The Small Ways Wealth Begets Wealth

There's a reason the rich get richer.

Just graduated and got your first real job? If you can immediately start socking away $100 or $200 every month, you'll save yourself from a lifetime of irksome costs, some small, some large.

Indeed, there's a virtuous cycle to managing money: As you amass more savings, like the rich you can sidestep more costs -- and that means your nest egg will grow even faster.

• Financial-account fees. For instance, once you've built up some savings, you are less likely to get hit with bank charges, you will avoid the account-maintenance fees often levied on smaller brokerage accounts, and your mutual-fund company might waive its annual individual retirement account fee.

• Even bigger savings could lie ahead. Fund investors with $25,000 or $50,000 invested may pay reduced commissions on broker-sold "A" shares. Favor no-load funds? If you have $100,000 in a Vanguard Group fund -- or $50,000 and you've been invested 10 years -- you can qualify for the firm's lower-expense share class. Similarly, Fidelity Investments offers lower-cost shares to index-fund investors with a $100,000 fund balance.

Sound appealing? Unfortunately, many of today's 20-somethings will never enjoy these sorts of cost savings.

In fact, they don't appear to be any more frugal than their famously profligate parents. As of 2004, 26- to 28-year-olds had a net worth equal to half their annual income. That's the same as the ratio for 26- to 28-year-olds in 1986, according to Boston College's Center for Retirement Research.

• Credit-card charges. There are few mistakes more foolish than carrying a credit-card balance, which these days might cost you 14% or more in annual interest. Yet almost 48% of households headed by someone under age 35 have card debt, according to the Federal Reserve's 2004 Survey of Consumer Finances. The typical, or median, sum owed is $1,500.

Want to avoid that mistake? Your best bet is to live below your means, sock away that $100 or $200 every month and thereby accumulate a cushion of savings.

An added bonus: If you pay your credit-card bills on time and don't use more than, say, 20% or 30% of your available credit, you will have a better credit score -- and that should mean a lower interest rate when you take out a mortgage or auto loan, or set up a home-equity line of credit.

• Borrowing costs. As you accumulate more savings, you may have the wherewithal to purchase a car, rather than being compelled to lease. And if you do buy, you might be able to pay cash or, alternatively, pony up a hefty sum, so you end up with smaller monthly loan payments.

Similarly, if you are a diligent saver, you may have enough to put down 20% when you buy your first home. That will allow you to avoid private mortgage insurance, which might cost you $500 a year for every $100,000 borrowed.

• Insurance premiums. With your wealth ballooning, your tolerance for financial risk will rise. Before long, you may be comfortable raising the deductibles on your homeowner's and auto insurance, because forking over $1,000 or $2,000 toward fixing storm damage or repairing your crashed car will no longer seem like a financial catastrophe.

At some point, your nest egg may be big enough to cover your family's financial needs, should you die prematurely. That will allow you to ditch your life insurance or at least reduce coverage (though some folks may want to hang on to their policies for estate-planning purposes). You may also have more than enough saved to cover nursing-home costs, so you don't need long-term-care insurance, which can easily cost $1,500 or $2,000 a year.

Your increased tolerance for risk may even affect your investing. You might be willing to stash more in stocks, which should translate into higher long-run returns.

But here's the irony: Because you are well on your way to a comfortable retirement, you may not need such high returns -- and thus you don't need to take so much risk with your investments.