The kind of friends you want to have and keep!

December 7th, 2008 · No Comments

A plumber came by the house this past week to give us a quote on some remodeling work that we’re about to do and for one reason or another, the discussion turned to financial matters.  Turns out that the plumber had a friend who turned him on to saving and investing when they were each only 15!

Plumbers need to invest their money too

Plumbers need to invest their money too

Apparently, when this plumber got his first summer job, his friend dragged him off to a credit union and had him open a savings account there and told him, “You have to deposit X percent of each paycheck you get in here.  Then, at the end of the year, we’ll invest it.”   That first year, they split his end-of-year investment amount 50/50 between gold and stocks.  As he tells it, our plumber friend kept this pattern up over the summers mostly on faith and trust in his friend, but by the time he finished schooling and went to work full-time, he’d already seen enough growth in his portfolio that he absolutely knew that this was the path to early retirement.  So, he’s kept it up every year since.   Even with the downturn from this recession, he believes he’ll be able to retire at 45.

There are a number of remarkable things in this story that I wish my friends, or even parents!, had taught me earlier in life.

  • First and most important, a pattern of saving a portion of what you earn means you don’t have to work forever, even if you don’t hit the lottery.
  • The earlier you start saving the more the magic of compounding works for you due to the longer time horizons involved.
  • Pay attention to the cost of investment transactions, don’t invest each paycheck if the transaction costs are too high.
  • Diversify into different types of assets to control risk.  I don’t know that 50% should be the dividing line between high-risk and low-risk investments at age 15, but even knowing there is a division is the important thing.
  • Our plumber didn’t mention if his investments were done through a tax-deferred retirement plan (IRA) or not, but he did mention that he was able to withdraw some money for his housing down payment when he was in his early 20’s.  (Retirement plans generally allow penalty-free withdrawals for first time home buyers) I would have been very happy to have been able to buy a house at that age!

Seriously, my wife and I were just lamenting the fact that neither of our parents had led us down the path of consistent savings and investment earlier in our lives.  Please don’t make this same mistake with your kids!

Tags: Personal Finance · Savings

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