Saving while reducing your debt builds fiscal foundation

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NEW YORK --- After Sandra Hanna graduated from college, she moved back to her parents' home so she could save some money. A year later, she moved out with a stash of $8,000 to help pay for her new life.

Within several months, she had burned through the cash and was starting to pile on credit card debt.

"It was my first apartment, and I felt I needed to furnish it so it looked like I was successful, career-driven and had myself together," she said. "And, of course, I needed a lot of nice clothes to project my new image."

Thousands graduating from colleges and universities this year will face challenges like Ms. Hanna did, but they'll have an easier time of it if they get going on the right foot by learning early to live within their means, avoid excessive debt and save for the things they want, experts say.

Ms. Hanna, 26, a graduate of the University of Western Ontario, found her financial bearings by forming a "money club" called Smart Cookies with four other friends in Vancouver, British Columbia.

They would meet weekly, initially following the "debt diet" espoused by television personality Oprah Winfrey, then later setting their own goals for spending and saving. Now, they have written a book named for their club; The Smart Cookies' Guide to Making More Dough is to be published in September.

Ms. Hanna's advice to those graduating this year is to overcome the tendency to keep money matters totally private.

"Stop trying to fake it, and have a serious money discussion with your friends," she said. "Everyone will breathe a sigh of relief, because you'll find that you're not alone, that everyone is facing the same money pressures you are."

Nancy Flint-Budde, a certified financial planner in Salem, N.Y., said one of the first things new graduates need to do after starting that first job is to figure out just how much money is coming in and where it's being spent.

She suggests they use personal finance software to track their money for six months or so, then print out a report by category.

"It can be kind of a wake-up call for them," Ms. Flint-Budde said. "Then they can make spending adjustments, if necessary."

She also urges those starting new jobs to fully understand the benefits packages they're being offered so they can take full advantage of them.

"A lot of companies offer certain add-ons, which means that you may be able to increase long-term disability or life insurance for a small amount of money," she said.

Understanding benefits is especially crucial when it comes to health insurance coverage, Ms. Flint-Budde added. Some companies may not offer comprehensive health policies, forcing workers to seek private coverage, or there may be waiting periods for coverage to kick in.

"It's important for them to take ownership of their own health care as early as possible," she said. "They shouldn't have a period of not having coverage just because they're young and healthy, because anything could happen."

She also advises new graduates to try to keep at least $500 in their checking accounts; that makes it harder to overdraw the balance, triggering high fees, and also provides a cushion for emergencies.

Dara Duguay, the director of the Citi office of financial education and the author of Please Send Money! A Financial Survival Guide for Young Adults on Their Own , said one of the biggest challenges new graduates face is controlling spending.

"This generation's expectations of their startup lifestyle are very high," she said. "They want their first apartment to look like the parents' house they just left."

Easy access to credit can make that possible. It also can pile up debt.

Learning to live on less than you earn also means the young graduate can begin saving sooner, including setting up a retirement account such as an employer-sponsored 401(k). Ms. Duguay suggests that if possible, new workers save at least the amount needed to get a full company matching contribution in their retirement account. If that's not possible, start with 2 percent of salary and increase the pace with every pay raise, she advises.

"They're going to argue, 'I'm young, I need to buy business suits, a car,' " she said. "There's a different excuse for not saving for every decade of life."

Young adults increasingly are graduating with heavy student loan debt, and both Ms. Duguay and Ms. Flint-Budde offer strategies for handling that.

While some new graduates may aim to pay the debt down as fast as possible, Ms. Flint-Budde urges them to go slow in the first year after graduation.

"Start saving so you get used to saving as well as paying debt," she said. "After that, if you want to increase payments to prepay a bit, that's OK. But build those savings; otherwise, everything will go onto the credit card."

Consolidating, or refinancing, student loans over a longer period can bring down the monthly cost, she said.

ON THE NET

- www.smartcookies.com


- www.oprah.com


- Ms. Flint-Budde's site: www.philandnancyplanning.com


- www.financialeducation.citi.com

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