Thursday, November 13, 2014

"Thanks" to Government "Help" in the Form of Easy to Access Student Loans, College Students and Graduates are Likely to Find Themselves in a Big Financial Hole Early in Life

When young, too many of us don't save enough money for life's surprises and later retirement. And of that which we do manage to save, we don't invest enough of those savings in long term appreciating assets such as stocks. Although stock prices fluctuate from time to time and sometimes violently, over time they rise and beat inflation by a wide margin. Over a working career they will rise by multiples of the initial sum invested.

But if no money is first saved, none is available to invest in our future financial health and well being. That's just a stubborn fact. So let's take a look at the current sad and troublesome saving habits of young Americans.

Younger Generation Faces a Savings Deficit says this:

"After a flirtation with thrift after the recession, young Americans have stopped saving.

Adults under age 35—the so-called millennial generation—currently have a savings rate of negative 2%, meaning they are burning through their assets or going into debt, according to Moody’s Analytics. That compares with a positive savings rate of about 3% for those age 35 to 44, 6% for those 45 to 54, and 13% for those 55 and older.

The turnabout in savings tendencies shows how the personal finances of millennials have become increasingly precarious despite five years of economic growth and sustained job creation. A lack of savings increases the vulnerability of young workers in the postrecession economy, leaving many without a financial cushion for unexpected expenses, raising the difficulty of job transitions and leaving them further away from goals like eventual homeownership—let alone retirement. . . .

To be sure, Americans’ savings is still growing in the aggregate. The Commerce Department’s main figures on savings show a nationwide increase in saving since the recession as baby boomers and other older Americans have maintained the cautious savings habits developed during the recession....

The problems from a lack of savings promise to reverberate for years. Those who don’t save are unlikely to be wealthy in the future, meaning American angst over wealth inequality seems poised to persist if most millennials are unable to save or choose not to. . . .

The Fed’s data also show young Americans are less likely to own a variety of investments and investment accounts than their counterparts in Generation X were at this age, including certificates of deposit, savings bonds, stocks, retirement accounts and other managed assets. The only savings vehicles young people today use more than Generation X did at the same age are transaction accounts.“

They are truly a vulnerable group,” said Annamaria Lusardi, an economist at George Washington University who studies the implications of financially fragile young households. “They don’t have assets to buffer themselves against shocks, and they also have to manage debt.”. . .

For some young households, the inability to save reflects the weak job market, said Shai Akabas, an economist at the Bipartisan Policy Center. While unemployment nationally has fallen below 6%, workers age 25 to 34 have a 6.2% unemployment rate and those 20 to 24 face 10.5% unemployment.“

There’s people who really can’t save because they don’t have the means to save and that’s not a small group of people,” Mr. Akabas said. “If you’re in a $25,000-a-year job and starting a family, it’s going to be very hard to accumulate savings regardless of your consumption decisions.”

Another big difference from earlier generations is the rise of student loans. In 1995, borrowers under 35 had median student debt of $6,100, according to Fed data. That has risen to $17,200."

Summing Up

More education is better than less education. Less debt is better than more debt. Avoid student loans.

Savings precede investing.

Earnings precede savings.

Savings result from spending less than earnings.

Saving and continuously investing those savings for the long haul are essential ingredients for a financially comfortable and enjoyable adulthood, including retirement.

Sooner or later we all learn that there are no free lunches in real life, and the earlier we learn about the dangers of burdensome debt, including student loans, the better off we will be.

That's my take.

Thanks. Bob.

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