has multiple financial goals, needs to prioritize them then develop a strategy consistent with those goals.
"Right now her strategies may work against one another. But she's got the ability to do all of it, so long as she prioritizes," Johnson says.
At the rate she's going, Amy won't save enough to put $60,000 – or 20 percent – down on a $300,000 home. But if she decides buying a home next year is her top priority, she should do several things, Johnson says.
She can buy a less expensive home, which means a smaller down payment; or she can put down less than 20 percent and pay private mortgage insurance premiums and possibly a higher interest rate on her loan. Either way, she should find out what breaks she may get as a first-time homebuyer, and she should shop around for the best mortgage, Johnson says.
Johnson advises Amy to buy a less expensive condo so she won't tie more than half her income to her home.
"Once you become a homeowner, your expenses are always more than your mortgage," Johnson says, noting that Amy will also put all of her available savings toward buying that home, leaving her with nothing in the way of an emergency fund.
Either way, she recommends that Amy transfer the money in her S&P 500 index fund into her money market fund. "Her time frame for a down payment is way too short for her to be in the market," Johnson says.
If Amy's true goal, however, is to be financially independent by 40, she'll have to forsake the pricey apartment in favor of one priced around $150,000, Johnson says. What's more, she'll have to cut her spending and devote most of her efforts toward savings and retiring debt.
"Financial independence is really created by spending as little as you can and saving as much as you can to achieve that freedom. Most people who are millionaires didn't inherit money or sell a business," Johnson observes. "They systematically accumulated assets and invested those assets." 
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