If you put together a diversified portfolio of stocks and bonds, for example, you should be able to earn about 8 percent per year, on average, over the long term. You won’t, of course, earn that amount every year — some years it will be less and some years it will be more. The following table shows how much you’d have after 40 years if you got a 3 percent annual return versus an 8 percent annual return.

So when you combine regular saving with more-aggressive yet sensible investing, you end up with lots more money. Saving $1,000 yearly and getting just an average 8 percent annual return results in a nest egg of $259,060 in 40 years compared to ending up with just $3,260 if you invest $1,000 one time at 3 percent return over the same time period. And remember, if you can save more — such as $5,000 or $10,000 annually — you can multiply these numbers by 5 or 10.

With historic annual inflation running at about 3 percent, you’re basically treading water if you’re only earning a 3 percent investment return. As I discuss in Chapter 11, the goal of long-term investors is to grow the purchasing power of their portfolio, and that’s where investments (such as stocks and bonds) with expected higher returns play a part.

Among the common goals for folks in their 20s with whom I’ve worked are the following:

1. Making major purchases: You need to plan for major purchases. So if you have a future purchase in mind for a car, living room furniture, vacation trips, and so on, you need to save toward that.
2. Owning a business: Many people want to pursue the dream of starting and running their own business. The primary reason that most people continue just to dream is that they lack the money (and a specific plan) to leave their job. Although many businesses don’t require gobs of start-up cash, almost all require that you withstand a substantial reduction in your income during the early years.
3. Buying a home: Renting and dealing with landlords can be a financial and emotional drag, so most folks aspire to buy and own their own home. Despite the slide in property prices in the late 2000s, real estate has a pretty solid track record as a long-term investment. If you’re looking to buy now or in the years ahead, the good news is that real estate is more affordable in most areas than it has been in a long, long time. (See Chapter 7 for more on housing.)
4. Starting a family/educating kids: Having children leads some parents to cut back on work, which requires planning for living on a reduced income and facing higher expenses. And, if you have kids or are planning to have kids, you may want to help them get a college education. Unfortunately, that can cost a truckload of dough. Although you may never be in a position to cover all that cost, you’d probably like to be able to pay for a portion of it.
5. Retiring: Retiring is a catchall term for discontinuing fulltime work, or perhaps not even working for pay at all.

You’ve probably just entered the workforce, but planning ahead for retirement is important. You may enjoy working and haven’t given retirement much thought, but most people eventually do want to retire, and you want to be prepared. I address how to do that in the next section.

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Alongside the costs of owning or renting a home, taxes are the other large personal expenditure for most folks. Everyone gets socked with taxes when earning income and when investing and spending money. That’s the bad news — the good news is that you can reduce the amount of taxes you pay by using some relatively simple yet powerful strategies. The following two tax trimmers can help; in other post has more tax reduction strategies.

• Utilize retirement savings plans. To take advantage of such plans, you must spend less than you earn. Only then can you afford to contribute to these plans.
• Reduce the amount of sales tax you pay. To do so, you must spend less and save more. When you buy most consumer products, you pay sales tax. Therefore, if you spend less money and save more in retirement accounts, you reduce your income and sales taxes.

The following breaks down budgeting in simple steps:

1. Analyze how and where you’re currently spending. Chapter 4 explains how to conduct your spending analysis.
2. Calculate how much more you want to save each month. Everyone has different goals. This book can help you develop yours and figure how much you should be saving to accomplish them.
3. Determine where to make cuts in your spending. Where you decide to cut is a personal decision. In other post, I provide plenty of ideas for how and where to make reductions. income and you want to save 10 percent for retirement. If you can save and invest through a tax-sheltered retirement account — such as a 401(k), 403(b), SEP-IRA, or Keogh (see the section, “Valuing retirement accounts” later in this chapter) — then you don’t actually need to cut your spending by 10 percent to reach a savings goal of 10 percent of your gross income.

When you contribute money to a tax-deductible retirement account, you reduce your federal and state taxes. If you’re a moderate-income earner paying approximately 30 percent in federal and state taxes on your marginal income, you actually need to reduce your spending by only 7 percent to save 10 percent. The other 3 percent of the savings comes from the lowering of your taxes. (The higher your tax bracket, the less you need to cut your spending to reach a particular savings goal.)

So to boost your savings rate to 10 percent, you simply need to go through your current spending, category by category, until you come up with enough proposed cuts to reduce your spending by 7 percent. Make your cuts in areas that are the least painful and in areas where you’re getting the least value from your current level of spending.

1. Small-town bank: These banks only have a couple branches. Everyone knows your name. Hours are generally limited and you may face extra ATM fees for using ATMs that aren’t at one of the bank’s branches. A sometimes attractive, “small-town” banking option is credit unions. To join, you generally need to work for a particular employer (such as General Electric) or industry/occupation (for example, teachers). Thanks to a federal government exemption on income taxes, credit unions tend to be able to pay higher interest rates on deposits and charge lower rates on loans. Don’t assume, however, that a local credit union always has the best deals; be sure to comparison shop.

2. Large chain bank: Such banks tend to be regional, national, and sometimes even multinational. You may recognize their name from extensive advertising campaigns. They tend to have extensive ATM networks, which may reduce your ATM fees but you pay for it in other ways, such as through less-competitive terms (interest rate paid, service fees levied) on checking and savings accounts.

Later in this other post, in the “Banking Online” section, I identify some universal questions you can ask when searching for a bank, no matter which kind of bank you use. If you want to use a brick-and-mortar bank, you may want to investigate these additional points:

Be sure to comparison shop among several banks and scrutinize their fees and interest rates on their checking accounts and any other type of account you may be interested in. Also, read the “Understanding Your Banking Account Options” section later in this chapter, and read the rest of the chapter so that you’re aware of your nonbank and Internet banking Foptions.

Some of these firms have fairly extensive branch office networks and others don’t. But those that have a reasonable number of branch offices have been able to keep a competitive position because of their extensive customer and asset base and because they aren’t burdened by banking regulations (because they aren’t banks) and the costs associated with operating as a bank.

A type of account worth checking out at brokerage firms is an asset management account, also referred to as a cash management account. Although the best deals on such accounts at some firms are only available to higher-balance investors, the best of these accounts typically enable you to:

? Hold and invest in various investments (stocks, bonds, mutual funds, and so on) in a single account
? Write checks against a money market balance that pays competitive yields
? Use a Visa or MasterCard debit card for transactions

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1. Discover how to cook. Take a course and read some good books on cooking. Consider that most people eat three meals a day, 365 days a year. That’s more than 1,000 meals yearly — a lot of eating! If you don’t know how to cook for yourself and how to do so healthfully, you may end up spending a lot more money on food and eating out — and have poor health to boot. What you don’t eat, you can put in the refrigerator or freezer and eat at a later meal. Making your own food saves you money, helps you enjoy your food more, and makes you more attractive to a mate!

2. Consider store brands. Name-brand companies spend a lot of money on advertising and marketing, which you, the consumer, end up paying for through higher prices. You can save a considerable amount of money by buying the store brand, which is usually the same quality (and sometimes the same product) as the name brand at a lower price.

3. Buy in bulk. You can save substantially by shopping at stores that are able to sell groceries for less because of their operating efficiencies. Topping that list are wholesale superstores such as Costco and Sam’s Club. The catch is that you must buy most items in bulk or in larger sizes. An additional advantage to buying in bulk: It requires fewer shopping trips (hence less gasoline) and results in fewer instances of running out of things.

If you decide to buy in bulk, be careful with items that can spoil. Make sure that you buy what you can reasonably use (or freeze when necessary). If you’re single, shop with a friend and split the order. If you’re looking for a store that sells more organic and natural products at a reasonable price and in smaller sizes, check out Trader Joe’s.

4. Kick the bottled water habit. Although tap water often does leave something to be desired, lab analysis of bottled water shows it has its own problems. You can save hundreds of dollars annually and drink cleaner water by installing a water filtration system at home and improving your tap (or well) water.

5. Pack your lunch sometimes. Eating out daily can rack up a lot of expense.

6. Spend carefully when dining out. Eating out can be a lot of fun, but keep in mind that you’re essentially hiring someone to shop, cook, and clean up for you! You can save some money when eating out by remembering these points:
• Eat out for breakfast or lunch rather than dinner. You can generally get the most bang for your buck then.
• Go easy on the beverages. Alcohol is especially expensive when dining out.
• Gravitate toward the dishes that cost less.

Vegetarian dishes cost less than premium meat based entrées (and are generally healthier for you).