The simple answer is: instant gratification.
It’s much easier to spend and immediately feel rewarded, than to save and wait for that same sense of satisfaction.
Focusing on the present is easier than worrying about the future.
Now it would be easy for me to say, "Th-th-th-that's all folks!" and wrap up this article, but let’s dig a little bit deeper.
I encourage you to keep this question in mind while reading: would you save if you knew $10,000 would turn into $320,000?
Why Save
Why would you save a dollar now to have the exact same amount 10 years from now?
After all, it’s a dollar now, and it’s still a dollar in 10 years.
Obviously you need to save for retirement, but children don’t think about retirement - some 35-year olds don’t even think about retirement.
That’s why we need to include a financial reward for investing, which is your interest.
Ok let’s say 1% interest then.
With 1% interest, $1 today will be $1.11 in 10 years.
But convincing a child to save based on a return of $0.11 over 10 years just isn’t that enticing.
So what is?
The Amount
We need to make the amount material.
A dollar is not going to get someone excited.
So let’s use $100,000.
If we receive 1% interest on this amount, then it will amount to $111,000 in 10 years - nice!
A free $11,000 - you have just piqued my interest!
At least somewhat.
The Return
What if you received a 7% return on that same $100,000?
After 10 years you would end up with $200,000.
That’s $100,000 in free money - that’s amazing, now you’ve really got my attention!
If you extended this period to 50 years, then $100,000 at 7% would turn into $3.2 million.
This means $100,000 generates $3.1 million in interest - amazing!
Once we get to material amounts with a higher interest rate, suddenly saving seems a lot more appealing.
But the question is, how do you get a 7% return?
Understanding The Investment
You can’t get a 7% return in a chequing account.
To get this return, you actually have to invest.
So what exactly do you invest in?
The simplest answer would be a well-diversified mutual fund.
And what is a mutual fund?
Ah ok, you don’t know...
It’s a group of stocks and bonds.
Alright, but what is a stock, and what is a bond?
A stock is a type of investment that gives an ownership stake in a business, and gives a claim to part of the corporation's earnings and assets.
Ok, I’m not a business major, I’m a little confused on that definition…
A bond is a type of investment, that is a loan to an organization on which you get interest.
Hmm, I got that one, so a bond is a loan, right?
Yes! You got it!
Bonds can be investment grade or high yield, depending on their credit rating.
Ok, this a little overwhelming, you’ve lost me.
Adult: Ok, I’ve got to go pick up my kids, I’ll get back to you.
Children: Ok, sounds good, let me get back to playing my video games!
Let’s say you’ve gotten the individual to the point where they understand, or partially understand, investing – stock market cycles, basic investments, etc.
Then they have to move onto taxes.
You have a 7% pre-tax return, after tax you actually get a 5% return.
To avoid taxes, you need to use an RRSP, TFSA or other tax advantaged savings plan for retirement.
Retirement Savings Plans
How is money treated going into the plan, how is money treated in the plan and what are the tax laws when the money comes out of the plan?
It could take an average person a couple hours of intense studying to figure it all out.
If they’re not understanding it after the first half hour, then chances are, they’ll probably give up.
Too Many Investment Options
Then there are dozens of different types of investments:
Stocks, bonds, mutual funds, GICs, ETFs, annuities, principal protected notes, hedge funds, currency, commodities, options, futures, precious metals and real estate.
There are also different investment styles:
Currency trading, passive investing, active investing, option trading, commodity trading, penny stocks, fundamental analysis, technical analysis, real estate investing, margin investing, momentum trading, day trading, precious metal investing and contrarian investing.
Just within Bonds (a type of investment/financial security) there are:
High yield bonds, Investment grade bonds, Government bonds and Corporate bonds.
Then there are downright scams, such as ponzi or pump and dump schemes.
When schools teach investment education, there is no way they can teach all of the above.
What they should be committed to teaching is generally safe investments, such as well-diversified funds, where you pay a fair fee for the product.
If a student really wants to learn technical analysis to do day-trading of stocks, that would be best handled on their own.
In Conclusion
As you can see, the road to achieving a 7% return on investments is complicated.
The reality is that not everyone may be able to handle the reading required to learn these things.
Even in a classroom setting, once you lose someone for a minute, you may lose them for an hour, and suddenly the lesson is gone.
But if you have a program that will really allow people to understand these things for themselves, then saving and investing will become a lot easier.
Putting away some money every month to build your nest egg will become second nature.
Human nature will always side towards immediate gratification, but if the path to deferred gratification is very clearly laid out, we can certainly increase saving and investing rates.
It is important that you don’t allow someone else to tell you how to manage your money. You need to understand these topics on your own.
If you can clearly and easily lay out the path to turn $10,000 into $320,000, will it entice people to save more?
A lot more?
Yes, I am sure it will!
Valista Education
