Money Matters for Generation X - includes financial management tips for people in their 20s - B.E. Lifetime Planning Guide, part 1

Black Enterprise, Sept, 1997 by Judith Aidoo

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.