Ignoring Finances When Young is a Risky Game
This is a guest article by Kevin. You can find Kevin at 20s Money, where he writes about financial topics geared specifically for young people in their 20s.
The Perfect Storm
Young people are in dire financial conditions. A weak job market, crushing debt levels and a lack of fiscal responsibility are a perfect storm resulting in the disastrous shape of most young people’s financial lives.
Ignoring the Numbers
There is great risk in not addressing the financial shape of one’s life when they are young. Most people are aware of the numbers, that if you start saving X amount of dollars when you’re 25, it will result in substantially more money when compared to someone who started saving when he or she is 35. We’re so aware of these numbers, that I think many of us are numb to them. They don’t have quite the impact that they should even though they tell a very accurate story.
The reality is that unless you start your journey towards financial health and financial independence now, when you’re young, there is a strong chance that you won’t achieve your financial goals.
Retirement is an easy “end goal” to focus on. Many of us naturally assume that we’ll make more money down the road; therefore, we’ll be able to put money towards retirement at that time. This will be sufficient for retirement, right? Furthermore, many of us believe in the assumptions that we’ll earn upwards of 10% every year on our money, and because of these easy returns, we shouldn’t concern ourselves with retirement yet. After all, I’m only 25!
The Risks for Young People
Unfortunately, I believe that there are significant risks to the financial future of young people today.
Crushing debt levels. Debt at the individual level as well as the public level will take time to unwind, and every dollar put towards paying down debt is a dollar that is not put towards retirement or some other financial goal.
Prolonged inflation. It is a serious risk, and if it materializes, it will make our savings lose its purchasing power. Simply put, our money won’t buy as much tomorrow as it does today. This means you will need even more money saved.
Lower returns. Many credible economists believe that the best years of the American economy are behind her which means that money invested in the U.S. stock market might not earn the long term returns that we have become accustomed to. It’s better to assume a more reasonable 4-5% return over time in my opinion instead of the often mentioned numbers such as 8-12%. A lower return means you must save more.
Sacrifice and Save More Money
It is because of these reasons I’ve outlined that saving, significant saving, is extremely crucial for young people today. There is no free lunch or easy alternative with regards to saving. It requires sacrifice and giving up on things that you want to buy. Rather than getting the latest gadget or a big house, maybe you should put more money towards your future.
Young people can have a bright future, but it will require sacrifice and dedication. Even if not all of the risks outlined in this article materialize, you should acknowledge that there most likely will be some sort of real obstacles in the way of financial independence. I encourage you to take a hard look at your financial picture, your lifestyle and the current actions you are taking towards your financial goals. Are you saving enough? Are you living beyond your means? Are you paying down debt? Be honest with yourself and make the necessary changes.
Instead of focusing on the amount of money young people are putting away now, we should focus on percentages of income. Of course, a $1,000 investment now won’t be that significant in 40 years, but by creating good habits now, the 10-15% retirement savings now can have a large effect down the road, so when we do earn more money, we won’t be forced to cut back because we’ve already created a solid base over the past 5 or 10 years.
Kevin, fears of inflation are largely overblown. I have yet to see any credible evidence that we are running the risk of sustained inflation beyond the Fed’s target level of 2-3%. Commentators pointing to the large amounts of money that the Treasury and Fed are pumping into the system miss the point – the infusion of cash represents an effort to stave off deflation, which is far more destructive than modest inflation (hint: deflation makes those crushing debts even more crushing).
Lower returns are a real risk; however, as you note, the risk is primarily in investing in U.S. securities. There is plenty of growth potential in emerging markets, provided one has the appetite for the extra risk. The young have the luxury to take on that risk.
You are spot on with your assessment of young adults in our country. What can be done to get them to start saving now. That is the 64,000 dollar question.
“Most people are aware of the numbers, that if you start saving X amount of dollars when you’re 25, it will result in substantially more money when compared to someone who started saving when he or she is 35.”
So well said. I quit smoking twenty years ago but if I had quit 40 years ago and invested the money wisely instead it would be worth a million today.
Good article Kevin. I think a lot of people get out of college these days with so much student loan debt they are discouraged from the start.
Social work majors getting out of school with $100K debt is crazy!
Of course getting rid of that is not impossible but with the desire to live like mom and dad immediately and get a fancy car a sad spiral is started and very hard to get out of.
Young people have more time than money…they are Timeionnaires. Prevent overspending by getting a 2nd night/weekend job because it’s not like bosses are giving big raises to keep up with big life goals.
I agree with some points of this article, although all are though-provoking. I do believe many young people are beyond unprepared when they leave both HS and College. I know personally even thing I have learned about finance and saving is entirely self-taught. With the help of using my parents as an example of exactly what NOT to do. (getting caught in the “rat-race” as Robert Kiyosaki puts it.) In this century we need to find positive $ mentors and become more responsible for learning the power of money.
And in responsible to moneymanleo…thats why I dropped out…I have absolutely NO college debt and I feel it will only benefit me. Having a college degree has almost lost its validity.
Totally agree with you! I think it is critical for young people to start investing (even if it’s just $100 per month) and saving their money like crazy! If they have debt, then they should definitely try and get rid of that, but not neglect investing and saving.
The inflationary tidal wave is coming soon- congress can’t hold it back any longer!
Thanks for the post.