Will Our Generation Be Good Investors?
This Blog’s
Rap & Finance Section:
Drake “Laugh now cry later”
Tired of beefing you bums, you can't even pay me enough to react
“Drake is referring to the fact that he has reached a level of financial security to the point that there is not a dollar amount on his stress or mental well-being. We should follow suit, many of us have jobs or careers that we hate but the reality is that we are still in places that our companies have enough to make us react.”
One thing that we must recognize is that within our generation we have a huge influx of young people taking hold of their finances. Or better put, I would say more people are becoming aware of the lack of financial education in our country. This excites me, because I think more than ever, we have young professionals and college students speaking about finances. This is good for our generation; people are breaking the “money silence”. I find this to be positive because studies show that the more “involved” people are with their finances, the better chance they have of reaching financial efficacy, or a sense of financial freedom
Yet, in the midst of this reality, I still have a sense of fear for our generation when it comes to our future as investors. Particularly, I worry for those who still feel afraid to get involved in investing simply because they “do not know enough.”
Perhaps you are a person in their early twenties, who has just graduated college, and for the first time in your life you are actually earning some real money. Yet, in spite of this new reality you still feel overwhelmed by the world of money, finances, and investments.
Listen, I understand that money can be scary, and at the risk of sounding like your parents, I give this advice: you should start investing - now! Let me explain why. I see it as dealing with a messy room. Bring to mind the days you have returned home from work plain exhausted. The second you open your room door, you see the 12 outfits you tried on that morning laying on the floor. You want to ignore the problem and just lay in bed, but you’re an adult now (or so they say), and you know that the mess will not take care of itself. Therefore you shove it all in the closet. No! You grab one shirt, pick up your shoes, and hang your pants. Now, what was the most important step? The most important step was the first: simply getting involved with the process of cleaning your room. *Messy room analogy*
Inflation: Sometimes my parents talk about how “back in the day” they could go to the store and buy 2-weeks worth of groceries with just twenty dollars. Well, they might not be that far from the truth.. Naturally, over time the cost of things rises. This means, practically, that your dollar will likely be worth less tomorrow. This is one of the reasons people make you pay interest on loans. Because the “loaner” knows that over time the value of money changes.
Now, this is where investing comes into place. If you simply save your money(put it in a savings account), it will inevitably lose value over time. Conservatively, inflation increased at roughly a 3% rate per year on average throughout the history of the United States. In comparison, the return on investment of the S&P 500 has been roughly 10% since the early 1900s.
Compound Interest: I know it is hard to comprehend, but one day you will be looking to retire, and you will have to find a way to fund this goal. Please do your “later self” a favor. Stop kicking your “later self” in the knees. What am I talking about? I am talking about the moments you stay up until3 AM even though you have work at 8 AM. Yes, you rationalize this by trusting your “7 AM self” to deal with it, only for your “7 AM self” to hate your “3 AM” self and its addiction to TikTok! “ Please, do not let your “later self” hate the 23 year-old version of you. Do not wait to start investing; the longer you wait, the more you will have to save. An example of this would be if you had two investors one who started at 25 with a $5,000 investment and invested another $1,000 every year by the age of 45 if their money grew at a six percent rate they their investment would be over $50,000.
If you were to invest that same amount with the same return at 35. You would have to invest more than three times the amount annually to reach that same goal!
Yes, I know you’re thinking, “I’ll be making more money by then.” While this may be true, you will undoubtedly have to save more to catch up on the missed time. Think of it as a snowball: the longer the slope, the more time the snowball has to grow.
Now that you’ve survived my analogies and inevitable TikTok joke, what are your next steps?
If you are young and have a long time horizon to retirement, but find yourself to be risk-averse, feel free to invest in an allocation that is less volatile. Your time horizon will help make up for the risk you might sacrifice..
If possible, take advantage of tax-free growth by saving in a Roth IRA. Not to mention, if you are early in your working career, there is a good chance you are in the lowest tax-bracket you will ever be in..
If possible, take advantage of investing in your company’s retirement plan, especially if they offer a match. This is free money, we love things that are free.
Additionally, for the sake of flexibility, consider investing in a separate brokerage account so that you can have ease of access to this portion of your money. You would be able to have more flexibility in your investments.
As a friendly reminder, if you find any of this confusing, overwhelming, or simply want to ask questions, please send me an email and I would love to schedule a time to talk.
All the best,
Odaro
References:
Drake, Lil Durk. “Laugh Now Cry Later”. OVO, Republic Records, 2020. Spotify
spotify:track:2SAqBLGA283SUiwJ3xOUVI
J.B. Maverick “What is the Average Annual Return for the S&P 500?”Investipedia.com. Feb 19, 2020.
Kenneth J. White, PHD. Narang Park. Kimberly Watkins, PHD. Michael G. Thomas, JR., PHD. Megan McCoy, PHD, LMFT (2019) The Relationship Between Financial Knowledge, Financial Management, And Financial Self Efficacy Among African American Students. 19-25.