She listed several questions. And as I started to respond to her first query -- which I have pasted below -- I realized she was going to get more than she bargained for! I've never given a commencement speech, but my intended brief response turned into this column.
Here's what she asked: What are the stages of financial planning by age (from 22 to 32)?
I read that question and started to smile. And then I started to write:
Well, from my perspective, from ages 22-32 is just one stage -- the getting started stage. And it is perhaps the most important stage because you're just starting out, and you are creating the base for your future financial security. And since time is more important than money -- something else you will only learn in hindsight -- it is imperative that you build a strong base right from the start.
The two keys to that base are: paying down debt and starting to save. You must deal with your student loans promptly, hoping to pay extra every month to not only shorten the repayment time, but ease the burden of interest, which can more than double your total loan repayment. And, somehow, at the very same time, you must start saving on a regular basis -- even if it is only $50 a month.
Of course, that gets down to one basic principle: Spend less than you earn. Always. You will earn more over the course of your lifetime, and you can always spend more. The secret is in having money taken out regularly and automatically -- before you see it and spend it.
The best to way to save is in an Individual Retirement Account. That's just a way of holding your investments to make sure you are building money for your "old age."
I know this seems like an impossible task, but you can do it. First, recognize that it doesn't have to be a lot of money, because time will leverage your money. Putting away just $2,000 a year -- that's $38.46 per week -- at historic stock market average growth rates of nearly 10 percent a year (with all dividends reinvested) would give you a portfolio worth about $365,000 in 31 years -- or $2.1 million in 50 years! Over time, your money starts working for you -- instead of you working for it!
Now, there's one more thing to consider: Taxes. In addition to debt, the burden of taxes will always be with you. A Roth IRA grows tax-free, and should be invested in a diversified portfolio of stocks, like a mutual fund.
Most mutual fund companies, such as Fidelity and Vanguard, require at least $1,000 to open an account. But at Sharebuilder.com, there is no minimum purchase, and they will help you do the paperwork to make your investment account a Roth IRA, where all those gains described above will come out tax-free! Just ask about the Standard & Poor's 500 stock index mutual fund or Exchange Traded Fund, and use that to make your investment.
OK, I understand that you're skeptical. Given all the economic problems in our country, you're probably wondering how I could begin to suggest that the stock market will give annual average returns, including dividends, of nearly 10 percent.
But just think if you had graduated nearly 100 years ago, in 1926, and started investing. You would have had a couple of booming years, until the Crash of 1929. (I'm assuming you studied this in history class!) That was followed by the Great Depression -- far worse than anything we've seen since. And yet, if you had kept following that plan of regular investing and reinvesting dividends during the market crash and decline of the 1930s, you would have averaged that 10 percent stock market return!
So that brings me to the next, most important point about this plan. You must stick to the plan! There will always be ups and downs. There will always be scary times.
If you think back over your history studies, think about this long-term pattern of America's growth, despite the Great Depression, World War II, the Korean War, The Vietnam War and the Cold War. And we survived peacetime challenges such as the Great Inflation of the 1970s, leading to interest rates of more than 14 percent on government bonds -- and the subsequent huge industrial recession of the early 1980s. And then there was the tech boom and bust, and the 9/11 attack.
America has survived, and prospered, through some tough times. And today the stock market is near all-time highs. It's a bet that you want to make -- and keep making -- on a regular and automatic basis, every month that you get a paycheck. And it's a bet you want to increase as your salary increases -- and it will.
Can't afford to save and invest? Don't tell me that. Just look at your first paycheck. There's a box there called FICA -- a big deduction. (I promise, no matter what company you work for, they'll be taking a deduction for FICA.) Those initials stand for Federal Insurance Contributions Act. It's better known as Social Security. And it's not a voluntary contribution. But I have little doubt that my generation will soak up most of the money supposedly being set aside in Social Security for your generation!
So you owe it to yourself to create your own retirement security plan -- and a plan to build savings for the things you want along the way. Yes, a house is still part of the American dream. But just as generations before us did (there's that history lesson again), you might have to rent for a while or share an apartment, or even move back home to save up for a down payment.
You see, the "American dream" is not really so much about buying (SET ITAL) things (END ITAL) as it is about having financial peace of mind and economic freedom. Value that freedom highly. It allows you to choose your own career path -- instead of being indentured to one job or profession your entire life. It is not only measured in money. It is measured in personal satisfaction and the relationships you build during your life -- including your personal relationship with money.
You are graduating into a period of slow economic growth, but huge economic opportunity. The American economy is like an engine chugging uphill, still gaining momentum. The litany of historical woes and wars that I just described didn't stop our growth. And today's challenges are also no match for the American spirit.
We are on the brink of total energy independence. We have the brightest minds working on technology and medicine, and the intersection of these two fields will give us longer, healthier and more productive lives. Make the most of yours. Never give up on America -- and never give up on believing that you can create your own bright future. And that's The Savage Truth.
Terry Savage is a registered investment adviser and is on the board of the Chicago Mercantile Exchange. She appears weekly on WMAQ-Channel 5's 4:30 p.m. newscast, and can be reached at www.terrysavage.com. She is the author of the new book, "The New Savage Number: How Much Money Do You Really Need to Retire?" "Terry answers readers' personal finance questions on her blog at www.TerrySavage.com. To find out more about Terry Savage and read her past columns, visit the Creators Syndicate Web page at www.creators.com.
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