LESSON 2: TIMING IS EVERYTHING
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Transcript

Transcript of the interview with an expert, Harvey Greenberg, Manager of Productions and Projects at Standard and Poor's Research Services- a McGraw-Hill Company.

Rucker:

Welcome to ECONnections, a McGraw-Hill sponsored program for the National Council on Economic Education. Our lesson number two is "Timing is Everything, Saving for College", and our guest on lesson number two is Mr. Harvey Greenberg. Mr. Greenberg is the Manager of Production and Projects at Standard and Poor's Research Services. He is located in Lexington, Massachusetts. Welcome, Mr. Greenberg. I am wondering about this whole saving issue that is so critical today. We are all talking about it-we are not saving enough as a whole society. As young people are establishing their goals beyond high school, why should learning to save be such an important objective?

Greenberg:

It is an excellent question and I think first of all, it's an important life skill. We have the luxury today of a lot of things that were put in place many, many years ago, not the least of which is Social Security. I think, as everyone is aware, there are some issues with Social Security going forward in terms of the shift in demographics and the wherewithal of one generation to pay for another generation. Although we all hope that there will be government safety programs and other things to take care of ourselves, we'd better learn to fend for ourselves. Even if there are safety net programs to take care of things like health insurance and retirement, there are never going to be safety programs to get new automobiles or accomplish other financial goals, not the least of which is putting children through education.

Rucker:

You talked about college and buying automobiles and the like. Why is it so important to begin saving, say at age 15, in our mid teens, rather than at age 40?

Greenberg:

The reason for that is the power of compound interest. It's the single most important equation in financial planning. It is illustrated in a number of different books, but the best example I can take is the example of a person say at age 21, who puts $1000 a year away between age 21 and 30 and never saves again for the rest of his or her life. You compare the results with a person who doesn't save between age 21 and 30, but starts saving at age 30 with the same $1000 a year through age 65. It turns out that, with an interest rate assumption of about 8%, that the nest eggs at age 65 wind up to be identical.

Rucker:

My goodness. As this lesson is entitled, timing is indeed everything, then, isn't it? The earlier the time, the better off you are going to be.

Greenberg:

Absolutely.

Rucker:

Mr. Greenberg, I wonder what strategies you would recommend for a teenager planning to start an effective savings plan?

Greenberg:

I would start small, something like a CD player or some other piece of electronic equipment in the couple of hundred to a thousand dollar range (assuming this is a legitimate goal in the context of the student's family and other priorities). If you take a goal that is modest and a goal that can be accomplished within two to three years, that's a good way to establish a target and provide a savings plan around that target and accomplishment.

Rucker:

Once a student starts that plan, I think that's an excellent thought process to get a goal that we can see and visualize a little closer at hand. How would we allocate their savings? We hear today and study about money market accounts, bonds, the stock market-I wonder how you factor risk into those various instruments?

Greenberg:

As with savings and investment as well as many other life endeavors, what you get is a large function of risk. Let me put this into non-financial terms first. Take the case of an entrepreneur like Bill Gates. Bill Gates undertook enormous risk when he started what is now the Microsoft Corporation, because in order to get that business going, he had to make the decision to drop out of Harvard. Most people would recognize that a degree from a university like Harvard really puts you on the fast track to other things. Bill Gates sacrificed that because he saw, presumably going out, that making a successful company that would become Microsoft was going to give him a greater return. That is exactly what happened. He took a risk; he was rewarded for it. You can take the same analogy into sports or performance. If you think about someone like Kristi Yamaguchi, the ice skater, and what she had to sacrifice and what she had to invest-the hours and hours of practice every day, competing with her other priorities. It could have gone for naught, but it didn't because she took the risk and excelled. The same for a NFL quarterback or anyone like that. I think the bottom line is that if you are willing to take the risk and the risk works out, you can be enormously successful. On the flip side, we have to understand that not every company that wanted to be Microsoft wound up as Microsoft and there are a lot of other people who are very, very good at skating, but they never became Kristi Yamaguchi. The same thing is true for financial markets. We have things like savings deposits or certificates of deposit, which are fairly predictable. They are government guaranteed, but they are not going to get you very far very fast. We can, on the other hand, think about some investments that can pay off more, like stocks. There is more risk because the stock market (not withstanding the past ten years, which has been beyond any stretch of the imagination fantastic) can lose money, even over appreciable periods of time.

Rucker:

That puts risk very much in an area that we can understand, Mr. Greenberg. I appreciate those analogies. I am thinking as we wrap up our conversation today, and going back to college education, if we assume as a teenager that is indeed an investment in our future that we are willing to invest in. What is the difference in your mind between saving for that investment and planning for it through a savings account as opposed to saying "I will just borrow the money when I need it", let it go at that and pay whatever the interest is. How would you weigh borrowing versus non-borrowing kind of formula?

Greenberg:

Let's talk about colleges and investment generally. I looked at some figures recently from the 1998 current population survey from the U.S. Department of Commerce. What it is showing is that for males age 25 and above who are full-time in the work force, the average median income for a college graduate is about $50,000 a year. For a non-college graduate, it is $30,000 a year. Females in our society, for a number of reasons, don't have quite the same earning power as males, but the comparable statistics are $35,000 versus $22,000. What you can see right off the bat is that a college degree can make a tremendous s difference in earning potential. If you just rough it out and figure that on average, over a 40-year career, a college degree is worth at least $10,000 a year, then the investment in college is worth almost a half million dollars. First of all, to the question "Is college a reasonable investment?" the answer is most decidedly so. The second part of the question is given that you are going to invest something, should you pay cash (assuming that you have the cash), or should you borrow it? The answer to that question has to do with your assessment of whether you could out-earn the interest you would pay on a loan or not. If the answer is that you think you can get a higher rate of return on your money than the interest rate for the college loan, then you are better off borrowing. If you don't think you would achieve a higher rate of return, then you are better off paying the cash.

Rucker:

Good advice to probably end with as we complete our discussion on saving for college, investing, and the whole notion of timing is everything, and the effects of compounding on timing. I liked your earlier advice of start early and plan to save over a long period of time and diversify your investments and you will be well rewarded for it in the long run. Our guest today is Mr. Harvey Greenberg. He is the Manager of Production and Projects for the Standard and Poor's Research Services located in Lexington, Massachusetts.