What does your future hold? A comfy retirement? A house you own free and clear? A couple of college-educated (and loan-free!) kids who can explain the latest musical trend -- something called "glitch," apparently?
Yes, indeed. It's a nearly perfect picture. But if you want to paint it, you gotta get going. Here's a two-step plan for doing just that.
1. Get serious about saving. No, really.
It doesn't matter if you're 10, 20, or even 30 years away from retirement: the time to "pay it forward" is right now. And the more you sock away, the more miraculous the miracle of compound interest will be: $10,000 that earns 10% annually for 30 years will grow to $174,494, while $20,000 becomes $348,988. Kick in $30,000 and it'll rise to more than half a million dollars.
Impressive, no doubt, but don't get us wrong: We're not suggesting you sacrifice the present and live on a diet of warm beer and bread for the sake of funding your future. If, however, you want to eat cheeseburgers in paradise -- just to complete the Jimmy Buffett lyrical arc -- you should spend (and save) now with your future in mind.
After all, you'll no doubt want to eat cheeseburgers then, too. And while you may choose to work during your dotage -- lots of folks do for the sake of personal satisfaction -- my wild guess is that you'll want it to be precisely that: a choice, not a requirement. If so, you'll need to plan -- and save -- accordingly.
2. Invest Foolishly.
When I say "save," I mean "invest in the stock market." As my pal Robert Brokamp explains here, "Any money you don't need in the next five to 10 years is a candidate for the stock market."
And that's for good reason, too. No other savings vehicle gives you as much bang for your buck, but remember: Whether you opt to go with individual equities or world-class mutual funds, diversification is key to investment success.
Your portfolio should be tailored to your timeline and tolerance for risk, of course. But in general, you'll want to offset race cars such as Google (NASDAQ:GOOG), Research In Motion (NASDAQ:RIMM), and Starbucks (NASDAQ:SBUX) -- each of which sports a price-to-earnings ratio above 50 -- with more buttoned-down fare such as AT&T (NYSE:T), Citigroup (NYSE:C), and ExxonMobil (NYSE:XOM).
As the Fool's resident fund geek, I'm a big fan of cherry-picked actively managed mutual funds, too, the kind that allow you to beat the market while getting a good night's rest. You may want to consider allocating at least a sliver of your fun(d) money to a top-notch index pick like Vanguard 500 Index (FUND:VFINX) as well. True, as USA Today reported earlier this year, 2005 was the seventh year in a row that actively managed funds as a group bested the S&P 500. That said, indexing as a strategy will no doubt hold sway at some point in the future. Why guess whose turn it is to outperform if you don't have to? Owning both fund flavors is a perfectly viable option.
The Foolish bottom line
To be sure, volatility comes with the territory when you invest in the market, so everyone and his uncle should be prepared for it. At the end of the day, though, building wealth really isn't that hard. You just need time, discipline, and information.
Speaking of which ...
If you could use some assistance on the latter front, consider taking the Fool's new GreenLight personal finance newsletter service for a risk-free spin. In the issue that just hit the streets yesterday, we zero in on the criteria you should use when it comes time to sell a stock -- the tougher side of an investment transaction for many of us. We also take a look at the impact of the mythical "presidential cycle effect" on the stock market.
If the data are to be believed, that effect isn't so mythical after all, so click here to read all about it. And not to worry: There's no obligation to stick around if you find it's not for you.
Shannon Zimmerman runs point on the Fool's Champion Funds newsletter service and co-advises GreenLight with his pal Dayana Yochim. At the time of publication, Shannon didn't own any of the securities mentioned above. Starbucks is a Motley Fool Stock Advisor recommendation, while AT&T was a former selection of that service. You can check out the Fool's strict disclosure policy by clicking right here.
