Money is on the brain this week. It is official — the early bird does get the worm. I recently came across a Dave Ramsey money article that especially peaked my interest. It basically is the simple truth about money that almost all of us probably know. Yet, the visual he shared just hits you smack in the face.
I do not want to steal the visual from his website, so I will explain and link back to his site for the full picture. Meet Ben and Arthur. Ben starts investing at age 19 and puts $2000 in an account each year for 8 years straight and then does absolutely nothing with the account until he retires at the age of 65. A total investment from the ages of 19-26 of $16,000. A lot of money to put away in those early years of his life. Arthur begins investing $2000 when he is 27 years old and continues to put $2000 away from 27 to when he retires at age 65. Arthur invests a total of $78,000 over 39 years. A difference in $62,000 in the amount that was actually put away between Ben and Arthur.
The result: at age 65 Ben has $2,288,996 and Arthur has $1,532,166. Ben came out $700,000 ahead by starting 8 years earlier and only put away $16,000. Compounding interest is an amazing thing. How do we spread the word? I do not know many 19 year olds that a) care about investing, b) truly understand compounding interest, c) have $2000 a year they can or want to spare.
Why not have a prerequisite that you have to complete a personal finance class to make it out of freshman year of college (no matter what your major). Or maybe it is a class that every high school graduate must take (since many might never go to college). The class could teach many types of life skills, and maybe those that truly understand it might actually decide not to purchase that video game they are dying to have and rather put a bit more into their retirement.
To think that all it took was $16,000 for 8 years, rather than $78,000 for 39 years. If I only knew when I was 19 what I know now, I might have made very different choices, especially thinking of that $700,000 difference at age 65. How do we make compounding interest sexy?
I recently read this discussion called: “Why Kids Should Chip in for College.” It is a discussion I support. I had to pay my way through college and while it was tough, it was good life experience for me. It starts the reality that life costs money in a big way. Maybe you do not have to have your child pay for school completely, but they should contribute. If not, what happens when they graduate? Will you continue to pay for their life? How have you helped them to prepare for the next stage of their life where they have to pay rent, utilities, food, car payments, insurance, etc.?
These days with the zillions of technical devices we have at our finger tips, the ease of access to credit cards, and dwindling checking accounts, those graduating from college will have a harder time balancing the cost of their wants with the bills they will now have to pay, with the amount in their paychecks. Do we need to shift the balance of what we are doing for kids today? Have we taught them the value of the cost of life itself?
I remember a class we had to take in high school. I cannot remember what it was called, but what I do recall is that we had a section on stocks. We were split up into teams and we had to decide what stocks we were going to buy together based on the research we did on the company, the rate of return, and many other factors. I cannot remember how well my team did, but it sparked a new thrill inside me of something I had never been exposed to – investing. What I find interesting about this class that we were required to take, was that we never learned about the basics of money: balancing a checkbook, living within your means, interest rates, deciding between how much you can make saving versus paying off debt, and saving for retirement. These aspects of personal finance would have benefitted us way before we were ever at a place to actually invest in stocks.
I wonder how many college graduates know those core personal finances ideas. Are most college graduates savvy with their social media profiles, and maybe how to create their next app, but not ready for the basics of paying their rent, and saving for their next plane ticket? Are we coddling kids today, rather than finding ways for them to be set up for success?
What do you think? Are we preparing today’s college graduates for their best financial future?