Dear Gary,
My husband and I married young. I am 21 and he is 23. In a couple of years we want to own a home and have children. What are some things we can do now? My husband is working full-time and going to school full-time. I work full-time. We do have about $2,000 in credit card debt and are working on getting out of it. We live in an apartment and we are starting to learn about what it takes to own a home. What should we know about CDs, the stock market and mutual funds? Should we be looking at those options as a young couple? Diane

Diane and her husband appear to be off to a great start. They've set some goals and begun to work towards reaching them. Plus, it would appear that they're willing to make some sacrifices along the way.

Hubby's college education is a great investment. The U.S. Statistical Abstract for 2002 indicates that the average household headed by a college graduate earns 93% more than one headed by a high school graduate. Right now that amounts to a difference of over $25,700 per year.

And Diane is wise to pay off her credit card debt as soon as possible. If they never charged another cent and paid just the minimum each month, they'd still be making payments well into their 50's! Being debt free will give them a better credit score which will translate into a lower mortgage rate when they buy a home.

Diane and her husband should make an attempt to live on just one salary. Or as close to it as possible. Clearly that will be easier once Hubby has graduated and begins to earn more money.

Living on one income will allow them to save a sizeable down payment in a relatively short period of time. It will also put them in financial position to start a family. Whether both parents work or one stays home with the baby, they'll find that living on one income now is very similar financially to what it's like after a baby arrives.

Many young families make the mistake of spending everything they make. That might seem like fun now, but they'll find that it's hard making a downward adjustment in lifestyle later. Remember that a house and baby will increase family expenses. And the baby could also decrease family income.

Now that Diane and her husband are working and saving, the next question is how should they invest in anticipation of buying a home? CDs are a good tool for savings when you might need the money immediately. Or if you plan to need it in a couple of years. That sounds like the situation that Diane is in.

If Hubby has the opportunity to contribute to a 401k plan they should make every effort to participate. Not only will their money grow faster since the earnings aren't taxed, but his employer may match part or all of his contribution. As an added benefit, they may be able to borrow money from the account to use for a down-payment on that first home they're planning. Check now to find out how the loan provisions work. Not all plans allow for loans.

They should try for some diversification within the 401k plan. A mixture of guaranteed investments (like CD's) and more aggressive choices (stock mutual funds). Stocks will earn more over a longer period, but they can have a bad year or two with a negative return. Normally that would be unacceptable if you were saving for a down payment. But if Hubby's employer is matching at a 50% rate that should cushion any drop in a mutual fund.

The next step is to prepare for a mortgage. The Federal Trade Commission advises checking your credit report before making any major purchase. That will allow Diane to correct any errors.

About 1 in 4 people have an error in their report that's significant enough to increase their mortgage rate. How much could that error cost? A difference of one half percent will add $500 interest on a $100,000 mortgage each year.

Credit reports are kept by Credit Reporting Agencies (CRA's). They collect information from lenders. The three major credit reporting agencies are: Equifax, PO Box 740241, Atlanta GA 30374-0241; 800-685-1111 Experian, PO Box 2002, Allen TX 75013; 888-experian Trans Union, PO Box 1000, Chester PA 19022; 800-916-8800

You can expect to pay approximately $10 per report. It's money well spent.

Congratulations to Diane and her husband for laying a foundation today that will allow them to build a bright financial future.