[ Golden Gater Online - November 13, 1997 ]
Jason L. Ables
Staff writer
As any student knows, money does not grow on trees. But, what they may not know, is that money can really grow, and that the people can in fact become millionaires. Experts say all it takes is time -- and a good investment plan.
For most college students, the idea of investing their scant funds in anything besides books, beer and tuition may seem ludicrous, but according to financial planning consultant Fred Nelson, the students who can bite the bullet now and make themselves save and invest money will have the last laugh in the end.
Students should not put off investing while waiting for 'the big job,' nor do they have to be well-to-do in the first place to begin. Nelson, who has his own business and also advises through Consumer Credit Counselors "Strategies" program, said it is a myth that only people with lots of money are qualified to be investors; all it actually takes is making the decision to be one.
"That is the hardest part of the plan," said Nelson, because instead of becoming investors, most "people want to buy motorcycles and cars and bicycles."
That is fine as long as they remember that nothing saved is nothing earned, and that anything is better than nothing. Saving what may seem trivial amounts of money can really add up later.
How?
Compounding returns on investments. They are the great ally of the long-term investor. It makes little sums of money invested today grown into handsome sums later.
For example, according to Nelson, consider a person who invests $100 a month and gets an average rate of return on their investment of 5 percent for 30 years. In financial circles, 5 percent is considered pretty lousy, yet it would lead to $83,000 in wealth being built up.
At 10 percent, the return is just over $250,000, a quarter million, said Nelson.
At 15 percent rate of return, it blossoms to nearly three quarters of a million dollars at $692,000. If waiting 30 years to make that kind of money seems unbearable, Nelson said that students should realize that with the retirement age at 65, if they start investing now, they could retire early.
Getting a good rate is not a pipe dream either, according to Curt Weil. As an investment consultant, he only deals with portfolios of at least $250,000. He agreed with Nelson that the biggest obstacle people face to building wealth is getting themselves to start.
Weil said that some people feel they need to be experts before they can begin, or that they are intimidated by the idea of participating in the markets. But he said regardless of the hesitation, a person should just start.
"George Patten said that a good plan violently delivered is better than a great plan delivered a week late," Weil said.
In other words, it is OK to make a few mistakes while learning how to invest and people should not get too nervous about them. Over the long run, they have a way of getting smoothed out.
For example, the 10 percent rate of return mentioned above is not only feasible, it is really just about average according to Weil. He said that in the 20 years between 1970 and 1990 the S & P 500 index has averaged 11.2 percent and leaving it alone would have gotten them an 11.2 percent return for the two decades.
So how does a student start investing?
Starting at work is good idea said Nelson. People should ask if their company offers a stock purchase plan or a 401K plan they can participate in. Some companies will even match 401K funds so that a person putting in a dollar might get another one added to it.
If not (and even if they do) the old stand-bys of investing, Individual Retirement Accounts, should be looked into. It used to be that a person could not have both a 401K plan and an IRA, but that has changed. And starting next year there will be a new kind of IRA called a ROTH IRA. Whereas the old IRAs allowed money to be invested tax free, but later taxed it when people pulled the funds out, the ROTH IRAs will allow people to invest their after tax money now and later when they take it out. No taxes attached to it.
Mutual funds, offered by companies like Vanguard, Montgomery or Fidelity, are another investment tool students can use. Mutual funds are large numbers of investments that are pooled together to make one fund. A person gets the average rate of all the investments in the fund as their return.
Considered a good choice because their diverse nature offers extra security compared to say, investing in just one stock, mutual funds are a common investment favorite.
But regardless of the investment vehicle, both Weil and Nelson said that students should realize that the greatest thing they have going for them is their age. Time is on their side.
For example, said Weil, if a 20-year-old invests $2,000 a year for 10 years and then stops contributing but leaves their money alone to grow while at the same time a 35-year-old person invests $2,000 every year until they retire, in the end the 20-year-old will have substantially more money given equal rates of return.
All it takes is deciding to save.
"The worst thing you can do is let (saving) slide until you are 50-years-old," Nelson said.
[ Golden Gater - November 13, 1997 ]