In light of the current series on investments (see last issue's column), this column from 12/07/97 is being rerun to re-emphasize the point that everyone can become financially independent.

Who Me? A Millionaire...?

By Robert Schiener

It would appear that the Post-War era has been characterized by new and innovative "fads" such as disco, rap music, and many others. Among this list, unfortunately, includes the priority of extended consumption behavior amongst Americans. This should not be misinterpreted as critical of expenditures, however. A rational self-interest model praises consumption-like behavior in order to permeate into the wonders of a mixed market. Such is certainly the case. Yet, the point to be made is that an increase in savings should be even more glorified as working in this rational self-interest since the opportunity costs of failing to save is unconscionable.

What exactly is this notion of saving and what are its economic implications? Can it help all Americans eradicate their fears and justified anxieties over their feasibility of receiving a government check when they reach age 65?

As any economist will tell you, "Saving and investment are not interchangeable terminology." Specifically investment is the purchase of new capital goods like factories, combines, and homes, whereas saving refers to the deposit of monies into an interest bearing account-including the stock market.

The latter term is, for the most part, an unexploited gold mine that, over the long run can manifest a metal so precious that it alleviates the common burdens that so many Americans face today in their plans for retirement. Such anticipatory organization of financial resources at the present contains extravagant implications for the future.

As an attachment to the ordeal of economic "reward," one must construct a basic formula for determining the potential for success. The most commonly known devise used is that of: Y=P(1+r)t, where Y=the total return to one's saving; P=the initial saving; r=the average annual rate of return; and t=the length of time (years) your saving grows.

So what does it all mean to me? Consider this: You are 19 years of age and are interested in becoming a millionaire when you retire at age 70. How much would you have to save today in order to reach your goal? And, more importantly, what is the average annual rate of return supposed to be? Relying on the Wall Street Journal and their expert commentary, the real rate of return (this includes inflation) is 12%. Completing the preliminary stages of such analysis then, we have: 1,000,000=P(1+.12)52. It turns out that P=$2,758.44. In another light, save $2,758.44 today in order to receive $1,000,000--in today's dollars-- when you need it most.

Without hesitation, ignorance is a sure detriment to any society and as such it should be noted that most students do not have $3,000 to save today. Although such is true, they will have it once they find a job which allows them to save a certain fraction of their income. Moreover, the main element from this experiment is the possibilities one can achieve if they forgo present consumption today.

Hence, I would claim that America's elderly should be the wealthiest Americans alive. They've had the opportunity of enjoying one of the most important variables of finance, that being "time." To those who shout a distrustful skepticism toward saving, rid your naive "aura." To those who claim recessions and depressions will erode the value of one's savings, remember that we are speaking of the long run, not inevitable short run fluctuations.

Who knows? If everyone saved now, there would be little rationale for a government-sponsored program like Social Security on such a large scale. Maybe we should listen to Jose Pinera, the Chilean financial guru, highlighted recently on ABC's 20/20 who has a feasible and foreseeable perspective on saving and its consequences. Let us at least consider the proceeding analysis and his palatial possibility.

Eric Seymour

Robert Schiener

Joel Corbin