Third-Quarter Review of Investments and Personal Finance : Road to Riches

How do you become financially well-off? This year's great returns on stocks and bonds are just one part of the story You need to follow a program. Even a fairly mundane savings plan can work wonders. Indeed, starting early can make most people millionaires. Here's a look at how things might go for a frugal--and imaginary--Lucy and Raul, average college graduates who get good jobs but never get close to six-digit salaries. Like most people, they weather a few setbacks along the way but aren't slammed by huge disasters. Not everyone would make these choices, but Lucy and Raul's story shows how easy it is to gather $2 million by retirement.

Lucy Sanchez graduates from college at age 22. She has $5,000 in credit card and student debts.

She uses $350 in graduation gifts to pay the first month's rent on an apartment shared with two roommates.

She gets a job that pays $25,000 annually or $961.54 every two weeks.

Lucy contributes 10% of her pretax wages to the company's 401 (k) plan. Her employer adds an amount equal to 25% of Lucy's contributions --an automatic double-digit return.

Lucy invests the 401(k) in a risky but high-return growth fund. Her investment return jumps around, but averages 10% annual.

She joins the office van pool--$50 per month--to save gas and parking expenses. She uses her 1968 VW bug to get around on weekends. Frugal living helps Lucy pay off debts from her monthly gross income of $2,083.

Monthly Budget

401(k): $208

Taxes: $405

Rent: $350

Food-clothes-entertainment: $650

Transportation: $100

Debt payments: $350

Health insurance: $20

At 24, Lucy, is debt-free.

What to do with the $350 that used to pay down debts? Lucy considers buying a new car. Payments and insurance would be $350 per month. Still thrifty she buys used, spending $200 per month instead. She socks away the $150 difference.

She gets 5% annual raises. After five years of work, she earns $31,907 annually.

She continues to put 10% of wages in her 401(k) and saves $150 per month in a 5% savings account. (She ears more-and could save a bit more-but her expenses rise a bit too. Besides, she's got to have some fun.) Thrift pays: At 28, Lucy has $22,133.03 in her 401(k) and $7,952 in savings.

Lucy's in love. She and fiance Raul Jones plan a June wedding.

Mom and Dad pay for the nuptials but Lucy helps. She spends part of her savings--about $5,000 on the reception.

Raul, 29-year-old graduate, ears $32,000. Together, the newlyweds' gross income will be nearly $64,000.

Lucy and Raul rent a new apartment which cost $800 per month.

Time to get rid of the thrift store castoffs. They spend the rest of Lucy's savings--Raul's too-on new furniture.

Lucy explains the benefits of a 401(k) to Raul, who starts contributing 10% of his income to the company plan. he also gets a 25% match.

New Budget

On gross monthly income of $5,333: Monthly Expenses

401(k): $534

Rent: $800

Transportation: $700

Charity: $150

Health insurance: $106

Savings: $1,000

Lucy's company hits hard times and cuts workers wages by 4% . Raul gets a 4% raise. The couple's income stagnates for five years. Still they save in their 401(k) plans and a simple savings account. Goal: Buy a home.

After five years, their 401(k) accounts are worth about $88,000. Their savings account has grown to $68,000. their cars are paid off.

At age 34, Lucy and Raul qualify to buy a $250,000 home, putting 20%--$50,000 down--and paying $5,000 in closing costs with cash. The payment on their 9%, 30-year, fixed-rate mortgage of $1,609.

The Joneses have a baby. They spend $3,000 of their savings on baby furniture and supplies. They plunk the other $10,000 into a down payment on a station wagon.

Monthly expenses revamp drastically. Between the mortgage and the new little deduction, they save on taxes. They don't go out to dinner anymore, either. But they're paying for child care for Benjamin, paying more for health insurance and buying term life insurance. The transportation costs shoot back up too.

New Budget

On gross monthly income of $5,333

Monthly Expenses

401(k): $500 Taxes; $790

Housing: $1,860

Transportation: $700

Life and health insurance: $200

Day-care: $500 Savings: $83

Raul and Lucy both get 3% raises. They put discretionary spending on hold while they re-establish and emergency fund, socking away $200 per month. They've shaved contributions to 401(k) accounts, saving just $500 per month.

Another new baby, Leticia. Day-care costs rise to $800 per month. But the wagon is now paid off, cutting their transportation costs by nearly $300--and they save a little more on income taxes.

Interest rates drop. Lucy and Raul are able to refinance, getting an 8% fixed rate and shaving $200 off their monthly payments. Breathing room.

Niggling expenses hit. $30 for Benjamin's soccer team. $45 for Leticia's ballet lessons. Birthday parties, presents, books, toys, zoo passes, school fund-raisers.

The Joneses steadfastly refuse to spend more than they earn. They put their emergency fund in money markets and mutual funds. The combined return rises to about 6%.

Lucy and Raul hit 40. they have $221,338 in their 401(k)s. But they decide they're invested too aggressively. They shift into a balanced fund, which returns an average of 8% annually.

The couple teach their children about money. Benjamin and Leticia earn allowances and are encouraged to spend--and save--wisely.

Life is full of parental joys and stresses, inexpensive family vacations, modest raises and quiet chaos--but no major changes for 10 years.

Benjamin, age 17, is ready for college. He opts to attend community college for two years and pays the tuition from his own income. Proud parents beam.

Lucy and Raul now have $502,635 in 401(k) savings. They're both 48.

They still contribute $500 monthly--and continue to get a 25% employer match--for another two years, earing 8% annually. At age 50, the Joneses have $605,743.

Leticia starts community college when Benjamin starts at UCLA. Mom and Dad stop paying in to the the 401(k) and savings accounts, contributing all discretionary income to the college costs instead.

Four years later, both children are grown and graduated. Lucy and Raul start to save for weddings.

Leticia gets married. The Joneses host a lavish reception, paying cash. Fiscally responsible Leticia pays part of the cost too.

Benjamin weds. Raul writes a check for the rehearsal dinner. Benjamin helps his new bride's family pay for the reception.

Lucy and Raul are flush with cash that they've forgotten how to spend.

They resume non-retirement saving but allow themselves more luxuries. They sock away $600 per month for five years.

Grandchildren arrive. Lucy and Raul divide the $40,000 they saved over the past five years in four parts, giving each child and each child's spouse $10,000 to help the young couples buy houses.

The Joneses pay off their mortgage.

They retire at age 65. Their 401 (k) savings are now worth a staggering $2 million.

They deplete the retirement account over 40 years--assuming they live to 105--and collect monthly income of $13,928, or $167,137 a year.

Revised Budget

The Joneses now spend what they want, when they want.

Average* Lifetime Income

Female college graduate: $1,009,840

Female high school graduate: $443,560

* Over 40 years

Source: Census Bureau

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