Hugh F. Wynn
"Excu-u-use Me" Series: The Roaring 20-Somethings
Unfortunately, because credit is plentiful, it’s easy to load up on debt in today’s world. For this and other reasons, most 20-somethings save very little by age 30. Many don’t save one thin dime.
In their 20s, just after high school or college, most unskilled or inexperienced workers don't knock down much dough. Many were raised by parents who made the same excuses for not saving that their kids are now making. Parents who, like their kids, went to college on borrowed money, had a good time, lingered on campus a couple of extra semesters longer than necessary, worked some - but not too much - during summer and semester breaks, and finally graduated burdened with a rather hefty student loan debt.
Hey, I’m not being critical here – just stating the facts – well, maybe I'm being a little critical. And I’m not speaking just of student loan debt. There’s also credit card debt, car notes, mortgage debt, and personal debt of one sort or another that must be dealt with. As an aside and speaking of debt reduction, eliminate the costliest debt first – usually credit card debt carrying interest rates of up to an astounding 20%. But best of all, avoid debt whenever possible.
Reasons NOT to Save
Unfortunately, because credit is plentiful, it’s easy to load up on debt in today’s world. For this and other reasons, most 20-somethings save very little by age 30. Many don’t save one thin dime. A common reason is that many 20-somethings believe that learning about personal finance is too difficult – with scant validity – largely a myth we hope to dispel with this blog. Give credit to a spidery financial industry (the Wazoos) working hard to spin the web that dealing with personal finances is SOOO COMPLEX. Well, it doesn’t have to be. Not if we keep a suspicious eye on the Wazoos. They’re experts at using fine print and acronyms to convince us. They develop elaborate schemes – not to enlighten us, but to convince us to let them manage our money (primarily to enrich themselves).
Where are our Teachers?
One of the big gaps in today’s learning process is that our educational systems no longer teach the rudiments of personal finance to youngsters. However, all is not lost. Twenty-somethings are still blessed with time, God willing. Lots of it. But when the time factor is mentioned, up bubbles the oft-used excuse, “I just don’t have any time to spend on budgeting or messing with my personal finances.” Hogwash! Most younger people do lead busy lives – mostly watching television on average 19-25% of their waking hours, not to mention time spent shopping or pursuing hobbies. Okay, so we have 40 years-plus to make up for lost time but remember… time is fleeting. And the decade you can least afford to lose is the one right out of school.
Free Money Opportunities
Many folks work for employers that offer a “matching contribution” (FREE MONEY) in their 401(k), 403(b) and other savings plans. And these same folks can even set up their own IRAs – Traditional or Roth. We’ll define the various savings plans in greater detail as we go along. Question is, will new hires take advantage of any of them now instead of later? The statistics say not likely, at least not nearly to the extent they should. One good move by employers in recent years is to automatically enroll new hires in defined contribution savings plans. Experience shows that once enrolled, few drop out… a good thing. And that participation rates nearly double to 93% under automatic enrollment compared with 47% under voluntary enrollment.
About Those Missed Opportunities
This brings up that most troublesome of habits – deferring financial opportunities until tomorrow, always tomorrow. Remember that “It’s Never Too Late, but Early is Better”. It seems so obvious that the longer we wait to save… to invest… to pay down debt...the more we miss those fleeting opportunities for investment gains. And the most egregious missed opportunity of all is to NOT participate in an available 401(k) or 403(b) - to fail to take full advantage of the EMPLOYER’S MATCH – that free money mentioned above. Just remember, time slips away, and suddenly you’re – gasp – 30!!!
So, c’mon, don’t worry about personal finances later. Worry about them right now and do something about it. Remember, these bad habits – putting off saving, investing and paying down debt until later – affect us the most right now. The longer we wait, the more we miss out on potential investment gains and the glories of compounding.
The Marlboro Man
To place all this palaver in context, let’s create a simple example of an investment strategy ignored by most of the 20-something crowd. In our example, we’ll assume that the average 20-something – college educated or not – starts making enough “earned income” (remember that term) at age 20 to save a few bucks if he/she chooses to do so. Further, let’s assume this potential saver gives up smoking two packs a day of cigarettes (the most egregious of the many Million-Dollar Habits). Twenty cancer sticks cost about $7.26/pack (average price of a pack of those “cowboy killing” Marlboro Reds). Our ex-smoker now has $14.52/day, including Sundays, or roughly $440/month to invest. Based on some unusually sound advice from a friend, the new saver decides to invest this windfall in a Vanguard Total Stock Market Index Fund that, since inception, has yielded roughly 6.45% per annum (no guarantees, the past is not prologue). Our new saver now routinely deposits the $440 into a Roth IRA and invests it in the Index fund. After investing $440 of after-tax money each month in a Roth, compounded annually at 6.45%, by age 30, his IRA is worth $74,365; by age 40, $212,482; by age 50, 470,532; and by age 65, $1,333,235! Yes, you noticed. I’m being terribly optimistic, but I’m trying to make a point.
Compare these numbers to those mentioned in a Government Accountability Office (GAO) study, which noted that median retirement savings for most Americans, in the decade after retirement (age 65-75), totals about $150,000, a far cry from the $1.3 million figure mentioned above. That pathetic figure belongs to those former 20-somethings who decided to keep smoking or who simply chose not to start saving during their 20s. The $150,000 could have been $1.3 million-plus. Coulda! Woulda! Shoulda! Who knows, maybe in their 30s, this smoke-saturated group finally joins the savers, but even so, this Johnny-come-lately attitude has already proved to be a costly mistake in terms of future investment earnings.
Boring Student Loan Debt Fact
Almost 45 million Americans have student loan debt. We owe over $1.56 trillion ($521 billion more than the total U.S. credit card debt).
The average loan debt for the Class of 2018 graduates is $29,800 (69% of that class took out student loans). The average monthly student loan payment is $393. The student loan delinquency rate is 11.5% (90+ days delinquent or in default). These student debt statistics will negatively impact the ability of several generations of savers to do just that… SAVE! (Source: U.S. Federal Reserve)
What’s The Point?
The point of all this blather is that we must first become savers in order to make money as investors. And by the way, index fund investing is not gambling. More correctly defined, it is “calculated risk-taking” by investors who employ dollar-cost-averaging in a highly diversified portfolio and dare to be average.
In short, young investors need to develop a good investment strategy and stick with it over the long term – a strategy that offsets our gambling proclivities; that avoids our tendency to roll the dice on a single “sure winner”; that defies our desire to play the Powerball lottery (with those wonderful odds of multiple millions to one), and so on. And just remember that a stock market chart looks like a sawtooth in the short-term – up and down, up and down – but smooths out over the long haul in a decidedly upward direction.
In next week’s blog, we’ll discuss the consequences of the 20-something’s “lost decade” error in judgment.