Many years ago I was working in a large banking company in the Atlanta area. As part of the community outreach efforts of my employer, they asked several of the execs, including me, to host students from a nearby school in the inner city to conduct a “lunch and learn” for a group of High School students. Our ambitions mission was to take two and one half hours of our time and attempt to offer this deserving group of students a basic workshop on financial literacy and responsibility, and maybe even provide for them a small glimpse of a corporate world which I had no doubt was starkly different from the world they lived in every day. We hosted approximately 35 students, mostly African American, and a few other minority groups. The demographic makeup of the students from this school, from what I was able to gather based on my knowledge of Atlanta neighborhoods, was unfortunately about what most would expect when one uses the general descriptor “inner city”. Putting political correctness aside, in my opinion, the kids were generally poor, disenfranchised, raised in mostly single parent homes, and had been moved along in a public school system that had already failed them. We’ve seen the movie. Some of us played major roles.
As it happened, I was the only executive in the room who was African American. So naturally the other white male and one white female execs were kinda looking to me to be the shield, the moderator, the spokesperson, the bridge, for the event. Their reservations and fears of speaking to this group of brown students were very palpable. Too much evening news I guess. Maybe the execs looked to me because I was back in my native element now. Of course! I grew up in similar circumstances. I could personally identify with their struggles and challenges. I could deliver an impassioned and thought provoking talk. No! I could deliver a sermon on financial literacy. And I’d deliver it in such a way that Dr. Martin Luther King Jr or Rev Jeremiah Wright would be envious and proud. I could end my seminar/sermon with a soulful eloquent prayer and maybe a group hug. There would be tears and hugs and these poor souls would see, would finally have a light in their dark worlds. They would find hope. (insert pause) No. Sorry to disappoint. I grew up in a solid middle class community in Chicago and was educated in a high-ranking parochial private school system. But I’m no stranger to struggle, as relative as it may be. But, my qualifications were more than good enough for me: I was brown like them. So I knew I would have their attention, at least for the first 15 seconds. I wanted to take this opportunity to share something that I hoped would have an impact; maybe not a life changing impact, but hopefully something that might keep them awake at worst and at best maybe provide a small spark and get them thinking about something important relative to finance. My other colleagues started us off with invigorating talks about the Federal Reserve banking system, how do you fill out a check properly, what those strange numbers mean on the bottom of a check. One Exec actually talked about himself and the corporate lending division he managed. He may as well have been speaking ancient Mandarin.
So, I, the native son , decided to talk about one of my favorite subjects – Money – investing money in particular. To keep their attention, I spent 40 bucks before hand and I bought 40 Susan B Anthony dollar coins from the retail branch downstairs. I put the coins in a brown paper bag and asked them to pass the bag around the room and everyone take one. There were 35 students in the room. 40 coins went out. There was one left in the bag when it came back around the room. But I digress. I continued by asking questions. “Who here likes money?” Everyone’s hand shot up enthusiastically. “Why is money important?” I got the obvious answers to that question, but the class was engaged. They were one dollar richer and apparently I had stumbled upon a subject that was pretty important to all of them. So we talked a bit about the necessities and some of the nice things that money can buy. Feeling emboldened I went in for the leading question so I could make my point: “Give me some examples of how you can make money/get money?”. Oh this was years ago but I remember the answers were interesting – A job (we expanded on that a bit), the lottery, a govt check, dope game (yes, some young man said that). Then I had them. No one said investing. No one. Not one. I found that interesting, not surprising. I continued. “What about investing?”, I exclaimed. “Oh yeah” came some soft voices. So I went on, “ What if I told you that your money can one day actually work harder for you than you ever can. And your money can potentially make more money for you than most jobs. Would you believe me?”. A couple nods but mostly blank stares.
They weren’t following. “Ok kids, I have another question for you, I’m going to give you a scenario and I need you to make a choice. Let’s say Bill Gates, one of the richest men on the planet, is coming here today. He is going to give you all a choice, an opportunity of a lifetime. He will either give you $250,000 in cash today or give you an investment. Now here is how the investment will work: Mr Gates will give you one penny and that penny will double every day for 30 days and you get the full amount on the 31st day. For example – day one you will have 2 pennies. On day two you will have 4 pennies. On day three you will have 8 pennies, on day four you will have 16 pennies and so on and so on and so on until you get the full amount on the last day. Now kids, which will you take? $250,000 today or the value of that penny investment on the 31st day? Let’s see a show of hands…”. Unanimously just about everyone said they’d take the $250,000 today. A few didn’t raise their hand. I figured I had lost them after the dollar gift. Maybe they were the ones who took an extra dollar. But I digress. So I asked the obvious question – “Why?”. And I got the answer I wanted from a young lady. “Because a penny isn’t gonna add up to much in a month. I’d rather have 250 thousand dollars now. “Well that sounds fair.” I responded. Lets do the math. Stand up go to the white board and we will do this together, with the help of my calculator.” This is what we came up with for the penny investment:
|ONE PENNY DOUBLED FOR 30 DAYS|
Can you imagine the responses? The room was abuzz with my mathematics wizardry of simple addition. Not sure it was disbelief or amazement or if they were still excited over the silver dollar. But I had made an impact. Even some of the execs were surprised by the power of that graphic and that example. Now to my current readers you may have seen this example before. It never gets old to me. Its obviously an extreme example of a very real concept called compounding Now we know no investment returns 100% on your money every day for 30 consecutive days (well, maybe the dope game – joke). But, investing and saving was a concept that was completely alien to that group of high school students visiting that company boardroom on that day. It’s a concept that is pretty foreign to most adults, I’d wager. We spent the rest of my 45 minutes discussing the importance of saving and investing at a high level. We didn’t end with a prayer and group hug, but I was the one who walked away with hope. Hope that I did strike a spark that might help them think and prioritize financially a little better later in life.
Regular saving and investing should be part of the financial strategy for everyone who has income and is trying to accumulate greater financial wealth. This applies to the business exec or entrepreneur and to the factory worker or hotel maid. I’m speaking generally, but everyone can afford to invest SOMETHING. For the ones who say they cannot squeeze out even an extra $20 bucks out every couple of weeks, let me take a look at your lifestyle and budget and I’ll guarantee I can find it beyond the basic necessities of food clothing and shelter. You can make the choice.But that’s not my point in this blog. I’d like to demonstrate the power of regular saving and investing with a couple of simple examples.
We all know middle class nuclear families that don’t have money to send their children to university. I’m not judging. But after Disney land vacations, an endless progression of luxury foreign cars parked in their two car suburban garages, designer shoes and handbags, the money simply isn’t there. But let’s say that same middle class family reprioritized when a child was born and decided to start a college fund and forego the newest Mercedes and buy a late model car or buy the $80 knock off from Canal Street versus the $1500 original (I don’t condone product right infringement, but you get my point). Or the family can forego a couple nights out on the town per month or pack a lunch for work. Let’s say if they reprioritized, this middle class, two-income family could come up with an extra $500 per month from the time their child was born until he/she is packing their bags for Collegetown, USA. So let’s see. That would be $6,000 per year saved. For 18 years that’s approximately $108,000 saved for college! $500 x 12 months x18 years. That might pay for a year at Harvard in 18 years. Or may pay in state tuition for 3-4 years for a good state university. Now this example assumes you stuffed that $500 into a coffee jar and later your mattress over the time period. That’s not really investing, is it? No. No it’s not. That wasn’t rhetorical. It’s saving. And that’s good. But we can do better. So let’s assume this middle class family took that $500 and invested it into a 529 plan that has wonderful tax benefits and an appropriate equity and bond investment strategy catered to the age of the prospective student. For arguments sake let’s say that the 529-investment plan has an average return of 10.4% per year for those 18 years. I can hear the questions now – Blah, blah, blah. So here is my answer: 10.4% is a good rate to project, not expect, based on historical equity market results for just under two decade. For the entire 20th century the average US stock return was 10.4%. So just trust me on that one. Now, we have $500 invested each month for 18 years and earning an average return of 10.4% annually. So instead of $108,000 that same monthly investment of $500 grows to over $314,368 by the end of 18 years. That is almost triple the amount that you will pull out of your mattress in 18 years.
Here is another example. Let’s take the Molly, hotel maid who is starting her career job at the tender age of 21 years. Let’s say, as fate would have it, she keeps that same job for 40 years. Now Molly is on a tight budget, but she makes room in her budget for cigarettes and she plays the number religiously every Wednesday and Saturday. She also has a strong penchant for $5 scratch off lottery tickets. Lets say she reprioritizes and quits smoking and swears off gambling and now she has found herself with over $100 bucks extra each month. She replaces her demons with coffee and chocolate but she manages to be at least $75 bucks a month extra in the clear – about $20 bucks a week. Molly used to spend that on cigarettes alone. Through hell and high water, she is steadfastly committed to this one investment. She pays herself first 75 bucks every month for 40 years. Now, if Molly stuffed that money into her mattress, she would have $75 x 12months x 40years =$36,000 by the time she is 61 years old! That would be a great start to making her retirement a little more comfortable. But, let’s imagine Molly was a little smarter. Molly maid can open up a brokerage account at any number of financial institutions and start a regular investment program for 75 bucks a month, even less. Let’s say she gets some sound financial advice and decides on a high growth domestic equity mutual fund in a retirement account is the way to go. Assume this growth fund returns approximately 10.4% per year on AVERAGE because it is primarily equity investments. 75 bucks per month for 40 years at 10.4% average return grows to (drum roll): $730,643. This is not a typo. That 75 bucks a month that could have been spent on cigarettes and lottery tickets could grow to just under three quarters of a million dollars at a 10.4 % average return. Maybe Molly maid will buy a bed and breakfast to kick off her golden years.
Now, I could write pages and pages on pairing the right investment strategies with your risk profile and goals and picking the right investments. I will not. It’s a little different for everyone. I’m not a financial advisor. There are plenty of qualified financial advisors out there who can lead you in the right direction. There are some unqualified ones as well, so be careful. But if you haven’t heard this spiel before, it’s intended to drive home a simple concept that you may not have heard before or you may not have thought about recently or maybe you simply don’t practice – save and invest regularly. Pay yourself first. It will pay off in the long run. Good luck. (Insert stirring prayer here).