The Diary of a Prudent Investor
This department is designed to help readers to a better understanding of the general business conditions which affect their investments. It is obviously impossible to give advice ns to specific investments.
by MERRYLE STANLEY RUKEYSER
WHEN Jim Blake, at twenty-two, received his sheepskin from college, his personal ledger balanced, with his financial assets and liabilities, at zero.
As a recruit in the world of hard knocks, Jim was less concerned, however, with managing his nonexistent estate than with getting a job. His first idea was to give Nicholas P. Winthrop, an old friend of the family, an opportunity to redeem that pledge: ’When you’ve finished school, come in to see me and I will take care of you.‘
Mr. Winthrop gave Jim a job and a title — executive assistant, salary fifteen dollars.
The shock brought Jim down to earth. He suddenly realized that he could not get rich quick on fifteen dollars a week. This amount, it seemed to the new ‘executive assistant, was commensurate neither with his title nor with his hopes. How could he achieve financial independence on such a pittance?
His first major move was to consult his employer as to the secret of attaining a competence — and, by implication, on fifteen dollars a week.
‘ My advice to you, my boy,’said the merchant, “is to open a savings account, subscribe to building and loan shares — and look into life insurance.
As his employer spoke, Jim kept thinking, On fifteen dollars a week.’
Mr. Winthrop’s eyes dropped to his mail. The interview, brief but epochal, was over.
Lunch time found Jim Blake at the office of a local insurance agent, Tom between nervousness and self-importance, Jim had a vague idea that the agent would ask him: When do you expect to die?’ Instead, the first question was: ‘When do you expect to marry?‘
‘As soon as I can afford to,’ replied Jim.
‘When do you want to retire?’
That challenge caught Jim wholly unprepared. Having just started on his first real job, Jim had scarcely thought yet of his final curtain call on the business stage.
‘ Sixty-five is a suitable age, don’t you think? the agent said, almost automatically.
Jim thought it a bit far off, but he did n’t argue the point. He was too surprised at discovering that insurance has much more to do with the business of living than of dying.
Seeking to move rapidly from theory to the practical act of getting a signature on I he dotted line, the agent said: ’You should start on your insurance programme immediately, while your health is robust, and begin to add to the foundation as your needs and income expand. It you are looking forward to getting married, you will want to start immediately to save as much as you can. You need a policy that will emphasize above all the savings feature. You need an endowment policy — about a forty-three endowment, which will mature on your sixty-fifth birthday.‘
The agent did not recommend more insurance than Jim could carry on his present slim income. He suggested a $2000 policy. At the end of forty-three years, if Jim lived, his annual payments to the company, — the premiums, — less the actual cost of insuring him against premature death during that period, plus the earning power of the premiums invested in bonds and mortgages by the company, would create a sum equal to $2000. This would be his sixty-fifth birthday present to himself.
The agent explained that, since Jim had no one dependent on him, the endowment policy was advisable rather than ordinary life or a twenty-payment life or a term policy, because endowment entailed the lowest net cost provided he lived, and offered the largest degree of saving of any of the policies offered. The annual premium would amount to $46.80, from which he could deduct whatever profit-sharing dividends the company paid. Of course, dividends depended on the skill with which the financial management of the company would meet the challenge of fluctuating conditions. If dividends were continued at the rate in effect when Jim took out the policy, he could anticipate $10.12 in dividends at the end of the first year, $10.20 at the end of the second, $10.28 at the end of the third, and so on, increasing through the years.
The merit of the endowment policy lay in the fact that, if he lived, he would find a high proportion of the annual premium reserved for him as savings. Thus, the policy which involved the largest annual cash outlay for premiums would ultimately prove to be the least costly in the event of his survival.
‘ As soon as you can afford more,’ the agent continued, ‘say in a year or two from now, you can buy at least another thousand. Insurance can he modified to meet changing needs. After you are married and have children, you will become more interested in protection than in savings, and doubtless will be attracted to the ordinary life form. Then, when you attain the retirement age and your children have become self-supporting, you can automatically convert, your insurance fund into a joint and survivorship annuity policy for your wife and yourself, guaranteeing each of you a regular income for life.’
Next day at noon, Jim called at the Building and Loan Association office, ‘ What is the smallest amount I can invest? ’ he asked the man behind the barred window.
‘Fifty cents a month,’ was the reply.
Fifty cents a month sounded so easy to Jim that there seemed little merit in accomplishing it. He naïvely asked the secretary how it was possible to take out in a dozen years considerably more cash than he would be called upon to put in.
Jim learned that the association was a privately managed, mutual thrift organization, organized and directed by responsible local business men and owned by all its shareholders. Many persons bought the shares in large and small amounts. Their deposits were then loaned by the association to local home owners, who would give a first mortgage OIL their homes as security. Moreover, the borrowers agreed gradually to retire the loan through regular monthly payments.
‘The fifty cents you pay in each month,’ explained the secretary, ‘pays for a $100 share in the association. We pay dividends depending upon our earnings, which, of course, vary with economic conditions and interest rates. The range of dividends is between 3 and 5 per cent. In addition, to reward consistent, systematic saving, the association pays a bonus equal to 1 percent a year at the time the shares reach their $100 maturity value. Should a subscriber need money, the association attempts to repurchase the shares.’
Jim figured that he could afford to subscribe to ten shares, which meant paying in five dollars each month. The results over a period of years were illuminating to a novice in saving. Five dollars, saved regularly each month, amounted in ten years, at a 4 per cent dividend rate, to $734.95. At a 5-per-cent rate, it accumulated to $774.30. Actually he would have paid in only $600, which would be augmented by the earning power of the mortgage investments, less the operating expenses of the association.
There was still time during the noon hour to investigate Mr. Winthrop’s last bit of advice —a savings account. Jim found it required only a dollar to open, an account. The teller informed him that the bank paid 2 per cent interest. Jim realized that when you buy something with money the resale value of the article depreciates as soon as you leave the store; on the other hand, when you entrust a dollar to the bank, it becomes $1.02 a year — and still remains an option on everything within its price range.
Accordingly, he made a covenant with himself to deposit part of his salary every pay day, so that he might build up a fund each year to meet his scheduled insurance premiums as well as unexpected contingencies.
At the end of his first month on this programme, Jim’s little book of accounts showed the following notations: —
Savings bank account $10.00
Building and loan 5.00
He persevered in this programme, even though it took nearly one third of his total income.
His first month’s savings started him on a $2000 insurance policy, $1000 (maturity value) in building and loan shares, and a bank account that would provide the basis for a more ambitious investment programme later. The institutions he used assured him that his savings would be managed by specialists in finance and real estate, and promised him a regular income on his slowly forming capital fund.
Jim’s book of accounts on another page disclosed the subjoined allocation of his gross income: monthly earnings approximately $65, against which $18.90 was reserved for savings and insurance, $25 paid to his parents for room and board, leaving about $20 for clothes, cultural activities, amusements, and incidentals.
Jim’s friends around town, impressed with his sonorous title, assumed he was probably making a fortune. But Jim bided his time, knowing that he was making progress, soaking up experience and laying the basis for a satisfying career.
(To be continued)
- The agent advanced the first, semi-annual premium, Jim paying him back in six equal monthly installments.↩