Financial Planning for the Totally Innumerate (Part 1: Savings)

Here’s the scenario: You’re a 21 year old aspiring novelist living on restaurant tips in one of the most expensive cities on earth. Think of finance and management expert Zvi Bodie as the benevolent, numerate uncle you never had.
  • Transcript


Zvi Bodie: You’ve just finished college, you’ve moved to New York City, your goal is to be a novelist, but to survive in the meantime, you are working as a full-time waitress.  if you could only squirrel away a small amount of money each month from your waitress job, your waiting job, what should you put it into?   

Well, you know, first answer is, you may, it may have to go to paying off your debt.  But let’s say you finish paying off your debt.  Then the question is, does your employer offer some sort of retirement savings plan where they match what you put in?  If that’s the case, then you don’t want to throw away those matching contributions because, you know, you put in, let’s say, $40-50 a week or a month, whatever it is.  The employer may match that, either dollar for dollar or 50 cents on the dollar.  You don’t want to throw that away, and typically it’s got to go into some sort of family of mutual funds 

So then the question is, you know, what do you choose?  The standard advice, which I would give everybody, is just go for a passively managed, low management fee, well-diversified portfolio of equities.  We’re talking about small sums of money, you’ve got the capacity to take risk.  Why not take the risk of equities?

On the other hand, if there is no matching retirement plan, and this is going to sound a little bit contradictory, but if you’re saving on your own and you need access to that money, right?  Because you don’t know, they may have unexpected expenses, you’re not willing to commit it—or you want the possibility of getting it out, you don’t want to be restricted and have to wait until you’re age 65 to take the money out--I strongly recommend US Series I savings bonds, which are inflation protected savings bonds.  They have an ultimate maturity of 30 years, so if you don’t touch the money, it’s accumulating for 30 years and it’s there for retirement for your old age.  But after the first year that you’ve had money in the account, you can take it out at any time.  And it’s fully protected against inflation.  So whatever the rate of inflation is, you’re covered.

In addition to that, there may be—although right now there isn’t because interest rates are so low—there may be some interest that you earn, above and beyond inflation.  That’s called the fixed rate.  Now, amazingly, and for a host of reasons—not good reasons, I’m afraid—the government has not done a very good job of making young people, like you, aware of the existence of series I savings bonds, because this is the ideal investment for money that you don’t want to necessarily lock up for retirement, but you know that if you leave it in there, you’re fully protected against inflation for 30 years, as long as you think the US Treasury is not going to go broke, which, I suppose, is a possibility.  But it’s not as big a risk as what can happen to your money if you invest it in the stock market.  

Directed / Produced by

Jonathan Fowler & Elizabeth Rodd