The Oberlin Review
<< Front page News September 24, 2004

Money Talks
Saving: the next generation

Today’s column is on long-term saving. When I was a kid, I would blow my entire allowance on comic books the first opportunity I had. My little brother, however, would save his until he had enough for a video game. He would then torment me by never making up his mind about which one to buy. “If you want a game so bad, maybe you should save your money,” he would say.

But saving has a higher purpose than sibling abuse. We need to save. We are (hopefully) soon going to be generating an income. At some point, we may like to stop generating an income and learn the joys of knee-socks and mismatched plaid. In addition, there are many events outside of our control and having some money stashed away is the only way to feel secure in a world of uncertainty. That, and a blankie.

When saving, the first consideration is inflation. Inflation sounds fun at first. Who doesn’t love balloons? But monetary inflation is the bad kind of inflation, like the kind that transformed the On the Waterfront Brando into the Island of Doctor Moreau Brando.

Currently the U.S. inflation rate is around two percent and, due to stable macroeconomic policy (I want all of you to go thank Prof. Ken Kuttner right now), it should stay in that vicinity for the future.

However, the vast majority of savings accounts only pay between one to two percent, which means keeping your money in a savings account will leave you with less buying power when you take it out than when you put it in.

There are solutions, but how do we choose how to save? With so many options, couldn’t someone come up with a simple three-step plan that would teach us what to do with our money?

No.

All right, fine. Here is a simple way for us to begin saving.

Step One: Start saving. Coming out of college, $50 a month seems like a pretty reasonable amount. That equals $600 a year that we do not touch.

Make sure that on top of this, you are able to build and maintain a healthy savings account (let’s call it $2000-$3000), for any unexpected expenses. You can earn some extra interest on the savings account by putting it in short-term tools like T-bills, CDs or bank deposits. I’ll have more on those in a later column.

Step Two: Meet Mr. Roth IRA. The Roth IRA is a wonderful tool the government uses to encourage saving. Think of it as the magic star that enables Mario (your money) to run through all the little goombas (capital gains taxes) without getting hurt. The only rule is that your Adjusted Gross Income (AGI) is less than $95,000 per year. If you are expecting to earn more than $95k your first year working, give me a call. We’ll work something out.

The IRA is opened through a brokerage. Thankfully, we are children of the internet and have a variety of discount options available to us. Some choices include E-Trade, Charles Schwab, Scottrade and Ameritrade.

Step Three: Invest. Now that you have the account, you are allowed to invest it. Hooray! If you do not feel like spending the time and energy to learn about company valuation and stock-picking, index funds are best. Index funds, on average, outperform managed mutual funds and, in addition, have very low fees, if any. The Standard and Poor’s 500, commonly referred to as the S&P 500, has a historical average growth of 11 percent per year. Although the stocks may go down one year, it stands to reason that in the long run, this index will perform in a (fairly) constant manner in the future.

So let’s have some fun. With $600 a year, $600 every following year, at 11 percent interest will equal over $426,000 in 40 years. But here’s the fun part. Leave it another 10 years and the total amount saved is over $1,200,000! This is all from saving $600 a year! As you can see, the key to saving is to start as early as possible and keep going with it for as long as you can.

For more on investing, come to the Oberlin Student Finance and Investment Club meeting, every Tuesday at 9:30 p.m. in King 337.
 
 

   

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