Lost Opportunity Cost: The Price of Re-Paying Student Loans Instead of Investing

After one graduates from college, on average, the new graduate has accumulated approximately $30,000 in debt…upon completion of undergrad. At this point, he begins to pay down his student loans. A thought experiment: What would happen if the student could pay towards his investments with those funds used to deal with the student loan debt?
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401(k) Fallout

This video takes an interesting take on some of the risks associated with the 401(k) plan. Although the video is over 10 years old, and it was filmed during the last major market correction(circa 2009), the risk factors surrounding the 401(k) plan have not changed.

Some contextual things to consider while watching the video: The 401(k) plan transfers the retirement risk to the employee. In the past, pension plans were the norm, and the employer would manage the retirement risk for the employee. The year of change: 1974. This is the year ERISA(Employee Retirement Income Security Act). The act itself covers many items, but one major outcome from the passing of this legislation is that the retirement risk transferred from employer to employee. Consequently, the rise in the use of defined contribution qualified retirement plans increased. Some examples of Defined contribution plans are, viz: 401(k), IRA, Roth IRA, and many more. Along this same time, the rise in popularity of mutual funds correlated with the increasing use of 401(k) plans and other defined contribution plans. All of these factors push the risk to the employee, but the employee lacks the control over his funds.

Inflation: The High Class Robber

 “Over the last 100 years, it(US Dollar) has lost over 96 percent of its value.”

Stop. Re read this statement. How does this impact your daily living? How does it impact your ability to build wealth?

With regards to daily living, the ability acquire goods and services has become increasingly more difficult. Prices of these goods and services are on the rise, but in reality, that isn’t the case. The reality: As more fiat currency units are being printed, the value of each unit declines. This means it takes more currency to purchase the same goods. Since goods are sold in terms of prices, it gives the illusion prices are rising.

When the value of the currency is in decline, concomitantly causing rising prices, people have a shortfall when it comes to purchasing goods and services. Banks have provided a remedy to this problem: The expansion of consumer credit. The proliferation of consumer credit has expanded, to wit, sub prime credit. The expansion of sub prime credit has allowed individuals to bridge the financial gap between their income and the rising prices of goods. Since wages are not rising at the same pace as goods and services, for many this is a major issue. Sub prime default rates are on the rise, and individual savings are almost nonexistent. When emergencies occur, the use of credit is the norm, not savings.

Wealth accumulation is a treacherous endeavor in an inflationary environment. When individuals take the newly minted fiat currency and purchase assets, the prices of those assets are subject to the same increase as consumer goods. For example, when one purchases over the counter equities, as an investment, the price is relative to the declining value of the currency.(along with other economic factors.) In reality, the gains, for these paper assets are nominal, as the price increases simply reflect the devalued currency. Millions of middle class Americans are placing their retirement savings at risk, yet have no risk mitigation strategy against this thief known as inflation.

Oh, let us not forget taxation. Taxes are assessed on the prices of the goods or assets. As prices investment equities rise, people are excited…until taxes are levied. The net impact, price gains of the assets with taxes, is negligible…making it more difficult to invest for the long term.