Better Off
Why is it so important to teach kids to invest at a young age?
We all want our kids to be better off financially than we are. We want them to have choices, and do work that they love. We want them to be comfortable, and not stress over money. We all expect them to do well, and enjoy their lives even more than we have ourselves.
But are these realistic expectations in 2021?
The answer for generations has been unequivocally yes. But that's no longer the case. According to a 2016 National Bureau of Economic Research study, "...children’s prospects of earning more than their parents have faded over the past half century in the U.S. The fraction of children earning more than their parents fell from approximately 90% for children born in 1940 to around 50% for children entering the labor market today. Absolute income mobility has fallen across the entire income distribution, with the largest declines for families in the middle class."
The fact is, the chances of our kids being better off than us becomes less realistic every year. Perhaps the only way to reverse that is to take matters into our own hands. We need to give our kids a leg up, by educating them, and investing in them ourselves.
Wages
As we'll see shortly, the cost of just about everything has gone up through the years. That's obvious enough, right? But how much an item has gone up versus inflation is the real question. Let's start with the money we earn, instead of the money we spend. At my first job in 1990 I was paid $4.50/hr (a smidge over minimum wage) to pull weeds at a tree farm. Surely they pay more than that these days.
Probably not much. In 1974 the minimum wage was $2.00. By 2009 it increased to $7.25, where it has sat ever since. If the minimum wage of 1974 had increased along with inflation, an average of 3.6% per year, it would now be $10.61. Effectively, my weed pulling would pay less today than it did in 1990.
What about overall wages? You can see in the chart below that, adjusted for inflation, wages have hardly moved in the past fifty years. From 1964 to 2018, the average wage increased from $20.27 to $22.65. That's less than a 12% increase in fifty-four years. So technically, at least, wages have gone up, which is nice, but now we need to see if they've gone up as much as education or housing costs.
Higher Education
We've all heard about how expensive college has gotten. Today's students take on more student loan debt than any other in history, in exchange for a degree that is worth less than it once was.
You can take the view of many, and say, "Well kids today are stupid. They get degrees in stupid stuff, and they spend their money on stupid things." Stupid, stupid, stupid. That's a convenient way to shift the blame from the adults to the children.
Or we can just look at the numbers, where things just don't add up.
Look at the chart below. Inflation is up 236%, but college tuition and fees are up 1200%! Safe to say that wages are not keeping up with that.
The cost of college has absolutely exploded versus inflation, but surely that's because college grads now make so much more money than in the past. Right? Let's take a look at the median salary of a 4-year college grad from 1990-2019, adjusted for inflation to 2019 dollars.
That's right, college grads make less today than they did thirty years ago. You would think that the huge rise in college costs would be due to both a better education being offered, and because it was adding so much value to future earnings of its graduates. But that isn't the case. Not by a long shot.
So, kids that have to work their way through college are doing so at minimum wage jobs that effectively haven't increased in decades, to pay for an education that has gone up 1200% since 1980, in order to get a degree that doesn't provide them with a boost in earnings relative to the cost.
Housing
Well, at least housing prices aren't crazy. The American dream is alive and well with the white picket fence. Does that pillar of Americana remains intact? Surely after the 2007 housing market bubble explosion prices must have come back to earth allowing anyone who wants a home to have one.
Yeah, no. That's not happening either. First-time home buyers today are left with no choice but to chase a parabolic curve higher. Charts like the one below don't last forever. Someone is bound to pay at the top and be hurt, while some may get lucky and catch a housing bust. But, of course, during a housing bust (which tends to lead to a bust in the economy as a whole) they also stand a good chance of losing their job, and even if they don't, it's unlikely banks will be eager lenders during that time. It's indisputable that affordable housing options for young adults are decreasing year after year.
Recap
Getting back to our original question, why is it important to teach kids to invest at a young age? The answer is simple. They need to learn to invest—and that includes a wide swath of everything from budgeting, to bargaining, to saving, to navigating financial instruments, to basic math, and the list goes on— because it won't be as easy to pay for school, to make good money, or to buy a home, as it was for Baby Boomers, Gen Xers, and each subsequent generation. Nobody likes to hear that their generation had it easy. Somehow they all think they had it tough. But economics tells a story, and that story is, perhaps surprisingly, different than the one that grandpa tells about how, "Kids have it easy these days. Why, in my day we had to..."
If you're a parent and you haven't read our recent article about the child tax credit, please have a look: Kids Investing—Child Tax Credit - Wanderer Financial
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