Monday, October 4, 2010

Savings

My oldest is a senior in high school and I have spent countless hours thinking through the issues he will face in making the transition from student to earner sometime in the next 5 to 10 years and given all of the currency, debt, peak oil, etc... issues.

There is this sense that saving money is pointless.  Nothing could be further from the truth for young people.  The US$ has already collapsed.  Could it head down 50% more versus the other major currencies? Sure it could... More likely is that it does not... Either way... does not change the need for savings.

The silly idea that maxing out your 401k is all of the savings you will need is BULL SH#!!  Money in an IRA, 401k, etc... is pretax savings... meaning that you will pay taxes on it when you take it out. $1 million sounds like a lot of money - but in a 401k that $1MM is worth 30 to 50% less than its face value after you factor in state, local, and federal income taxes.  This is not to say that you should not max out your 401k - you should - you should also payoff your home as quickly as possible (to make that chore easier, buy a smaller and less expensive home... and watch those property taxes... they are in insidious drain on your life), and save at least another 10% to 20% of your income in addition to the 401k and 15 year mortgage (30 year mortgage?  BULLSH#! If you can't afford the 15 year payment, you can't afford the house).

OK, so the US$ has some risks... I never said you had to leave all of savings in cash... as you accumulate cash it can be invested in farm land, livestock, precious metals (not a recommendation to buy them here; you are on your own on that call), productive capacity in your own business, commodities and their producers.... but you have to spend much less than you take in.  SIMPLE. LIKE. THAT.

In a LIFETIME many professionals will not earn more than $5 million (start at $80k per year at 30 and work your way up to $250k per year at 44 to 55, washed up at 60 if you are lucky - and that's if you are fortunate enough to escape any "hiccups" along the way).  That means $2.5 to $3 million after taxes (with federal, state and city taxes are aggregated). Guess how much money you would have if you took $200K and compounded interest of 4% for 40 years? $960,000!  Nearly 40% of the life time take home pay for most professionals!!  Well, it costs $200k for an undergrad degree at most "prestigious" private universities and colleges... and you can buy 30 year, zero-coupon, TAX FREE state issued bonds (states cannot go bankrupt) at 4% right now.  Still want to go to that private school?  For the equivalent of 40% of your lifetime earnings?  Really? That state school is looking better all the time, eh? Especially since grad school still needs to be funded...

Look at the Silicon Valley millionaires - they were RICH by the time you got out of grad school.  You don't have an unlimited work life. The earlier you can get to it and make money the better. Its no wonder that so few corporate women have families at the age of 40, and are relying on doctors and peeing into petri dishes in order to procreate... did I mention that that is not covered by insurance?  That career had better have put some savings in the mattress, because it ain't cheap to brew those test tube babies...

Nobody tells you all this stuff when you are picking out your major.  Life is about making smart decisions and luck.  You can't do much about the luck part, but you don't have to dig yourself any more holes than necessary... and when you find yourself in a hole - stop digging.

Times might be tough for a while... but that is all relative, and they don't have to be tough for everyone.

7 comments:

Donal Lang said...

When I used to live in the mountains, I would see trees growing on the rocky north-facing slopes and they'd be stunted and dwarf compares to those in the sunshine. Trees can't choose where they live, but people can.

Saving is almost irrelevant if you live in an economy which may be collapsing, or may just be in longterm decline. You'll always be on the wrong end of the equation; falling currency value, falling asset values, falling real wages,rising real taxes, declining standards in education, health and public services, and eventually declining security and safety. Not to mention being surrounded by lots of miserable, whinging people!

The successful US companies already get their income from overseas investments. The future successful individual will be somehow connected outside their declining economy through ability with languages, dual-country education, international investment, or just emigration.

If I were you, I'd tell your son that life is to short to spend the best years of it tied to a sinking ship.

Greg T. Jeffers said...

And a good morning to you, Professor Lang...

This might surprise you... we LIKE living here, and we LIKE being Americans! America's ship can be righted. So we will stick it out right here and try to make things better for ourselves, and in so doing make things better for all.

Enlightened self-interest along with Libertarian political values are the answer to America's economic problems, me thinks.

As for savings...

There is no circumstance in which it is better to NOT save and invest as best you can than to spend all because the future is unclear, IMHO.

As I said, one does have to hold paper currency forever... only long enough to exchange it for things of value.

Anonymous said...

The US will not decline dramatically in isolation, absolutely no way US will just whimper off into the night as the rest of the countries somehow survive contraction with no problem.

Britain requires more outside energy inputs than the US does, they have some advantages in public transit and the like, but Europe will not stand apart if the US sinks dramatically.

If the US contracts in dramatic fashion in the next decade or two, it will leave a hole, a gaping chest wound to most of the modern world. Many of the 3rd world countries, won't really notice much, except when natural disasters hit and food-aid doesn't get sent anymore.

Too much effort and hubris training to sustain the unsustainable, forget the US titanic, and look to figure out how to build a smaller version of the Titanic--and avoid magical thinking and iceburgs. Britain still exists after their empire collapses, and the US will also, hegemony should not be a national goal, all nations that go toward that, fail--sometimes in dramatic fashion.

-Meiyo

Anonymous said...

The British Empire took from 1914 to 1945 to go from top to bottom. We will do it much faster. Thirty years.
Many Brits emigrated in the 1950's, a grim, gray time for that country. But many stayed.
Hopefully the US can go thru the same decline as gracefully and without the world wars.
I'd say the US is where the Brits were in the 1930's. The elite are attempting to cling to the empire and many on the bottom know its gone.

Dextred1 said...

This is our country. I will go done with it if needs be. You don't abandon your wife when she is sick do You? No decline is irreversible as Jeffers points out. Just need right policy’s and a willingness to forge ahead.

John said...

There has never been a country as wonderful as the USA. Currently, no place is safer to live or invest than the USA. Our problems are directly related to misguided fools, most of whom are Democrats, who have led this country down an unsustainable path. This will change, after a blood price is paid, for the better. I want to be here for the Blood price. You cowards may leave.

Anonymous said...

Take a look at these videos of a graduate from West Point explain to you how our government system works. http://www.csper.org/renaissance-20.html

Your republic is an illusion.