A tip for young people: Save and invest

Stuart Ritter of T. Rowe Financial.

TEXT OF INTERVIEW

TESS VIGELAND: Break out the bubbly, the Dow crossed the 10,000 mark this week!

OK, so we're still quite far from the high water mark of more than 14,000 two years ago. And there is talk that the Dow itself is a little bubbly right now and ready to pop. But still, the major stock indices have gained more than 50 percent since the market bottomed out in March. Even longtime market watchers must be scratching their heads over such massive price swings. And for those who aren't long-time? Say, those just starting out their investing lives? What on earth are they supposed to make of all this?

Here with some answers is Stuart Ritter. He's a financial planner with T. Rowe Price. Welcome back to the show.

Stuart Ritter: Thank you for having me.

Vigeland: As you know, we're focusing on issues of kids and money over the next few weeks. And I wanted to talk to you a little bit about what we might call "older kids," perhaps folks in their early or mid-20s, who have been looking at what's happened in the stock market over the last year or so and wonder why anyone would ever bother. What's your advice to them?

Ritter: They need to look beyond just what's happened in the last year or two. If you're in your early, mid-20s, you have decades before you're going to be using money that you are setting aside for retirement. And that's hard for that age group sometimes to think about, because everything has happened to them in three-, six-month increments. The same time, just as you don't listen to the same music as your parents do, you probably don't want to invest in the same way they do investing.

Vigeland: I like that advice a lot. So then let's talk about some of the rules that we can still follow or perhaps not follow and this is the question I've been asking a lot of folks over the last four months -- what still stands?

Ritter: Well, I think -- and forgive the corniness of the phrase -- the "new new" is the tried and true. The fundamentals still apply. And what we've learned from what happened is, if you're sticking to the kinds of things that we know work in the long term, that is probably going to work out for you in the long term.

So for younger people what they need to focus on first of all is saving. I mean, before we can even talk about how they should be invest money, they've got to have some to invest. So managing your cash flow, making sure your expenses are lower than your income, as hard as it is when you're starting out, getting that piece right.

Then when you do have money, recognizing that when you're saving for retirement, the money you're using is going to buy things that 50 years from now are going to cost a whole lot more. So while the stock market has felt uncomfortable in the last year, we're not talking about your using the money in the next year or the next two years or 10 years. It's many years after that, and that's where being in diversified equities, investing that way makes sense for people who have that long of a time horizon.

Vigeland: I will make an admission now, that when I was in my 20s I was actually forced to set aside some retirement in my first job. And then when I moved to another city to take my second job, I promptly cashed it out. And boy, I look back now and wonder how many thousands, tens of thousands of dollars I missed out on because I did that. Can you take us through some of the math involved here, the basic math. Why it's important to start that so early?

Ritter: So when I talk to young folks and asked them, "Do you think you're going to get the full Social Security benefit currently promised you under the current rules?" There's laughter in the room, to be frank.

Vigeland: Well I'm 40 and I would laugh as well.

Ritter: There you go. People realize, "Well wait a second, if some of the current parts of income and retirement are going away, the only thing that's left is the money I save." The earlier you start, the less you have to save in terms of a percentage of your income.

What happens is you are putting money into your account, and then when growth starts happening in your account, it's happening both on the money you put in and then on the growth that you've already gotten. And then what tends to happen is if you look at what people's balances look like in retirement -- if they've had these decades to save -- the amount they've put in is actually a very small percentage of the ultimate balance. Because it's been in there so long that money has been made on money.

Vigeland: But again we're talking about earnings on growth, and over the last year or so we have not had growth. Well, actually, that's not true. We have had growth since the market bottomed out in March.

Ritter: Well, I think you just answered your own question.

Vigeland: OK, there you go. So my question was...

Ritter: Your question was, if we haven't had it over the last year, can I count on it in the future?

Vigeland: Exactly.

Ritter: And what we try to do is help people look beyond just that one year. For the 30-year period ending at the end of 2008, your average annual return was 11 percent. One year right now looks really big and it's been very difficult for people to live through. You compare that to 40, 70 years, it's going to be a very small piece of it. And that's the perspective we encourage young people to have.

Vigeland: All right. Stuart Ritter is an assistant vice president at T. Rowe Price investment services. He's also a financial planner with T. Rowe Price. And always good to have you come in, and thanks for talking to us about kids and money.

Ritter: Thanks for having me.

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