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Third-Quarter Review of Investments and Personal Finance : Playing the Money Game

October 01, 1995|KATHY M. KRISTOF | SPECIAL TO THE TIMES

Frustrated by 1995's fabulous investment performance because you didn't participate? It's time to follow the simple advice of Samuel Johnson, the noted 18th-Century essayist: "Resolve not to be poor: Whatever you have, spend less."

That is, in fact, the only way to save. Without saving, you have nothing to invest. Without investing, your chance of building wealth--or even avoiding poverty--is slim.

Still, spending less than you earn is difficult. It takes discipline. It requires a certain amount of sacrifice. And, the more modest your means, the more difficult the sacrifices become.

Yet, in the long run, it pays dramatic dividends. Without doing anything fancy--without ever earning six-digit salaries--a modern couple could easily become millionaires. All they have to do is save a little, invest with a little common sense and give themselves plenty of time.

It's true that this year's stock market performance may not be repeated for some time, and if you haven't invested in stocks yet you may feel that you've already missed the boat. But there are other places to save your money and there will be more up-markets if you are patient. Just get yourself started.

The final goal is up to you. Your financial aim may be to create more security and comfort while you are working, but if a major part of your game plan is to be comfortable when you are old, the key decision is how well off you want to be then and what sacrifices you are willing to make now. One thing is certain: Social Security will be changing and you may not want to plan on its current generosity--especially if you are young.

When planning for retirement, remember that you live on much less than your gross income. For example, a single person making $40,000 a year might be living on $25,000 a year after taxes and savings. To maintain that over a 20-year retirement may require $200,000, assuming a fairly high annual interest rate.

But if you want real security, you don't want to cut it so close. And you don't have to be a CEO to do it.

Consider Lucy and Raul, a fictitious couple who are both college graduates. They get jobs, marry in their late 20s and do what most people do--have children, buy a house and cars and do their best to save for big expenses such as college costs and retirement.

As illustrated on this page and the next, they never earn more than $70,000 between them. And even though they stop saving in their 50s while they help send their children to college, they end up with an astounding $2 million at retirement. That's enough to pay them monthly income approaching $170,000 a year for life .

How did they do it? They made wise decisions and stuck to the program over an entire lifetime. You, too, can be wealthy and wise. Here are the key lessons from Lucy, Raul and a smattering of economists, statisticians and financial planners.

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Go to college: Just how much is a college degree worth? About $795,000 if you're a man. (Women tend to make less over a lifetime.)

The Census Bureau, which compiles statistics on annual income by education level, has found a definite correlation between how many years you attend school and how much you earn later.

The average male high school graduate, age 25 or over, earns $21,782 per year. However, graduate from college and your average annual earnings expectations soar. The average male college graduate earns $41,649.

Over a working lifetime--the 40 years between age 25 and age 65--the difference that four extra years of school makes adds up to a fortune.

It's also worth mentioning that more than 70% of the families reporting annual incomes of $70,000 or more boasted a college graduate in the household, according to the Bureau of Labor Statistics.

"That's not to say that if you didn't go to college, you aren't going to make it," says Kathleen Stepp, a financial planner in Overland Park, Kan. "It just increases your chances."

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Economize when you're young: Did you know that 30-year-olds who earn between $30,000 and $40,000 save about three times more than 50-year-olds with the same income? It's hard to know precisely why, but some believe it's because family financial pressures begin to heat up in middle age.

And in your 20s, before many people marry and have children, you're in a great position to economize. You haven't raised your living standards yet. You can share an inexpensive apartment friends, drive an inexpensive car or take the bus. Housing and transportation costs typically eat up more than half of the average 25-year-old's take-home pay, according to census figures. If you can cut that, you can pay off your debts fastser or create an emergency fund.

Sure, you won't appear as prosperous as friends who drive BMWs and lunch at the Ritz. But stick with the program for a few years and you'll be better off.

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