Investing

Investing in individual stocks is a bad idea at the moment, with the economy going into recession, so the risks are too big, and the profits you make will be too small. I'd only invest if you know the company, have seen year reports and are sure that they will be able to keep up with a crisis.

Also, why the hell would a college student want to put money away for RETIREMENT? You don't want to start paying for that until you're 35 or older (at least that's how people around here do it). I think that students need to invest some of their money on a shorter term, to be able to use it to buy a house in the near future or some other big expense that you find necessary to make. The safest option is probably government bonds, you can find them for various periods, and they come with a fixed return, so if you have no experience with the financial market, this may be right for you.

Another option is a "savings insurance" (I don't know what it's called in the US. TAK 21 accounts in Belgium). You basically put your money into an account for a fixed period (usually eight years here, then you don't have to pay taxes on the return), and the compound interest combines a small fixed percentage, and a variable return that depends on the market (the bank will invest the money for you in specific funds, so this can fluctuate, but is usually around 4-5%). The nice thing about these accounts is that you you always get your investment back (guaranteed by the contract), and in the case of your death, your heirs will receive a 130% return (the insurance bit).

Jam it back in, in the dark.

Originally Posted by zzeroparticle

Because of the power of compounding returns? The later you start, the more you have to square away to reach that retirement goal, whatever monetary amount it may be. But the sooner you start, the more time you have to let your contributions grow and the less you have to contribute later on to reach that goal.

So you'd rather live like a poor sap NOW, to have 10000 dollars extra in FORTY YEARS? I'd prefer living a carefree life now and start putting some money aside later on, when I can afford it without affecting my lifestyle. Why would anyone want to set a part of a starters wage aside, or even worse, money that you have as a STUDENT (through a student job or parents) when you have much more room to save later on. There's nothing wrong with thinking of the long term, but you also have to able to live the way you want now.

There's nowhere I can't reach.

If you have money to invest but you choose to save everything and live like a monk, then yes, you are a poor sap. I'm not talking about spending everything, you obviously need to put some savings aside, but investing in a RETIREMENT PLAN at 23 is just silly to me, you won't even know if you will get the chance to be old enough to profit from your savings. Even if you encounter hardship in your thirties or forties, most retirement funds are for a fixed period, so the money would be no good for you anyway since you can't touch it.

This thing is sticky, and I don't like it. I don't appreciate it.

Originally Posted by Spike

I'm actually LATE in starting a retirement account. Most of my friends started theirs in highschool. But then again I come from an affluent area of California where people know how to handle their money. It may sound like I'm stroking my e-penis, but I'm simply doing this to show you how wrong you are with your assumptions. You obviously don't understand compound interest if you think a difference of 13 years of compounding interest equates to $10,000. Here's a calculation for you:

Assuming a retirement age of 55, and a yearly addition of $4000 (easily done if you know how to handle your paychecks), here are two scenarios. The first being what you suggested; starting a retirement fund at 35. The second is what you SHOULD do; starting a retirement fund in your late teens or early twenties.

Retirement Fund started at age 35
Initial Principal: $4000
Annual Addition: $4000
Years to Grow: 20
Interest Rate: 8% compounded annually
Account Size at 55: $216,335

Retirement Fund started at age 21
Initial Principal: $4000
Annual Addition: $4000
Years to Grow: 34
Interest Rate: 8% compounded annually
Account Size at 55: $740,027

That's almost a 350% increase with only an extra $56,000 invested. Are you telling me you wouldn't save $56,000 over 14 years to get a 350% increase? And yeah, who knows if you'll live long enough, but that goes with everything in life. No one's saying you have to live like a monk if you start an investment fund. The best time to invest is always when you're young. The second best time is now. I can afford to save $4000 per year while being able to live in a very nice area so why shouldn't I start saving now? If others can't save that much, then save less. Compound interest is one of the most powerful tools people can use to get wealthy. The only thing is, it takes time.

Actually, your calculations are too simplified, since you don't take into account the ACTUAL value of those admittedly huge amounts of money. You als have to take inflation and the market rates. Say that you take a current market rate 5% into your calculation (which is, given the current circumstances a rather generous guess), lets see what the actual value of your savings will be using annuity calculus*.

If you invest for 20 years :

4000 x a20┐0,05 = 49,848 USD

If you invest for 34 years :

4000 x a34┐0,05 = 64,771 USD

So my rough estimate wasn't so far off it seems...

*The more exact formula being A x [1-(1/1+i)³]/i
With A being the amount of money you put aside, i being the rate, and the 3 representing the number of years.

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I'm not saying that the final value of your capital will only be 50 grand, but that the actual value will be worth 50 grand. Money loses value over time, that's why people demand interest in the first place. Interest has two functions; compensate for missed opportunities (if you would have invested the money in something else), and compensation for the loss of value over time. A euro/dollar you have today will be worth less tomorrow, and even less in 34 years. If I could buy a loaf of bread for 75 eurocents 10 years ago, I have to pay almost 2 euros today. This is mainly caused by inflation, and various other factors like devaluations, the economic climate etc.

The 5% that I used is also just an example to simplify things, obviously you'd want to choose an interest rate on your account that is bigger than the market rate and the inflation, to make a bit of an economic profit on your investment. The formulas I used are taken directly from one of my textbooks btw, where we treated a case that is comparable to this, to illustrate the effect of time on monetary value taking compound interest rates into account.

I was speaking idiomatically.

Sorry, we use "Actual" in Dutch, so I'm not too familiar with the correct English terms. We've always been thought to look at the actual value of your investment (according to my textbook, the annuity formula also considers that the amounts of money in the future will not be the same at present value, so they say that the numbers would be pretty accurate given a stable inflation), and it was used in several case studies to show that compound interest can look too alluring when too simplified. Assuming inflation = market rate is the standard method that we use, since the actual calculations will be too complex, and not very trustworthy since there are so many factors that you can't take into account.

In a different turn, why is there a need to start saving on your own at 21? Don't you have state pensions and retirement funds at your job (the 401k thing I assume)? My parents, while still years away from retiring could easily afford to quit their jobs now, and keep their current living standard with the state pension and the money they saved through their employer, without even touching their personal retirement funds for at least 10 years (and this is taken into account a lot of hardship, since both of my parents have a chronic illness, but since we have public health care, it isn't as important as it is in the US), but I'm guessing it's not that easy in the US.

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