Debating Myself

I have been deeply immersed in critiques of the market system this month, and my reading and thinking on the issue has happened to occur at a time I am about to strike out on my own financially–graduating college this May.

Thinking about the financial entanglements already piling up immediately following graduation (car insurance, student loan debt, rent commitments, etc.), I started to wonder if I was prepared to manage these and begin thinking about investment, retirement and savings.

And then it hit me. I’m not.

When most people hit the workforce for the first time starting off their career they have little or no experience or training in financial planning. It is like giving someone a car and not teaching them how to drive it first. Except it is more like strapping them into the driver seat of a car hurtling down a NASCAR racetrack and warning them that if they don’t drive right they’ll crash into the wall and badly injure themselves.

See this post at the Western Democrat listing the “debtor society” as one of the biggest issues facing American society. I have to concur (I mean Warren Buffet agrees too!).

The market system is incredibly complex and learning how to take advantage of its tremendous opportunities while avoiding its many dangers is as vital as learning how to buy food and keep clean. Maybe even more important, if you made enough money in the market you could actually pay someone to do those things for you. Yet we receive little or no formal training on financial matters. We don’t really talk about financial literacy, and those of us that do probably enjoy a sizable advantage.

Without getting into overarching judgments about the validity of the market system or the way capital is regulated (which is certainly a debate we as a society should always be having) we have to accept that we live in the here and now, and the here and now is dominated by a global capitalist economy. Shit. So how do you live well within that system? What are the instruments of that system, what are their functions?

One possible explanation for some degree of the growing inequality of wealth in the United States of America today may very well be the different levels of understanding of the market system. Wealthy people tend to impart their knowledge about the market system onto their children, who then use that information (and seed money from their wealthy parents) to generate their own wealth. If you and your parents were not fortunate to possess such knowledge (or seed money) then you are at a distinct disadvantage when it comes to generating wealth.

Knowledge is power. In a market-based economy basic knowledge can make a big difference in the returns you see on your investment.

That is why new campaigns about financial literacy are one of the most important components of reducing inequality (because the whole socialist revolution might still take awhile). We need to teach people about generating wealth now, and let them decide to take that advice or not. And if they want they can work for change within the system too. But don’t miss out on your own financial well-being because of ignorance (out of principle, that’s your choice–but if you miss out because of ignorance that is society’s failure).

So here are four super easy steps to help you get started:

1. Save money. I know, it isn’t revolutionary, but the first step is to decrease your spending–give up your Coldstone ice cream habit for example–and begin putting your money away for the rainy days that inevitably occur in a market-based economy. You will live long enough to see them.
2. Put your money to work. After successfully saving up some money, gradually put some of those savings to work. Always keep cash on hand, but after you have a strong base of cash start putting some excess into long-term investment vehicles with tax benefits (there are an array of these: ROTH IRAs, IRAs, 401(k), 529s, etc. ). If you want, put money in stocks and bonds on your own, but don’t feel obligated–you can make money by keeping it simple.
3. Start now. This seems odd, especially if you are young, but the sooner you start saving the more time your money works for you and the greater returns you get. Compounding interest is the back on which many fortunes are built. Start using it to your advantage right now.
4. Keep it simple. Don’t try to beat the market. If you save early you can take very low-risk investments with high long-term yields and make money without ever worrying or gambling on the market. Stocks have an average annual rate of return of 10% over the last 50 years. There will be booms and busts, but you should wind up with about 10% per year over the life of a 40 year retirement account.

If you don’t trust me or want more information, here are some further resources that you should definitely look at seriously for all kinds of other advice–tax, insurance, etc.

• http://www.mymoney.gov/
• http://www.360financialliteracy.org/
• http://www.jumpstartcoalition.org/

If you want a book there is only one you need to read, John C. Bogle “Common Sense on Mutual Funds”. Its intelligently written, interesting, and it will change your financial life.

We take finances very seriously in America, but we don’t seriously discuss them. A great majority of people are wholly unprepared for the kind of sound financial planning that will protect them from lay-offs or sickness and prepare them for a wealthy and enjoyable retirement. These are easy steps.

Because of the seriousness of financial advice and financial security in American culture, however, I am compelled to give a disclaimer here that I am not liable for any financial losses you incur as a result of taking this advice–I’m not trained in any way. Just think of me as a friend telling you about some great resources you should look at that will help you with financial problems.

Seriously. Start saving now.

Tags: Bogle, financial planning, retirement, Vanguard

This entry was posted on Friday, May 2nd, 2008 at 2:26 pm and is filed under Business, Finance, Personal. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.