Managing Your Money : RETIREMENT : Getting Started : A financial primer for those fresh out of school--and everyone else

Fresh out of school? It’s important to enjoy life while you’re young--to travel and have experiences--but it’s also important to look ahead. When it comes to money, you should look way ahead.

“If you want to own the house on the hill,” says Rick Keller, a certified financial planner at Keller, Coad & Collins in Irvine, “you have to start saving early, because the compounding of money will get you there.”

Financial planning is something to start right now. Here are some tips for those just starting out. Consider them the nucleus of a personal financial primer that can help you get where you want to go.

First, some planning. Think a little bit about the future. Can you anticipate sharply higher income in your field? Do your plans include children? More schooling? Where do you want to live? You might want to make yourself a rough five-year plan.

“Americans just have goals until next week. The Japanese have 25-year goals,” says Chellie Campbell, owner of Cameren Diversified Management in Pacific Palisades. “We have to learn to see the big picture.”

Then sit down and draw up a budget. Keep it simple. Jot down fixed and variable monthly expenditures, and set them off against income. The idea is to track where the money goes and live within your means. If income falls short of expenses, cut back spending.

Then attack your credit card debt. “The best investment you will make is paying off your credit cards,” Keller says. “I mean zero balance. It’s a better investment than stocks or bonds.” Consumer-finance debt is no longer tax deductible, and with most credit cards charging 16% and up, paying down this debt is more lucrative than earning 4% from a bank.

Finally, set up a savings or money market account and deposit 5% to 10% of each paycheck, religiously, with the goal of accumulating three to six months pay as an emergency fund and then accumulating wealth. Payroll deductions, possibly into your company credit union, are especially effective.

Perhaps the best way to save is through a retirement plan. Many big companies offer 401(k) plans, for example. A 401(k) lets you contribute pretax earnings, which employers usually match fully or partly with a company contribution. You pay no taxes on the money until you make a withdrawal. As a result, 401(k) contributions yield an instant return of 30% to 80%, depending on your tax bracket and your employer’s generosity.

If your company doesn’t have a retirement plan, consider opening an individual retirement account. IRAs offers tax-deferred growth until withdrawal. You can start small and add up to $2,000 a year. And if you’re single and earn under $25,000 a year, the $2,000 is fully tax deductible.

Retirement plans carry heavy tax penalties for early withdrawal, but left alone, your money will grow impressively, especially if you start young. For example, if at age 19 you deposited $2,000 a year in an IRA for eight years at a 10% rate of return, it would be worth about $1 million by the time you turned 65.

If you opened an IRA at age 27 and deposited $2,000 a year for 38 years, at the same 10% as above, you’d have about $800,000 by age 65.

Student loans are typically such a good deal that you shouldn’t pay them off early. These days, though, the usual 7% to 9% student loan rate beats what banks pay on savings, so it’s a closer call. Still, don’t prepay student loans at the expense of building up your IRA or 401(k).

Now that you’ve drawn up a budget, paid off your credit cards and started saving, you’re ready to deal with two of your largest financial decisions.

In buying a car, opt for a good used model, but be careful. A used car saves you the costliest part of automotive depreciation. If you want a new car, leasing can work--just make sure you fulfill the lease and intend to buy the vehicle later. Otherwise, you’re paying for something you will never own. Focus on the total price of the car, not the monthly payment.

When it comes to housing, owning is probably best. If you have the down payment and are ready for the responsibility, buy a house or condominium. With mortgage rates low, your after-tax monthly payments rival renting. If you’re paying $1,000 a month in rent, for example, you could take on a $1,200 monthly mortgage with about the same after-tax results. Plus, interest on home mortgages is tax deductible, as are property taxes.

That leads us to the next step: investing.

There are three main options in this arena: stocks, bonds and deposits.

Owning stock means you own a piece of a company. A bond is an IOU and means you’ve loaned money to a company or government entity. Bank deposits are loans to banks, except that the government insures your money up to $100,000.

Contrary to what you might think, stocks aren’t just for stodgy old folks. In fact, stocks, or equities, are ideal for young people, because historically, they outperform other investments over the very long term.

But unless you’re especially rich or well-informed, forget buying shares of individual companies. It’s too hard to diversify your holdings and cover your commissions.

Instead, consider mutual funds.

Funds offer the chance to buy into a whole basket of stocks chosen by a professional money manager. The initial investment can usually be small. Large funds with broad holdings offer safety through diversification and economies of scale for cost control. If you’re just starting out, stick to no-load or low-load funds, meaning funds with little or no upfront sales charges.

Experts advise young people to hold some equities one way or another. Just use money you won’t need for a while. A good way to buy stocks is dollar-cost averaging. Buy the same amount--say, $200 a month--every single month, to guard against market fluctuations.

Bonds are a good counterbalance to stocks. They pay regular interest, and U.S. government bonds are probably the safest investment in the world, if held to maturity. But remember that bond prices fall when interest rates rise, and vice versa. Like stocks, bonds can be had through convenient, inexpensive mutual funds offering diversification and a low minimum investment.

Money market accounts are especially safe mutual funds that function like uninsured bank accounts. Money market funds and bank certificates of deposit lately aren’t offering rates much better than regular saving accounts. They’re a good place to keep ready cash or emergency funds.

While no investment is free of risk, procrastination in saving is a sure loser. The longer you wait, the harder you will have to work to make up for lost time. That’s due to the power of compounding.

This isn’t important only for retirement, which may strike you as inconceivable right now. It’s important for the next 10 years as well. Money can buy a lot of things, but the biggest one is freedom.

Finding Help

* An easy-to-read, widely available primer is Sylvia Porter’s “Your Finances in the 1990s” (Prentice Hall). Porter’s book goes through the basics of creating a financial plan, as well as the details of buying life insurance and investing in mutual funds.

* “The Smart Money Family Financial Planner” by Ken and Daria Dolan (Berkley) is a useful workbook that is short on talk, but long on charts and work sheets.

* Those who are simply not up to working out their own plan, but can’t afford to pay a financial adviser, might consider a new product put out by Money Magazine and Whitehall Asset Strategies of Rochester, N.Y. You answer an extensive questionnaire and pay them $295, and they’ll draw up a plan for you. Whitehall also has a hot line to answer follow-up questions.

Where the Money Goes

Most people have only the vaguest idea where the money goes each month. One thing they do know is that there usually isn’t enough left for savings or investment. This worksheet is designed to help you get a handle on your expenses, the first step toward getting your finances under control.

INCOME Salary Bonus Commission Interest Dividends Gifts Capital Gain Other Total Income

EXPENSES Housing (rent or mortgage) Utilities Installment debt (credit cards)

Taxes Federal income State income Local income Property Social Security State Disability

Insurance Life Auto Home Health

Food Home Away

Transporation Auto Public Other

Other Vacation, entertainment Education, child care Unreimbursed medical Gifts, contributions Clothing Alimony, child support Spending money Unreimbursed business expenses Savings/investments Miscellaneous Total expenses

CASH FLOW SUMMARY Total income Total expenses Total cash flow (Income minus expenses)

Source: The Smart Money Family Financial Planner