I guarantee the first response any financier will give when asked for advice will be to invest early and often, no matter how small the amount. Investing early is vital, after all, due to the magic of compound interest. They might then take from the alleged Einstein quote: “Compound interest is the Eighth Wonder of the World. He who understands it, earns it … he who doesn’t … pays it.” The money man may even tack on a mathematical trick to demonstrate the magic of compounding, e.g. a penny doubled everyday for a month will become $5.4 million. Man, $5 million? Better call up grandma and start rolling those coins!
I’m not trying to prove that investors and bankers are trite, though they are. The message is important for novices in the industry, especially those late to the game. Young investors like me, however, should take the advice, as well as the change, and put it in their back pocket.
Let’s say—if you’re lucky and frugal—you have $3,000 saved as a student in college. If you invest this, and earn the historic market rate of return of 7 percent until retirement, you’ll have yourself around $63,000. Sounds pretty good right? Well, with inflation it’s worth a whole heck of a lot less, and as a percent of future income projecting out a generous average salary of $75,000, it would be 1.9 percent of your overall earnings before retirement, ignoring investment of any future income.
Sheesh. That was a lot of numbers. I hope you’re still with me. The exercise just serves to show that investing the cash you worked so hard for in your minimum wage on-campus job won’t matter nearly as much when you’re salaried. The cash could be used to pay off loans to Sallie Mae, which would prevent you from paying interest in the future, but it’s effectively earning a lower interest rate than you could be earning in the market anyway.
The question that’s left is what to do you do with all your cold, hard cash? It’s simple: spend it. This may not be news to many a broke student consumed by the life of instant gratification that is college. Yes, the same population so often criticized for its overabundance, with its brunches and avocado toast, is the real wealth management expert.
Now, frugality isn’t a bad thing. If you find deals for quality products that are undervalued—like at thrift stores or when you buy in bulk—there’s no sacrifice. You’re just being smart. It’s the age-old adage of “cheap versus frugal,” with the former a more caustic and unhealthy notion. The difference is that the amount saved should be put toward a goal or future purchase as opposed to a savings account or mutual fund because, like I already said, don’t save.
I fell into this miserly trap of hoarding cash for a far-off rainy day this past summer. The previous few summers and semesters I, between a couple of ex-girlfriends and too many orders of late night Dominos, was hemorrhaging money faster than Tesla. So, after the second consecutive spring surviving off tax refunds, I opted for a complete reversal. I got an internship up in New Hampshire, lived at home instead of in Boston, and stayed on the circular path from home to work and back again. The summer ended and I had a nice chunk of cash saved, but the memory bank, and camera roll, were mostly empty. There were no such deficits the summers prior.
I hope I don’t sound as banal as the money men I cited before by delving into the equally tired cliché of “richer in experience than in worth” or moving towards the long-used phrase “you can’t take it with you.” These short, momentary experiences on the opposite sides of the scale of wealth, however, provided me with a different, indelible lesson: Trying to counter deficiencies of any kind with a complete reversion and a full 180 degree turn away from an undesirable experience only leads to a Newtonian equal and opposite deficiency on the other end. It was my Rosebud and my three temporal Ghosts of Christmas. Granted, I didn’t amass the wealth of Charles Foster Kane or Ebenezer, nor did I develop their magnanimous personalities, but the summer ingrained in me the timeless lesson of avoiding the overcompensation that the films preached in a way that only experience can.
So, after some quantitative and qualitative arguments, I hope I’ve convinced some of you of the detriment of (early) saving. The question is still left, though, of what I’m doing with the money I’ve saved. Well, I’ve certainly tried to spend more on the weekends and indulged in Black Friday shopping, but I’ve placed most of it in perspective. I’m trying to have a more positive mentality by doing things like putting my savings toward my time abroad. Any money invested for the long-term, in theory, should never be touched. Saving for goals is concerted but doesn’t follow in investing’s prudence.
There’s no doubt lack of savings and astronomical student debt are issues plaguing current and former college students. When the time comes, and it’s fast approaching for me, saving and setting aside a small portion of income is vital. The grey area of college, the buffer between adolescence and the “real world,” between still acting stupid and growing up, holds the same relationship for savings. Students can tread the murky financial waters any way they choose. I just hope the pressure placed on them from the outside—given all the economic troubles attributed to the scapegoated generation—doesn’t force anyone to defer an experience in the present they may never experience in the future for a few extra compounded bucks, no matter who implores it, even if it’s Einstein.
Featured Graphic by Ally Mozeliak / Graphics Editor