Personal Finance Mentoring

What a day! It all started when I had to wake up at 4:45 this morning. I had to be in the office at 6:00 am and then be in our VP’s office at 6:30 to give a presentation. Needless to say, I was a bit tired.

Later in the day, I had a conversation with a young guy (20) who asked me a question about investing. It all started when he asked me if I thought it would be a good idea to buy a CD. My first question to him was, “What’s it for?” He said it was for retirement. That’s what got us talking for about an hour and a half. Here are some of the things that I talked to him about:

Rule of 72
Dollar cost averaging
Index funds
Emergency fund
Consumerism and materialism

Like I was saying, we first started talking about CD’s. I told him that it probably wasn’t an ideal place for him to put his long term investments unless he wanted to just hand his money to the rich people. With a bewildered face, he asked, “what do you mean?”. I said, “basically, you’ll be lucky to keep ahead of inflation and at your age, you should really consider being more aggressive.” That’s what led us in to the rule of 72 and the power of compound interest.

I told him, “at your age, you should really consider just setting up an automatic investment that transfers $100 per month into a ROTH account and then automatically buy an index fund like an S&P 500 fund.” I explained that with this strategy, he could expect to buy in the market as it fluctuates. Sometimes you buy low, sometimes you buy when it’s higher, but over the long term (40 years for him) he could estimate that he’d probably see a return of about 10% if history is any indication (which we all know it isn’t, but it’s all we’ve got to look at). I took him online and used a calculator at bankrate.com to show him what $100 per month would grow to at 10% interest over 40 years. He was amazed. I also explained how he can use the rule of 72 to estimate how much he can expect to yield over a 40 year period. This really helped illustrate why it’s so important to start now, as opposed to waiting a few years. I explained that if he waits, he’ll end up losing out on the ability to double his money toward the end of his compounding resulting in losing half of the value of his investments. I also showed him how the rule of 72 can show him how much he needs to save to get back on track. (if he delays at all he can just save more to get him caught up to what he would have if he had been saving a little since he was 18)

We talked a lot about spending less than you make and I recommended he spend the $5 on the book, “The Millionaire Next Door”. I told him that the book does a good job of explaining how many millionaires got that way by not getting caught up in trying to keep up with their neighbors and spending less than they make. I told him, A brand new car with 21″ spinner wheels isn’t going to take care of you when you are old and can’t work. The women that might be impressed with what you are driving today, aren’t going to be around to take care of you when you are old. The people that you impress by spending all your money on clothes aren’t going to be around to help you when you are old. We talked a lot about driving a more expensive car than you can afford and how you can really sacrifice your future net worth if you keep trading in cars and buying new ones.

I also explained to him how consumer credit is a bad thing. He didn’t really understand how credit cards and bank accounts work. I gave him an example. “Let’s say that you have $1000 in your savings account at a bank which is paying you 2% interest. You also have a credit card that usually has $1000 balance on it at 18% interest. Do you know what’s happening when you do this?” He looked at me and shook his head. “It means that you are borrowing your own money and are paying the bank 16% to do it.” I explained that you should always pay off your credit card each month, or you were just giving your money to the rich people.

Payday loans? He handn’t really thought about them before. I explained that you can pay over 100% interest to borrow money from them. I said, “How can you get ahead and end up with a decent retirement if you are paying someone 100% interest?”

He really seemed to be interested in getting started. I told him that he just needed to go set up the account and set it up to automatically invest every month. By doing this he would be far less likely to stop investing because it is all automatic. I also told him not to chase the market. Just put your money in every month and don’t watch the market too much. If expert mutual fund managers have trouble beating the S&P 500, people like us certainly would too.

And to end it all, we talked about college. I told him that, without question and with no regret, the single best thing I have done in my life that has impacted my net worth was finishing college. Yeah, it took me longer than most, and I got a pretty insignificant degree, but it got me the pass to get in the door. I explained to him that it’s less about exactly what your degree is in, than it is that you actually got one. If you have a degree and have some documented experience (in his case with computers), you can make a good living. Once you get the job, it’s less about the degree and more about your ability to work hard and continually learn new things. The degree really is just a foot in the door.

So, this was a pretty abbreviated version of how our conversation went, but I did really enjoy sharing some ideas with him that he had never heard before. He thanked me no less than 5 times for taking the time to tell him these things because no one ever had before. He went to a bank to talk to someone about what a ROTH was, and how to get started in investing and all they told him was, “Oh, we can open a ROTH for you and our ROTH is currently paying almost 4%) Not exactly a financial education.