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Spend or Save?

Conventional financial wisdom for the ages.

Many twentysomethings and thirtysomethings have already moved back in with Mom and Dad to save money. If you want to help your child or grandchild financially, be sure to get your own finances in order first and then set limits on what you contribute. You may help even more by sharing conventional financial wisdom that has guided previous generations.

• Pay off debt first. Getting out of credit card debt is “the number one action to take in 2009,” writes personal finance expert Suze Orman in her book Suze Orman’s 2009 Action Plan.

• Build up an emergency savings account. Orman recommends saving enough money to cover eight months of living expenses, and relying on this fund instead of a credit card in the event of an emergency.

• Create a budget and stick to it. Remind Gen-Xers and millennials to distinguish between “wants” and “needs” and to consider ways to cut back. Do they need the latest souped-up cellphone model? Probably not. Packing a lunch every day, rather than eating out, could save them $100 a month—money that could be put toward that emergency savings account or credit card debt. Encourage them to pay themselves first by putting a set amount of money in a Federal Deposit Insurance Corp.-insured or National Credit Union Administration-insured savings account at the beginning of each month or after receiving each paycheck.

• Plan for retirement. Experts say to keep contributing to a 401(k), especially if an employer will match contributions (why turn down free money?). Younger investors can afford to take more risks, so they shouldn’t panic and put all their money in stable-value funds. Today, they can buy more shares at lower prices. When the market rebounds and they can “sell high,” they’ll likely end up with more money. The key is to have a smart mix of stocks and bonds based on one’s retirement age.

• Rethink big purchases. Gen-Xers and millennials hear that now is a great time to buy a first home. And it is, assuming that they can afford to buy. Conventional wisdom says that homebuyers can afford a house that costs about 2 1/2 times their annual salary, with 20 percent down. But they also should have enough savings to cover eight months’ worth of expenses in case of job loss, says Orman. They shouldn’t buy unless they plan to stay put for five to seven years. And before house-hunting, they should clean up their credit records and get preapproved for a standard 30-year, fixed-rate mortgage.

The father of two millennials, Neil Howe—an economist, historian and coauthor of Millennials Rising: The Next Great Generation—offers this message: “You’re now experiencing what other generations have experienced. Take advantage of the things you’ve done well. Stay close to your family. Don’t lose sight of the long term.”

“A rule of thumb is plan, don’t panic,” says Lynne Lancaster, coauthor of When Generations Collide. “Take a deep breath, and think about what are all the different things you can do to get ready for rocky times.”

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Lauren Gamber is a Cleveland-based writer and editor.