The majority of Americans spend money they don't have, to buy stuff they don't need, to impress people they don't like. -- anonymous poster on Yahoo! Finance

Boy, that's gotten a lot of people into trouble. According to official statistics, a recession is here. As a nation with a paltry savings ratio, tough times will mean trouble for those folks who bought too much house or who have been living beyond their means. In fact, Time recently speculated that credit cards could be the next part of the financial market to collapse, thanks in part to steadily rising default rates.

Hopefully my friend Jerry won't be among them. But he could be.

True story, fake name
In the spring of 2003, when he turned 35, Jerry bought a brand-new, fire-engine-red Mustang. What a sweet car! I don't think he was trying to impress me -- we'd been friends for more than a dozen years already. But besides thinking, "Hmm, mid-life crisis setting in a bit early," I couldn't help asking myself, "Why?"

He didn't need it -- he and his wife already owned two cars and the college town in which we lived wasn't large. You could drive across it in eight minutes during the rush quarter-hour. (It was a small town.)

Impress today? Impress tomorrow!
If Jerry had stopped to think about it for a moment, he could have done a better job at impressing his neighbors or co-workers -- but it would have required some patience.

Jerry probably needed to get a loan for that car. Let's suppose the loan was for $15,000 at 5% for five years -- fairly typical loan terms. That monthly payment turns out to $283.07.

What if, instead of getting the car right then, he had done something else with that money? He could have put one half into a savings account for those five years, to save for a larger down payment. With the other half, he could have invested into a broad market index fund such as the Vanguard Total Stock Market Index (VTSMX) fund.

Well, for one thing, it's a well-diversified fund that invests in companies like the following:


Percent in Sector

Representative Holding



US Bancorp (NYSE:USB)

Information technology


Cisco Systems (NASDAQ:CSCO)

Health care


Johnson & Johnson (NYSE:JNJ)



ExxonMobil (NYSE:XOM)



Boeing (NYSE:BA)

Consumer staples


Procter & Gamble (NYSE:PG)

Consumer discretionary



Source: Vanguard; sector weights as of Oct. 31, 2008.

This fund also comes with no loads and a low 0.15% expense ratio -- favorable fees when compared to many other funds. While its U.S. focus is a drawback, there's nothing to say that other funds couldn't be added for more geographic or asset class diversity.

From the time Jerry could have started, VTSMX returned, on average, 12.27% annually over those five years -- meaning that Jerry would have turned his $5,000 into more than $11,400. Not bad.

Let's say that Jerry left that account untouched, and that those returns are ratcheted down to the 20th-century average return of stocks (10%). By the time he reached age 65 -- retirement age -- Jerry would have $124,000. Of course, he would have had to suffer through what we are experiencing right now, but with 25 years ahead of him, he could afford to leave it be.

Now that's impressive
But … Jerry spent all that money. I'm not saying he couldn't, or that spending money on life's luxuries is stupid. Jerry isn't meant to make me look puritanical, but instead to show that avoiding or even delaying some non-necessary purchases can make a big difference in your household's bottom line. In Jerry's case, delaying the Mustang purchase for five years would have meant that he could borrow less and that he would have had a decent bonus to his retirement funds.

New Mustang and a boosted nest egg. Nice!

We work hard for our money, and it's understandable to want to enjoy life. But the statistics demonstrate that collectively, our nation isn't doing enough saving to counter all that spending.

Toward that end, here are three tips to help you get started:

  • If you carry credit card debt right now and have a little extra money, pay off your credit cards. Before you make any lifestyle purchases, you cannot have any credit card debt.
  • Try this with your next raise: Use half the amount to boost your savings and the other half to boost your lifestyle. Not only will that impress your friends, but you'll be impressed down the road by how much your retirement nest egg has been boosted.
  • Enroll in automatic savings or investing programs so that a small, fixed amount is deducted from your checking account into a savings or brokerage account. Those small amounts will really add up.

This is impressive, too
Still need guidance, tips, and advice? Robert Brokamp at the Rule Your Retirement service offers all of the above (and more) to help you toward a comfortable, and even impressive, retirement.

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Fool Jim Mueller is still many years from retirement but is planning ahead. His plans at this time don't include holdings in any of the named companies, except Apple and Johnson & Johnson. US Bancorp and Johnson & Johnson are both recommendations from Income Investor. Apple is a Stock Advisor selection. The Fool's disclosure policy is impressive all by itself.