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?
From time to time I write about money. Saving, spending, splurging, and thinking about the future. My childhood and lack of having many things as a child has created a passion inside of me that forces me to make sure that we never have a moment in our life where we have to wonder if there will be food on the table. Chris and I always try to have a back up plan. A Plan A, B, C…Part of the passion I have for living within our means, and saving for the future means that I stay interested in current personal finance trends and different ways of thinking about what you might need to do now to prepare for retirement.
This recent article from LearnVest shows an interesting infographic depicting what giving up a few things can mean for someone thirty years from now. If you scroll down to the middle of the page you will see an image of a pack of gum, with the description that if you cut back on a $2 pack of gum a week you would have $16,652 more for retirement. A $10 glass of wine on the weekend would be to the tune of $83,260 at retirement. The last one is mind-blowing (Chris are you reading this)? If you cut back $100 of your cable bill per month it would be $832,597 at retirement. It makes you think, right?
Thinking about retirement at 20, 25, 30, 35 and up is a very real and crucial aspect of our life. Often though we are barely paying our bills or student loans in our 20’s to 30’s and so retirement is the last thing on our list. I can imagine that many of us could cut back on paying $100 on cable each month, or get rid of it entirely. There are so many online options for entertainment. Regardless of what “thing” you could cut back (or eliminate) from a material consumption standpoint, the key is really to make a focused effort to think about what and how you are preparing for retirement. Have you thought about it? Will you be able to support yourself when you retire? Long gone are the days when your company supported you after you retire. These days a 401(k), IRA, and other options are the basic ways we kickstart our path towards retirement.
While retirement, saving money, and cutting back is not the most glamorous of topics, in 10, 20, or 30 years you may just realize how much you will need to put away each year for retirement and how much time you have lost. A good reminder that pertaining to money: this shit gets real… fast.
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?
Have you thought about where you might want to retire? I have not. Maybe it is my age, but I still feel like I have too much to experience in life before I know what I want to do in my retirement. However, whether I know where I want to retire or not, I am going to do all I can to plan for how I will support myself in retirement. The place will eventually be clear to us. In the meantime, we are doing what we can to put ourselves in the right financial place for retirement.
I have strong opinions about setting up a plan for saving for our future. I will tell you why. Just like you might eat well, or exercise so you can be around for many years to come for your children, you have to do the same with your financial future. When my parents passed on, they had not a single penny put away for retirement. I do not blame them. They had to use whatever income they did have to make sure we had food on the table. My mom often worked a few jobs to make that happen. They did not have the luxury to even think about their retirement, and yet when they passed on in their fifties they had not a penny to their name. I have no idea what they would have done if they had lived. Would I, or my siblings be taking care of them?
Life is different now. It used to be that folks would have a pension and Social Security. These days I am not sure that Social Security will be around when I am in retirement. Because of that possibility, Chris and I believe we have to do our own part to ensure we have the funds available to retire. If Social Security is around then it will just be icing on the cake. Yet, according to Fidelity Investments, “41% of couples surveyed in 2011 do handle retirement decisions together—which leaves about one in six couples who don’t.” It is an interesting article, definitely worth reading further.
Yet, I am a bit shocked. 41% is not enough. I am grateful for the 41% of couples that are talking, but what about the other 59%? And, of the 41% that are talking, are they saving, or just talking? How many of you are taking care of your future? Have you begun saving for retirement? It is not an exciting topic, but an important one to ensure that we can continue to live, retire, and enjoy our future.