Money Magazine
Money Magazine's undercover financial planner

Extra boost for an extreme saver

If you've already got the will to be financially independent, these three steps will speed things along.

By The Mole, Money Magazine's undercover financial planner

(Money Magazine) -- Question: I'm in my early 20's and want to start planning for retirement. I want to start planning early so I will be able to retire early and I'm not afraid to invest more of my salary to achieve that. What advice do you have for me?

The Mole's Answer: First, I have a request of you: Please go on a speaking tour to every college in America and spread your wisdom. The fact that you are even thinking about your savings plan in this way puts you way ahead of your peers.

Here are the three things that will speed up the timeframe to the financial independence you are looking for:

1. Spend less than you make

The good news is you've already learned the most important lesson, which is to plan for your financial future. But a close second is reining in spending. In my experience, there is little financial planners can do for people that come to us later in life with little savings and maxed out credit cards.

Changing the psychological mindset of spending everything you make is beyond my expertise as a financial planner.

This is America where marketing is king. Whether it's cars or clothes or gadgets, there is no shortage of ways to part you with your hard-earned money.

College students and recent graduates endure a marketing blitz of credit card offers. That new HDTV on the credit card with the $2,000 price tag, can actually end up costing many times that amount.

At this point in your life, one of the greatest skills you can develop is how to resist impulse buys.

That and making sure you are paying yourself first. Set up a budget and understand your cash inflows and outflows. Sock away as much cash as you can and never miss a match from your employer's 401(k).

Whenever you find yourself looking longingly at your friends' acquisitions, keep in mind that they will be working long after you've achieved the financial independence that allows you to pursue anything you want.

2. Don't worry about short-term investment risks

Time is on your side and you've got the luxury of a long-term investment horizon. Except for money you might need in the short-term, such as for a down-payment for a house, you can afford to put most of your investments in the stock market.

Though the stock market can be very volatile, it has rarely lost ground over a 10-year period and has always outpaced inflation over 30-year periods.

This advice isn't as easy as it first sounds. It means you have to ignore the barrage of advice coming at you.

It also means you have to have the mental wherewithal to do nothing after the market plummets and fear is rampant, which can be quite difficult even for the seasoned investor.

3. Don't go for sexy investments

Sure, we all want to find the next Google and strike it mega-rich, but the odds of this happening are quite low. My advice is to buy the broadest stock market index funds or ETFs that have the lowest costs and highest tax-efficiency.

A Total US and Total International fund will fit the bill just fine. A Vanguard Total Stock Index ETF (VTI (Charts)) has an annual expense ratio of 0.07% and the Vanguard All World Ex-US (VEU (Charts)) has a 0.25% ratio. (Correction: An earlier version of this story listed the expense ratio for Vanguard All World Ex-US as .025%.)

You may need the slightly more expensive mutual fund versions of these ETFs if you are buying on a monthly basis since ETFs charge commissions every time you buy them.

By keeping your costs low, your portfolio grows more quickly by compounding what you get to keep. And at your young age, you have decades to harness that power of compounding. Top of page

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More from the Mole in Money Magazine:
Financial advice: Get it in writing: When making investment decisions, believe what your adviser writes, not what he speaks.

The wrong kind of advice: When your planner steers you toward expensive investments, stop and ask the right questions.

Why 'trust me' makes me nervous: Planners try to make money for clients, but also for themselves. Anyone who says otherwise is trouble.