One big check, one big dilemma

Josh Padgett's friends think he has a "pretty sweet" life. He works only five months out of the year and then gets his paycheck in one lump sum.

"It's kind of exciting and intimidating to get a $60,000 check," said Padgett, a 24-year-old fisherman from Lynnwood.

He's aboard a vessel fishing for halibut off the coast of Alaska. Padgett left last month and won't return until the beginning of October.

What he wants When Padgett puts his feet back on solid ground in Lynnwood, he wants to save and budget his earnings.

What he has

Tips for Josh Padgett

Brad Allen, a certified financial planner and president-elect of the Financial Planning Association of Puget Sound, offers this advice:

Learn to manage money: "I try to avoid the B-word, budgeting," Allen joked. "Instead, think of it as tracking your money. If you don't know where your money is going, then you can't make any decisions."

Save 10 percent of your income: Open an IRA at an early age for a comfortable retirement.

Establish an emergency fund: Save enough money to cover living expenses for three to six months. A money-market account is a good place to keep "liquid cash," he said. Money markets generally pay higher interest than passbook savings accounts and have minimum-balance requirements. They generally allow three to six withdrawals per month.

"I don't have a budget at all," he said. "I just go with the flow and if I have a lot of money, I spend a lot of money. If I don't have a lot of money, I don't."

In the past year he spent a month in Europe, a couple of weeks in Hawaii and "just traveled around to see friends."

Now he's thinking more about his future. He would like to get married, buy a house and possibly go back to school to get a teaching certificate.

Padgett managed to put about $5,000 into a traditional IRA. He is about $30,000 in debt from his college education. The low-interest loans cost $500 each month. He also pays $140 a month for a life-insurance policy.

Brad Allen, a certified financial planner and vice president of Bainbridge Island-based Coast Capital Management, analyzed Padgett's spending patterns.

"Josh doesn't carry much debt, other than the student loans. He's been great about paying off his credit cards, which is usually where young people his age get into trouble," Allen said.

He says that he doesn't pay a mortgage or rent because he "couch surfs," living with friends or his brother.

"I clean up more than my brother does so he can't complain," Padgett said. "It's hard to get an apartment lease for just a few months."

Terms

CD: A certificate of deposit is similar to a savings account in that it is insured by the FDIC for banks or the NCUA for credit unions. Unlike a savings account, a CD has a fixed interest rate and fixed term (often between three months and five years.) Money removed before the CD matures is subject to a penalty.

Traditional IRA: With this type of individual retirement account, contributions often are tax-deductible. Withdrawals in retirement are taxed as income.

SEP IRA: This plan allows a small business or self-employed individual to make retirement-plan contributions in the employee's name, instead of to a pension fund account in the company's name.

VUL: Variable universal life insurance builds a cash value that can be invested in accounts the insurance company holds, similar to mutual funds.

What he needs

Within the next five years Padgett would like to buy a house. To come up with a down payment between 10 and 20 percent, he'll need to save at least $8,000 each year.

Allen advised Padgett to invest that money in a CD rather than stocks.

"Stocks are uncertain for someone who plans to use the investment in the near term," Allen said. "As luck would have it, the market would go down the year he's planning on buying a house and that $50,000 could become $30,000."

Although Padgett has what can be a dangerous job, he does not need life insurance, in Allen's opinion. Padgett has a variable universal life policy, which offers some advantages. But Padgett doesn't have any dependents and has already lost some money on the policy. Allen has recommended dropping it.

Health and disability insurance is a different matter. Since Padgett does not have benefits through his employer, that's something he should look into, Allen said.

Most of Padgett's financial goals are short-term, but he also needs to set money aside for retirement. In addition to fully funding his existing IRA, he could contribute to a simplified employee pension (SEP) IRA.

That tool is available to anyone who is self-employed or operates as an independent contractor, Allen explained. Padgett could put an additional 20 percent of his compensation, roughly $12,000, into an IRA.

What he thinks

"It's all good advice," Padgett said. "If I follow it I'll be in good shape. If I don't, I'll just keep going along like I have been and won't get anywhere."

After he gets his lump-sum paycheck in early October, Padgett said he'll probably end up at one of his favorite bars to "buy a round" and celebrate the fishing season.

He promises he'll also write an $8,000 check the next day and sink it into a CD.