Those morning lattes,
sandwiches on the go and weekend movies out, taken individually, are minor
expenses. But they all add up exponentially when you think about the returns
that money could be generating in a 401(k) or 403(b) plan.
Skip a daily $4 luxury coffee during the working week
and you'll have an extra $1,000 to throw in a retirement plan by the end
of the year. Assuming that your retirement plan generates 8 percent annualized
returns, after four decades, that one year of skipping the extravagant coffee
will have grown to nearly $22,000. Factor in an employer-matched contribution
of $500 and you end up with more than $32,000. If you skip the pricey caffeine
permanently and invest $1,500 each year ($125 per month), you end up with
more than $400,000. Of course, as you build your career, you'll be able
to contribute higher amounts to your retirement plan over time. But this
illustrates the power of building wealth simply by denying yourself a simple
cup of coffee every day.
Twenty-somethings are in a good position to cut corners,
says author Nicholas Aretakis. Since many students who graduate from college
are accustomed to living lean, new grads have not yet become accustomed
to a life of luxury. "Rough it until you can afford better," Aretakis advises.
"Whether you live at home, take on a roommate, buy a used car over a new
one -- do what you have to to live within your means."
Living within one's means also means avoiding debt. To skip the plastic trap, Dan DeKeizer, a vice president
and actuary in MetLife's Retirement Strategies Group, recommends having a small stash of emergency money -- one or two paychecks' worth of income -- on hand.
Even in unexpected situations, Danialle
Foy, a 29-year-old administrative assistant in Chicago, says to try to avoid credit cards at all costs. "The month we needed brakes
for our car, I took a job at a bar for a week just so we could pay in cash,"
she says. "That's kind of extreme, but that's how serious we are in not
charging."
