Students today are often told to invest in their future by going to college, getting a degree, and securing themselves a job. Student debt is a common issue among graduates, but the idea behind racking up tens of thousands of dollars in debt is that you expect to get a job and work towards paying off your loans, making yourself better off in the long run. While securing a steady job and salary are great, what students aren’t often taught throughout their time in college is how to invest their money once they actually have it.
The problem that recent graduates often face is that now that they finally have a job and money after living off Ramen for four years is that they want to go out and spend their money rather than save it. They figure that they will start their saving in a few years once they are making more and have had their fun. Why wouldn’t you want to improve your quality of life now that you can afford it? This is the concept of consumption smoothing. As Shane Ferro of the Huffington Post writes, consumption smoothing is “when you are fairly sure that you will make more money in the future than you do now, it’s not crazy to spend more and save less, proportionally, now in order to have a better quality of life.”
What can disrupt this idea of consumption smoothing are the unexpected events and expenses that occur in one’s life. This can include needing to buy a new car, in increase in rent or mortgage, or any other substantial financial increase. Job security can often waver, and health scares can really put you into debt if you do not have savings to help you through it. It is so vitally important to have savings for these types of events. Planning ahead and keeping some money tucked away could end up saving you. Furthermore, entitlement programs in the U.S. are not in a great state at the moment with Social Security and Medicare/Medicaid looking like they will be long gone by the time the younger generations (Gen Y & Millennials) reach retirement age. Fortunately, planning for your financial future now will allow you to retire without any worries. The benefit of compound interest1 demonstrates this by showing that choosing to save at 21 or even 25, rather than when you are in your 30s, can pay huge dividends.
The chart above does a great job of detailing just how important it is to not just save, but to save early. Something that sticks out significantly is the investment totals compared to the end account value. Investing only $50,000 at 25 for ten total years is more beneficial than investing $150,000 from age 35 until retirement. By investing early and spending $100,000 less you double your wealth by retirement age! This is information that most college students never learn in their four years of higher education. It is a life skill that should be utilized and should be more pervasive throughout college courses. Pitt only recently added a personal finance course to be taught to students. Without the knowledge to set themselves up for retirement, graduates may find themselves in an unfavorable position when their retirement comes about. This emphasizes further why saving now could end up saving you later.
1Compound Interest – Interest calculated on the initial principal investment and also on the accumulated interest of previous periods of a deposit or loan.