A Thought For Young People

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I hope each of you reading this considers yourself young! 

There were once two young people, trying to furnish their homes, get appliances, a living room and dinette sets, a television, a sound system, and a computer. Alas, when each of them priced these items after diligent shopping for “deals”, they discovered that the total was ten thousand dollars. They anguished with the thought that there was no way they could pay such a sum in cash, and so surely they wouldn’t be able to afford these things that they needed. 

The first young person went home and found an offer
from a credit card company, guaranteeing him a card with a $10,000 limit, with an initial interest rate of only 3.9% for the first six months, and then 21% as a permanent rate. Excited, he called his friend! Now for only $310 each month he could have everything he needed – right now! In 48 months he would be paid in full. $310 was a lot of money to commit to every month, but it was possible, and compared to the thought of living without these essentials, it was a wonderful opportunity! 

His young friend came home to the same offer in her mailbox, but she did not get as excited about it. She had always been taught to avoid debt, and although it would be hard to do without these items for now, especially when her friend had them, she was committed. So instead, she shopped sales and second-hand stores and found bargains as she could pay cash for them. She did want to have nice, new items when she could pay for them, so she saved the same $310 each month that her friend paid to the credit card company. 

At the end of four years, the young man had paid his credit card debt and was pleased with his accomplishment. Unfortunately, the computer, sound system, and television were hopelessly out of date, and the other items were out of style. So he sold them at a yard sale for a few hundred dollars, which he spent on a short vacation that surely he had earned, and used his credit card to replace them with new items. He would just keep making the same payments and would have the pleasure of having new and up-to-date items in his home!

He called his lady friend to see if she was finally going to get some current stylish things for her home, and was pleased to learn that she was willing to go shopping with him. They both picked out items that again totalled $10,000. He paid with his credit card, and was surprised when she paid cash! When he asked how she had possibly come in to such a large sum of money, she smiled and said she had paid herself $310 each month for four years into a savings account that paid her a little interest, and that this had now accumulated to over $15,000! So she could pay the $10,000 cash, and have $5,000 left over to put into a Roth retirement account that would accumulate for her tax-free.

Another eight years passed. Each person kept following the habits they had formed. The young man got new items every four years on credit, made his payments on time, and was out of debt and had no savings at the end of each four year period. The young lady made do with used items for the first four years, and bought the same new items as her friend with cash every four years from then on. She consistently saved the same $310 each month her friend paid the credit card company in a short-term savings account earning a little interest. She had over $5,000 to invest in retirement savings each four years over and above the $10,000 she spent on furniture, appliances, and the like at the end of each of these four year periods.

At the end of these additional eight years, making a total of twelve years since the initial decisions, the young man was surprised to learn that his friend had averaged 8% yearly return on her investments and had already accumulated over $21,000 in her retirement account! (Compare that to the amount you have saved in the last 12 years – I hope it’s more than that, but has it been?) 

When 20 years had passed from the initial decision, he was replacing his items for the fifth time and still had no savings, while she now had over $50,000 in long-term savings and had bought $10,000 of the items of her choice every 4 years in addition!

At 30 years, she had over $125,000, and yes, he still had no savings. At 40 years, she had over $287,000, and at 50 years, she had over $640,000! 

The Congressional Research Service, a unit of The Library of Congress, on October 2, 2009 published a study titled “Income and Poverty Among Older Americans in 2008”. This study notes that “54% of Americans age 65 or over received income from assets in 2008.” This means that the other 46% of Americans over 65 had no savings or other assets that paid them income. The study further noted that half of those who did receive income from assets received less than $1,054 per year in such income. 

This means that 73% of all Americans over 65 are totally reliant on Social Security and whatever pension they might be entitled to. Most of these changed jobs often enough that they had no pension, leaving them only with Social Security.

The difference is this: The 73% pay interest, and the other 27% collect it. Over a lifetime, that initial decision to pay cash can make a $640,000 difference! And even if you have only 12 years left to retirement, this one simple example could help you save $21,000 you wouldn’t have otherwise. Amazingly, this would still put you in the top quarter of Americans, measured by the amount each person has in savings at retirement. 

The sooner you start the better, and it is never too late! 

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Get Your Tax or Financial Questions Answered In A Future Blogpost

I choose topics for my articles based on the questions I receive most frequently from you. I appreciate your input! I originally wrote this particular article for my local newspaper in 1999, and have updated it in 2009 and again in 2013 to reflect the opportunities currently available.

Important Note! 

The information in this article is intended to inform you of some of the financial opportunities provided in the tax laws or elsewhere. It is not intended to give you specific advice for your personal situation, since each case is different. If you need such advice, please contact a qualified professional!

© 1999, 2009, 2013 Doug Beecher, CPA, MBA, all rights reserved. This article, either as a whole or in part, may not be reproduced or transmitted in any form without the prior written permission of the copyright holder. When such permission is granted, the user must state that the material was used by permission of the copyright holder. Please note that it is usually preferred to link to this article rather than to copy it.