Questions Generation X is Asking About Finance and Investments
Farm Business Management Update, December 1999
By David M. Kohl and Barbara J. Newton
As parents, many of you are or will be in the process of funding your children's education. According to a November 1999 issue of USA Today, 67 percent of high school graduates attend college, up from 40 percent 30 years ago. Many criticize the younger generation for lack of focus, addiction to technology, and the need for instant gratification.
This fall while I have been on leave from Virginia Tech, Dr. Bill Beal, professor of Animal Science, asked me to guest lecture for one week in his Introductory Animal Science class. To connect with Generation X, in the second class I asked them to write down one question about investing and borrowing. The following are some of my favorite questions that may be on your child's mind along with my responses to them.
What is the first step in investing money?
My response is the Nike principle, and that is "Just do it!" When it comes to investing money, whether 8 months or 80 years of age, your biggest enemy is procrastination. Any plan of investment should be based on a written budget with specific investment goals and with an implementation and measurement plan. A recent visit with a financial investment counselor found that people who write down their financial investment goals will often double expectations. Other studies have shown that people with written financial goals will earn nine times as much wealth over their lifetime.
I suggest that you develop a budget and pay yourself first. In today's world with consumption temptations, nickel and diming yourself to death is easy. Dr. Alex White, who is currently teaching my courses at Virginia Tech, recently put our freshmen majoring in Agricultural Economics through an interesting exercise. He asked them to keep a diary of expenditures. To their surprise, small purchases at the convenience store and McDonalds add up!
Research suggests whether you are making $8,000 or $80,000 saving patterns vary little by income brackets. It's not how much you make; it's how much you spend.
What's a good rate of return?
With the recent high returns in the stock market and mutual funds, perceptions on returns have been altered. For Generation X, the period from 1982 to 1999 has only seen a seven-month recession; thus, perception of good times has become reality. For example, I asked the class to write down what they thought was a good return on investment. Nearly one-third of the class expected at least a 20 percent return or greater. Realistically, I suggested to the students that their target over a 40-year period should be 8 percent. Many shook their heads in disbelief, thinking I am old and conservative. I am, but that is beside the point.
However, using the Rule of 72 (dividing 8 percent into 72), money will double every nine years. If the average is 12 percent, it will double every six years. The class got excited when I suggested that an 18-year-old investing $1,000 would have $32,000 by 63 years of age and $128,000 by 60 years of age at a 12 percent return. The principle I was attempting to get across is to start saving early in life with small amounts and let time and compounding interest take care of itself.
Should my parents handle my investments?
The parent's role should be as a teacher, coach, and facilitator, not a control freak. One of the biggest mistakes is that a young person does not learn the trials and tribulations of finance. My assistant says that the best thing her father did in her youth was to regularly give her the family checkbook to reconcile it to the bank statement.
In agriculture, I frequently find 60- and 70-year-old parents fearing to allow a 40-year-old the opportunity/responsibility to manage the finances. Then because of circumstances, the 40-year-old comes into wealth only to lose it within a few years.
Stock Market or Mutual Funds?
I suggest students invest in both. They should invest in stocks from companies whose products and services they use and trust. Mutual funds are good investments for individuals who do not have time to manage investments. However, regardless of whether stocks or mutual funds are used, 97 percent of wealth comes from diversification rather than timing investments in the market and going for the home run. One study done by a major brokerage house found that people who attempt to time the market actually lose 2 percent.
Old and crippled?
One student asked, "Why should I save, sacrifice, and invest all my life to have a large sum of wealth when I'm old and crippled and can't use it?" Saving and investing like everything in life requires balance and having fun on the way to the goal. Investing in earlier years establishes the foundation for financial independence when people reach their 50s and 60s. People who save and invest get choices later in life.
After the three classes, the real hope for Generation X came from one student's comment. She stated that she was not going to depend on government and Social Security for her nest egg. She was going to take care of herself. This spirit of independence bodes well for the generation that will lead us in the 21st Century.
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