by Archie M. Richards, Jr., CFP^®
May 30, 2005

Greg, 31 years old, writes, "I'm getting married soon. Both of us have decent jobs, but we need a solid plan to save. Could you help?"

Save 10 percent of your income, Greg - simple as that.

This might be the result (I'm making up this illustration): Let's assume the two of you make $60,000. You set aside $6,000 a year for 5 years. Your wife then raises children for 10 years, during which time you save $4,000 a year. The two of you then put aside $10,000 a year for 20 years. All of these investments grow at 9 percent a year. Bingo, you're worth $1.3 million.

And you'll be only 66 years old. Why quit working so young?

Compounded earnings are powerful. Not only do you earn money on your contributions, you earn on previous earnings as well.

Visit www.homeeconomiser.comto learn how a family with five children found contentment on only one modest income. Make frugality a central part of your life. Each of you could save $5 a day, for example, by avoiding bottled drinks, lunching out every day, and first showings of movies. These alone could save $2,500 a year.

Make your investments automatic. The money goes into the pot before you have a chance to blow it. If you're investing in a company savings plan, the employer takes the money out of your take-home pay. If you're investing on your own, direct the mutual fund or brokerage firm to deduct the additions every month electronically from your bank account.

Invest first in any plan in which your employer matches your investments. Those matchings are pure gold. Look upon them as getting something for nothing and take maximum advantage.

Avoid investing in your employer's stock. For your current income, you rely on the company staying in business. Don't rely on this for your retirement income as well. It's too much risk.

After taking advantage of your employers' matching programs, adopt traditional IRAs. Each of you can sock away up to $4,000 a year. The contributions are tax deductible; your income gets invested before it's taxed. Sure, the money is taxed later (assuming our income-tax system persists, which I hope it doesn't). But in the meantime, you're accumulating earnings on money you didn't pay out in tax.

I recommend Vanguard IRAs. Begin with Vanguard's Total Stock Market Index Fund, which acquires thousands of stocks representing about 98 percent of all publicly-held U.S. stocks. Vanguard's minimum IRA investment per fund is $1,000. Accumulate this amount first in your bank account. The delay is worthwhile, because the operating costs for this fund are only 0.19 percent per year.

When your contributions and the investment gains bring the value of your IRA up to $2,000, switch $1,000 to Vanguard's Total International Stock Market Index Fund, whose operating costs are also very low.

Of the values of all the stocks in the world, about half are U.S. and half are foreign. Split your money 50-50. Over the long run, foreign stocks will probably do better than U.S. stocks anyway.

After accumulating $5,000, switch $1,000 to the Long-Term Bond Index Fund and $1,000 to the REIT Index Fund. These will even out the volatility of the whole. Check out www.archierichards.com for additional ideas on investment strategy.

You could take advantage of 401(k) plans, which also enable your income to be invested before it's taxed. But the operating costs of many 401(k) plans exceed 2 percent per year. Costs make a bigger difference than most people realize. Stay with low-cost IRAs until you reach the annual contribution limits.

With savings in excess of 10 percent of your income, pay down the principal on your mortgage.

To summarize, a solid plan for saving means not spending on superficialities that bring no lasting contentment. Invest 10 percent of your income and use additional savings to pay down your mortgage.

Take advantage of employer matching programs and tax-deductible IRAs. Buy and remain invested in index funds with extremely low costs

Then, let the passage of time make you millionaires.