We always hear about the burden of student loans, yet we always see college students flocking to the bars. For evidence, just go to a bar near campus on a friday or Saturday night. I was wondering if the two might be connected and did some calculations. Here’s what I found:
Let’s assume our student goes to the bars two nights a week and has three overpriced beers each time. Over the course of a year, here’s what we have:
(3 Beers/night) x (8 nights/month) x ($5/beer + $1 tip/beer) = $144 per month in beer.
If we take that $144 and instead invest it in a basic index mutual fund, we could expect to earn somewhere between 10% and 15% annualized over a long period of time (10-20 years). Let’s assume our college students starts putting this money away at age 21 and continues through grad school to age 27. At the end of grad school he would have somewhere between $10,000 and maybe $15,000 in the mutual fund, depending on whether he caught a market cycle where he ended up making any return on his investments over that six-year period or not. The $10,000 is just the cash he would contribute. If he made an annualized rate of return of 10%, which is very possible, he would have about $15,000.
Let’s say now that he just left the money alone and that he got an annualized rate of return of between 10% and 15% over the next several years — something that becomes very likely if the money is left alone in an index fund because your return will approach the long-term market averages if given enough time. Here’s the results, both with a 10% and a 15% rate of return:
Years from Graduation Staring with $10,000 Starting with $15,000
0 $10,000 $15,000
10 $26,000 $39,000
15 $42,000 $63,000
20 $67,000 $101,000
Assumes 10% Annual Percentage Rate
Years from Graduation Staring with $10,000 Starting with $15,000
0 $10,000 $15,000
10 $40,000 $61,000
15 $81,000 $122,000
20 $160,000 $245,000
Assumes 15% Annual Percentage Rate
Even starting with just $10,000 and only making the 10% rate of return, many college graduates would be able to pay off the remainder of their student loans using the money in the account after about 15 or maybe 20 years. (We’re assuming here that they’re making the normal payments on the loans that they would be anyway, so the loan balance is shrinking a little during those years.) If they do a little better with their investments while they are in college so that they start out with $15,000, they might be able to pay off their loans in ten to twelve years. If they are really lucky and they hit a period like the 1980’s such that they make 15% both while they are in college and during the years afterwards, they might pay them off in less than ten years.
So does this mean that our college student needs to abstain from drinking throughout his/her college life? No, because beer can be bought in the grocery store for about a dollar per beer. Really good beer can be made at home for less than fifty cents per beer. Wine can be made for about $2 per bottle, or fifty cents per glass.
But what about all of the fun that is being missed? Well, there is nothing stopping you from going with your friends and just having a couple of soft drinks at maybe $2 each. You’d still get to enjoy the bar atmosphere, you’d save a lot of money, and you’d maybe even save your friends from a DUI or even a tragic accident by being the designated driver. Your friends or the bar might even buy you your soft drinks.
Is this plan for everyone? Probably not. The point here is that rather than being a victim of forces beyond your control that will put you into student loan debt until the day you die, you are in charge of your financial future. The decisions you make will either keep you in debt or get you out of debt. If giving up drinking each weekend is too much to ask, than so be it. Just don’t complain about student loan debt that stretches into your sixties – that’s the price of the fun you had. You could also make different choices about where you went to college and what you did during the summers and the period before school and maybe never get into student loan debt in the first place.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
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