Many fathers place importance on teaching their sons about how to throw a baseball, fix a flat tire and drive a car. My dad added one more to the list -- he taught me how to invest and manage my money at a young age.
Being part of the world's largest economic superpower, you would think many American parents and schools would pass on their financial wisdom to their children sometime during late high school or early college. Especially since about one-third of the nation's teen-agers have a job and receive paychecks every year, according to U.S. Bureau of Labor Statistics. Many others bring in cash through mowing lawns and baby-sitting.
But at 25 years of age, I find that many of my peers still know little to nothing about the stock market, 401(k)s or Roth IRAs. These are some of life's basic investing tools, and as my dad says, the younger you start the better off you'll be. Furthermore, it seems that many young people even lack basic personal finance skills on how to balance a checkbook, keep credit card spending in check, and shop around for the best value.
"Personal finance is one of the most important things to learn about in life, but I think most college students don't know anything about it," said University of Colorado Associate Professor of Finance Eric Hughson. Even with beginning business majors, Hughson said he finds some of his freshmen unaware about how interest rates, car loans and credit cards work.
"They teach a lot of fancy math in high school, but I think they also need to be teaching the practical side," Hughson said. "Basic personal finance is a course everyone should take."
For myself, I was lucky to have a father who worked closely with investments, and he taught me many things that the schools didn't. When my first paychecks began to roll in, he encouraged me to open a Roth IRA. The basic principle of a Roth IRA is that the earnings have been taxed once at my current low rate before going in, but then as it grows with investments, the larger final amount will be tax-free when I withdraw it later. The earlier one invests in something like a Roth IRA, the greater its value will be down the road.
To use a simple example, even if a person at my age of 25 puts in only $1,000 for their entire life and the investment returns an average of 8 percent for 40 years to the age of 65, that single investment ultimately will be worth $21,725, tax-free. Compare that to putting in $1,000, 10 years later at age 35 -- when most people seem to start caring about investing -- and the money grows only half as much to $10,063. The profits and differences between these two numbers are even greater if the person makes additional regular annual investments.
It is pretty easy to set up something like a Roth IRA. Most people can do it through the Internet with a mutual fund company and send a check by mail.
Simple yet powerful investment lessons, such as the one above, only seem to reach a small percentage of college students -- most of those few are business students like Napoleon Ta, a 20-year-old finance major at the University of Colorado in Boulder.
"I feel that learning the basics of finance and financial markets is extremely important to everyone," Ta said. "Over 80 percent of the population is an active or passive participant of the financial markets, so if people have a better understanding of finance, it will no doubt increase the prosperity of the population as a whole."
Ta said he recommends to many of his classmates to take business and economic courses, but he does not think it should be a requirement. "For some people, this subject is as fun as watching paint dry," Ta said.
University of Colorado Accounting Professor David Guenther said it is up to the parents to convince their children that some business education can pay off down the road.
Of those students who do explore business education, Guenther said it is sometimes difficult to get younger people to look at the markets in a long-term view.
"When the Internet bubble was going on, a lot of my students just wanted to get a job with some of the local fast-rising high-tech firms," Guenther said. Students were hoping to make a lot of fast money, he said.
"It was difficult to teach the fundamentals of valuation when they seemed not to exist anymore," Guenther said. He said the number of accounting majors at CU actually declined during those good economic times because business students looked toward working with the markets and information systems. But since the markets' downturn in 2000, the accounting major numbers are back on the rise, Guenther said.
In Hughson's investment management class, about 20 students are in charge of investing about $200,000 in donations from Gary Roll? with TransAmerica. In three years of a mostly difficult investment market, the class has profited about $10,000, which is put forth to scholarships for future students.
Hughson said the two main things young people need to know about investing are diversification and valuation.
"What happened last week seems to be the most important thing to students," Hughson said.
"They want to invest in any sector that's hot recently."
Perhaps the best advice for any young or experienced investor is to invest in products they understand, my dad says. With that advice, I've invested in sporting good stores, comic-book producers and video game companies, and so far it's worked out pretty well. Thanks dad.