I am an optimistic person living in a sunny state, yet I’m going to start this with some gloomy numbers: 40% of Americans cannot come up with $400 emergency cash; the average American couple only has $5,000 put away for retirement; only a third of working Americans are saving money in an employer-sponsored or tax-deferred retirement account. This list can go on for very long.
The stakes for financial-literacy education are high. Our population is aging, and our Social Security system is projected to be in distress. As corporate pension plans gradually disappear, our next generation will rely more on themselves for financial planning. They need financial-literacy education more than ever. Just like physical and mental health, financial health will enable us to live a fulfilling life, reach our potential and fully contribute to our society. That is our goal.
Daniel Chi
That goal is entirely achievable.
I tell my students that I want to make them all millionaires. To most 20-year-old college students, that sounds like fantasy. But it’s entirely achievable. Here is how. Each day, save $3. “But I am a college student, and I am broke.” Well, brew your own coffee, pack your own lunch or bring your own snack or water bottle—or do all of the above. So, save $3 each day. At the end of the year, you will have saved $1,095. Invest the $1,095 in an S&P500 index fund. Over the past hundred years, the S&P500 index has returned about 12% per year. Assume similar returns for the future and that you save $3 each day and invest at the end of each year, then by age 65, when you are about to retire, how much wealth will you have accumulated?
It will be $1.5 million.
It’s not magic. It’s pure math.
Then you ask me, well, $1.5 million in 45 years is not the same as $1.5 million today, right? Right, because inflation will eat away the purchasing power of money. But let’s set aside inflation for now and think about the alternatives to the above plan. Alternative 1: Don’t save, and in 45 years you will have nothing. Alternative 2: Only save but don’t invest, and in 45 years you’ll have $49,275 ($3 times 365 days times 45 years). What makes the difference between $49,275 and $1.5 million? The difference comes from the power of compounding—that is, interest makes interest, or money makes money. It’s not magic. It’s pure math. As described by Albert Einstein, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” Do you want to earn it?
Let’s stay with the $3-a-day example for a bit longer. There are two key ingredients for personal investment success. The first ingredient is to start early. If you start at 20 and have a 45-year runway, the future value will be $1.5 million. If you start at 30 with a 35-year runway, the future value will be $472,000. If you start at 40 with a 25-year runway, $146,000. But not all is lost if you start late. Better late than never, right? Rather than $3 a day, you can save more to catch up. If you start at 30, you’ll need to save $9 a day; if starting at 40, $30 a day.
The second ingredient is diversification. Don’t try to pick individual stocks. Rather, buy an index fund. In the stock market, you compete with professional investors. How many of you want to compete with professional tennis players or golfers? If not, what makes you think you can compete with professional investors and win? The good news is that the majority of professional investors cannot beat the market over the long run. If you invest in a diversified index fund and simply replicate the market return, you’ll beat the majority of professional investors over the long run.
UNLV President Keith Whitfield regards financial-literacy education as a top priority. The university is working on a plan to provide comprehensive financial literacy and wellness support to students beginning in the 2023-24 academic year. The Department of Finance in the Lee Business School will officially launch two financial-literacy courses this fall: FIN 111 and FIN 112. The first covers a broad range of financial-literacy topics; the second covers personal investment strategies. Any community member can enroll as a non-degree-seeking student and take these courses. We’re also partnering with the Clark County School District to bring these courses to our high-school students.
Do you want to join us to improve financial literacy in our community? The task is entirely achievable. If 100 people read this and educate themselves about financial literacy, and then educate 10 others in the following year—and if those 10 people influence another 10 in the next year, and so forth—how long will it take to educate our fellow 3.2 million Nevadans? Only take 4.5 years.
It’s not magic. It’s pure math.
You only need to influence 10 people a year, which is less than one person a month. Are you on board? If you all are, in four and a half years we will have no students to teach in our financial-literacy courses. And that will be a very good problem to have.
Daniel Chi is professor and chair in the Department of Finance at UNLV’s Lee Business School.
Click HERE to subscribe for free to Vegas Inc’s BizClick newsletter. Stay up to date with the latest business news in Las Vegas sent directly to your inbox each Monday.