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Closer to Fine

The path to disciplined investing can start with saving for college.

Don Phillips, 08/04/2008

We value your feedback. Send comments, questions, and criticism to advisorquest@morningstar.com.

Our summer issue's theme reminds us all of an often-forgotten truth: Investing is a means to an end.

In this era of constant financial noise, it's easy to see investing as a game where players ruthlessly try to rack up the biggest dollar totals or purchase the flashiest cars, yachts, or trophy spouses to prove that they have won. Financial publications and Web sites that sponsor stock-trading games or celebrate the spending habits of hedge fund managers only pile on to this ridiculously superficial notion of what it means to be a successful investor, or a decent human being for that matter. Thankfully, most investors and financial advisors have a far healthier understanding of what real investment success is. Successful investors live within their means, and they save and invest for the future to provide security and create opportunity for themselves and their loved ones.

Nowhere do we see the effort and the rewards of disciplined investing as vividly as in saving for college. The goal is clear, the time horizon is easily defined, the results are plainly evident, and the process from saving to graduation takes place within 10 to 20 years. College saving is an opportunity for parents and grandparents to give kids an advantage both in the job market and their own financial future.

My own entry into the workforce was made easier because I exited college with no debt, thanks to the then-low tuition at the University of Texas, the kind support of my family, and the fact that I had been an investor since my teens. The absence of student loans and other financial burdens meant that I didn't have to take the highest-paying job I could find and instead could pursue my true interests and join this tiny startup called Morningstar. It was a luxury that many of my friends who rang up big debts in college and graduate school did not have. They were forced to take the highest-paying opportunities, even if their hearts told them to go elsewhere. To me, this memory exemplifies why investing is so vital for our society. At some point in all our lives, there will come an opportunity to pursue a passion that might be blocked if we are forced to operate solely for short-term financial needs. Giving a graduate the opportunity to choose his or her own path can be every bit as valuable as an education--and it all comes from financial discipline.

Unfortunately, the economics of a college education have deteriorated dramatically in recent decades. Demand for education is way up, as more careers require degrees and parents are eager for their children to have such advantages. The supply of colleges, on the other hand, is relatively inelastic, forcing tuition costs up at a rate far above that of inflation. The economics of a college degree are ugly for today's youth. Many graduates get out of school with debts that will take years, if not decades, to pay off. To make matters worse, schools still do little to teach even basic financial planning to most students. Marketers aggressively target college students, luring them in with easy credit and the promise that they can lead a lavish lifestyle right away. It's no surprise that we have a negative savings rate in the country when young adults are taught from an early age to take on debt and to spend like drunken sailors.

Saving for college gives parents two opportunities to buck this sad trend. First, by helping fund their children's education, they limit the debt burden their kids will face in their early years in the workforce. This freedom may open doors and allow these young adults to find careers that best match their passions. How sad it is to see so many middle-aged adults today trapped in high-paying jobs that they loathe but cling to for financial reasons. Second, and more importantly, by being disciplined savers themselves, parents can show their children that saving and investing are something that responsible adults do--a message kids are unlikely to get from pop culture or politicians. Responsible adults find ways to live within their means and to save for tomorrow. This is the role model that young adults need, not the conspicuous consumption of celebrities that fills our TV screens. Smart parents can use college savings to showcase this aspect of adulthood to their kids and involve the kids in the process as well. Savings habits, like spending habits, are developed at an early age and tend to remain with us throughout our lives.

Unfortunately, we are still a nation that struggles to make sound financial decisions. We celebrate consumption, and we do not save enough. Rather than plan for tomorrow, we live for today, and in so doing, we shift a huge burden to coming generations--much as Washington has done with Social Security. A disciplined approach to college savings is one small but tangible way of helping to reverse this behavior. Advisors who spur their clients into action and parents who plan intelligently for their kids' college are fighting an important fight for noble reasons. It's also a test of responsibility and resolve. After all, if an individual can't succeed at this straightforward task, how can he or she hope to succeed at the tougher challenge of retirement planning? Whether we ultimately become a financial asset or a burden to society is not always in our control, but we have the ability to tilt the balance toward the positive. For many, it starts with saving for college.

Don Phillips is Morningstar's managing director, corporate strategy, research, and communications.

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