What Interests Young Investors

I recently spoke to a University of Kentucky class about financial planning and investing, as I have each semester for the last several years. The class has evolved some since those first couple of semesters to include more business majors than before. Their questions, however, haven’t really changed that much. Here is what I’ve found they’re most interested in discussing:

• When should they start saving? Answer: Now. While our business helps people save for retirement and helps people who have retired manage their financial lives, 20-something year old students have difficulty thinking in terms of retiring in 4 ½ decades or so. Go figure. Even the concept of saving for one’s financial independence is understandably WAY in the future. So, I demonstrate the wonderful powers of compounding to show them balancing the long-term with the short-term is in their best interest.
• What rate of return should they expect from their investments over a long period of time? Answer: We use an average annual return of 7% when preparing financial plans for clients, most of the time, depending on the clients’ situation.
• Should they pay off their student loans or save for their future? Answer: If employed where they receive a match to a retirement account, save at least enough to receive the match. That is part of their compensation. After that, compare the interest rate on their loans to an expected rate of return of about 7% annually. If the interest rate is about 2-4%, then generally we advise paying off the loan on schedule. If the interest rate approaches 5-7%, try and pay off that loan earlier.
• What type of account should they use to save? Answer: First, refer to the advice above regarding retirement accounts through your employer. After that, contributing to a Roth IRA when one has very low income is a great way to minimize income taxes. One contributes after-tax dollars to a Roth and then can withdraw those dollars tax-free, including the earnings on those contributions, after decades of growth. When one’s income increases, making tax-deductible contributions to a traditional IRA may make more sense as they decrease your taxable income and, theoretically, one’s income taxes are lower in retirement than now.
• Should I buy cryptocurrency? Answer: I don’t advise you to, but I won’t tell you not to either. A mushy answer, to be sure. I believe cryptocurrency, such as Bitcoin, is probably here to stay. Right now, however, it is rarely even used as a currency to purchase items - it is purely a speculative gamble in hopes the value will increase. The NFL wide receiver Odell Beckham, Jr. took his pay from the Los Angeles Rams in Bitcoin. The value promptly dropped in half – from roughly $64,000 to roughly $35,000. As a result, the guaranteed portion of his salary dropped in value from $750,000 to $412,953 – before taxes. He’ll still be taxed at the $750k level. A currency drop of that magnitude seems Venezuela-like.

Based on the discussion with these students each semester, I am definitely encouraged about their, and our, futures.

Steve Byars, CFP®