I’ve heard some bad financial advice over the years, but the recent advice provided by the New York Times is something worse than that…
Recently a college-age reader wrote into a New York Times advice column asking about smart savings. The full column can be read here, under the Master of Puppets headline. The Style Editor, whose column it is, responded with bad advice and then for good measure decided to take a shot at capitalism. Some may defend this and say the column is supposed to be light, tongue in cheek, maybe even funny in their responses, but the reality is their readers are still relying on their advice and are expecting it to be correct.
So what should this young saver do with their $1,000? I can think of a few things that would be better than opening up credit cards to improve their credit scores.
- Put it towards any bad debts. If you already have consumer debt, i.e. credit cards, with high interest rates put the full $1,000 toward that debt. It is the only way you can 100% guarantee yourself a return on your money. Credit card company charging you 25%? Pay it off and you just guaranteed yourself a better return than most investments you will ever make. This logic applies to any other high interest debts you may have, including auto and student loans.
- Establish an emergency savings fund – They should have six months to one year of their expenses in an online savings account. Many of online savings accounts are now paying over 2% interest.
- Invest – Here the Style Editor would totally disagree with me because you are just a chump for partaking in capitalism, but unless you are going to start a business this is the only way to make your money work for you. If you want to buy a house, I would match my investment to that time horizon. This means that if you are buying a house in a couple of years you should be very safe with your investments and buy certificate of deposits that mature around the time you need the cash for the down payment. If the time horizon is longer than that, you can look at buying bonds or maybe even stocks depending on how long you have until you need the funds. If you are lucky enough to have family that may be giving you money to put down for a house, you can put that money directly into an IRA for your retirement. $1,000 doesn’t seem like much, but if you earn 8% over the next 45 years (college age kids have many years of work ahead of them) you’ll end up with $31,920.45. If you can somehow manage to save that measly $1,000 every year you will end up with $418,426.07 at retirement. Man capitalism really sucks…
We are struggling with many things these days in America, one of the them in particular is a general lack of financial literacy. The New York Times had an opportunity to address that, although briefly, instead they gave poor advice and took an unnecessary shot at capitalism and investing.
If you haven’t recently reviewed your financial plan you should contact your CERTIFIED FINANCIAL PLANNER™ Practitioner.