We all know that investing and saving are important to our future, but many people lack the knowledge of how investing works, when and how to invest, and what stocks to invest in. Because of all of the information and disinformation out there, it is hard to tell what is real and what is not. This often results in analysis paralysis, even in adults.
This is one of the many reasons it is important to teach students about investing as early as possible and to continue to advance those lessons as they progress in their education.
It is not only important for them to be informed and have a good understanding of how things work as a consumer of investment products, but many may pursue career opportunities in finance, and the more knowledge they are armed with the better.
Here are some other key aspects to the importance of teaching students about investing.
The rise of day trading
It used to be that a day trader was a rare breed, but more often people are making careers in this area, trading for themselves or even a company. Trading software, the speed of the internet nearly everywhere, and the temptation of big profits all draw many to this field. For others, the thrill of risk is also a big factor.
It is important for students to understand how much money you need to risk to become a successful day trader, and how much money day traders can really make. The harsh truth is that many day traders fail, in many cases due to a lack of market understanding and by trying to invest with too little money.
The truth is the principles of day trading are simple, like buying low and selling high. However, knowing what to invest in requires a deeper knowledge of statistics and analytics, or access to high-end software to assist with the process. These are principles that can easily be inserted into any STEM curriculum, offering students a deeper understanding of the investment world.
Early retirement planning
Of adults aged 46-64, a full 25 per cent have no savings, retirement or personal. The numbers do not look much better even as you move up in the age bracket, and most couples do not have enough in retirement savings to survive more than a couple of years of retirement.
Studies show that the younger you start saving for retirement, the more likely you are to be able to retire with something other than social security and other entitlements. The days of working 30 years for the same company and collecting their retirement benefits are gone for most people. Most often, it falls to the individual to do their own retirement planning.
When it comes to retirement, there are some basic governing principles for IRA and 401k investments:
- Generally, you should save about 15 per cent of your income for retirement.
- Compound interest is a simple principle, but the essential lesson is not to take out dividends but reinvest them, allowing the interest to compound on those new, larger amounts.
- Research the types of IRA accounts, essentially deciding if you want to pay taxes now or down the road.
- A 401k is an employer-sponsored IRA, and while you work somewhere, even for a short time, often your employer will match a percentage of retirement contributions. This is essentially free money, so never leave it on the table. When you leave your employer, roll over your 401k into a new one at your new job, or into your private IRA.
- You can contribute a certain amount each year toward retirement, and those limits have gone up by about $500 per category this year. Your HR department or a financial advisor can discuss how much you can invest in each type of plan.
The point of all this is to say that is never too late or too early to start planning for retirement, and the better understanding students have of this and the ways they can boost their retirement investments, the better prepared they will be for retirement.
Good and bad debt
Unfortunately, with the cost of higher education, it is nearly impossible for students to avoid debt entirely. Still, they can learn the difference between good and bad debt, and how to avoid the latter.
First, in most cases, it is not a good idea to go into debt for something that depreciates, like a car. Instead, it is better to pay cash. With the price of new cars, this can be challenging, but if the interest rate is low enough, a car loan does not have to be “bad debt.”
To put things in general terms, the stock market has earned between 7 and 9 per cent annually over the last century, even counting the Great Depression and other market dips. So if the interest you are paying on a loan is less than that, it can be considered “good debt.” Anything above that number is generally considered “bad debt.”
Student loans are a little different, though. Often, interest is deferred and does not start to accrue until the student graduates or stops going to school. This is not always the case, though, and it is important that in researching how student loan interest works, students understand the difference between subsidized and unsubsidized loans and private loans. Different lenders have different policies, and the sooner students understand them the better prepared they will be to finance their higher education.
Mortgages are also different, as homes tend to increase in value over time, so are considered to be an investment. As long as the interest rate is reasonable, and fixed rather than variable, a home loan is actually a good debt.
This is especially true since you have to live somewhere, and renting is essentially supporting someone else’s future income and rather than your own.
In our consumer society, a good credit rating matters, which means borrowing and paying off loans, buying cars, and other debt is necessary to establish a history. However, there are ways to borrow with little risk, still invest wisely, and to establish a good credit history and build a decent credit score.
Sometimes this can mean starting with a secured credit card backed by investment in savings or a CD, and working up from there. Never carry a balance and paying the card off right away each month means you can earn money while building credit.
The key is to teach students to invest wisely, never borrow more than they can afford to pay back and use credit and debt wisely.
Students who learn the ins and outs of investing will be ready to better handle their finances in the future. That is a win for all of us.
Frankie Wallace is a freelance journalist from Boise, Idaho and contributes to a variety of blogs across the web.