By: Eli Saperstein
Everybody has that friend who is super invested in the market to the point where it appears their entire personality revolves around stocks. When that person, whether it is your uncle, parent, or stockbroker friend in training, tells you to invest your hard-earned summer cash in a “sure thing”, like many others you nod your head, roll your eyes, and walk away. You have no plans for investing, and if you do, it won’t be into some risky stock on a friend’s say-so, especially when your priority is investing in yourself during college, and assuring your potential future earnings, not some side distraction. It might be valuable to someone, but it is worthless to you.
In case you didn’t sense it already, I am not a person that has invested in stocks. However, I also like the idea of my money working as hard as I do, having the rise of the market makes shares of a market segment become more valuable almost as if by magic. There are many advantages to having money in the market instead of in a bank. While banks pay interest, the amount of money is minuscule, and will not keep up with inflation. This means that if you put away $50,000 today, it will not have the same buying power in thirty to forty years. Part of the solution is owning parts of companies, which means as inflation makes products cost more, the company (and my small parts of it) can become more valuable, outpace inflation, and even turn a profit over time.
While “playing the market” may sound like gambling, there is actually a sound, safe strategy for growing money over time. The government really likes the idea of retired folks having money, as rich older people tend to be less of a burden to society. An individual retirement account, or IRA, has many tax advantages over “regular” investing and may be a great way for our age group to start building a portfolio of assets and start saving for the far-off future of retirement. One thing I learned (while listening to Potterless) was that Roth IRAs are crucial to any retirement fund and that the earlier you start, the more effective it is for compounding its value exponentially. The reason for this is the tax incentive structure that has been created to encourage people to save for retirement. Putting money into an IRA allows individuals to direct pre-tax income toward investments that can grow tax-deferred. The difference between a and a traditional IRA is simple. In a Roth IRA, you contribute after-tax dollars, your money grows tax-free, and you can generally make tax- and penalty-free withdrawals after age 59½. With a Traditional IRA, you contribute pre- or after-tax dollars, your money grows tax-deferred, and withdrawals are taxed as current income after age 59½. As students, we can take advantage of Roth IRAs, which are even more beneficial as the principle is not taxed going in as many of us do not earn enough money to qualify for even the lowest tax bracket. This means that the total value of the money you earned and invested is what you will receive when retiring, which is something many “adults” do not have the luxury of as Roth IRAs are regulated that only lower-income earners are allowed to use this tax shelter. However, that does not stop some members of the plutocracy from trying to take advantage of this really powerful financial tool.
Albert Einstein once said, ‘Compound interest is the 8th wonder of the world. He who understands it earns it… he who doesn’t… pays it.’” This statement was told over in the age of the creation of atomic weapons. Many of us understand the incredible power of nuclear energy. The possibilities of harnessing its power will result in incredible opportunities while not realizing the awesome power of time and compound interest that any of us can master and take advantage of. However, it is possible to be hurt by interest. As we see the US budget on a year-to-year basis becoming more and more solely allocated to paying off the interest accrued on the trillions and trillions worth of debt, I’m beginning to see why. While not as effective as interest at raising capital off of the initial principle, Roth IRAs are a way of saving for retirement tax-free, which allows for increased compound growth. There is also so much that you can do with IRAs such as buying and trading other types of assets while still under the tax-free umbrella of the IRA.
My experience with Roth IRAs has been wonderfully effortless. This is because I have a managed account where someone else is worrying about the day-to-day trades and paperwork which allows me to focus on college while at the same time starting investing when I am young and have time on my side. IRAs are a tool that is designed to help people accumulate wealth over time. It is a tool that the ultrawealthy have been using for a long time in order to avoid paying taxes. It is time for us, the people who these tools were designed for to take advantage of these “loopholes” as well.
It’s all about delayed pleasure. These investments revolve around time because at its core it is a function of compound interest and that only works if you have a farsighted view in a myopic world. A study tried illustrating this idea of how “delaying pleasure” will result in a person being more successful. This was done with children and marshmallows. While this particular study was debunked, the idea seems sound. A study that I would like done would be about the future of those who had an IRA by the age of twenty-five compared to their peers. The reason for this is because while at a young age the maturity to realize the difference between instant and delayed gratification is a marshmallow is minimal, IRAs are a real test of how mature and how prepared people are to delay gratification when there are real and far-reaching consequences between getting a new phone and retirement.
While I do not recommend starting a Roth IRA today I would recommend starting one yesterday as there has never been a better time to invest. If you take a moment to think about what your life would look like having invested the money, the sooner you start your IRA the more valuable it will be later on. Compound interest is a force that many people do not take advantage of and when many finally begin to understand its potential and how that shapes your potential it is often too late. Take a moment, ask the person in your life who has always been into stocks and invest today! Future you will thank you.