Most high school graduates understand that the mitochondria is the cell’s powerhouse, yet they don’t understand the distinction between stocks and bonds. Students are taught how to calculate the hypotenuse of a triangle yet have no clue how to file their taxes. They can recite the periodic table but have no idea how to keep track of their income and expenses.
The unfortunate reality of our present educational system is that personal finance is not a mandatory course in most high schools, which means that the majority of students graduate and join the workforce with very little financial education.
The good news is that the internet has made it easier than ever before to learn about personal finance without having to take a formal course. Reading a few solid personal finance articles each day is a simple method to gain the financial information that schools fail to teach.
In this article, I’ll discuss several crucial money skills I wish I had learnt in earlier in life since we all should know these money lessons they don’t teach you in school.
1. How to Make Money With Your Computer
Most young people assume that having a college degree and landing a typical 9-5 job is the only realistic option to make a living. However, the internet has enabled almost anybody to become a freelancer or entrepreneur and earn money with their computer.
This eliminates the necessity for a daily commute, a rigid work schedule, adherence to a dress code, and all of the other bothersome aspects of traditional jobs.
Judging by the extensive amount of bloggers, YouTubers, and podcasters, just to name a few fairly new occupations, many people have worked out how to make a living just by teaching or entertaining others. Instead of having regular 9-5 jobs they make a living with their laptop, and most of them have never been happier or more free.
2. Why Owning Assets Always Leads to Wealth
To be “rich” is to control your time. The world’s wealthiest people are those who can wake up each morning and choose how they want to spend their day. The best approach to obtain this control over your time is to possess assets that generate income for you while you sleep, eliminating the need to report to a job to make money.
An asset is something that grows in value over time or gives you money just for holding it. Real estate, equities, bonds, websites, and companies are a few examples. These assets are available for purchase and/or construction. You might, for example, invest your paycheck in stock index funds. Alternatively, you may devote your efforts to creating a website that generates cash for you while you sleep by writing what you know about.
And, after you’ve accumulated enough assets that generate income for you, you won’t need a day job to pay the bills. That is true wealth.
3. How Important it is to track Your Finances
One of the most fundamental personal finance principles is to keep track of your finances. You should be particular aware of the following key figures:
- How much money you make each month.
- How much money do you spend each month?
- Each of your bank accounts’ monthly balance.
- How much money you spend on investment fees.
Budgeting Apps like Mint and an Excel spreadsheet is how I keep track of my monthly cash flow. Both programs are free, that is, if you choose the free online version of Excel instead of the paid subscription one.
4. The Powerful Law of Compound Interest
Compound interest is another fundamental principle in personal finance, yet it’s difficult for most people to grasp since it’s so counter-intuitive. As an example: If you invest $10,000 per year at a 7% annual rate of return, which is the one often cited as the average return of the US stock market, it takes you 7.84 years to go from $0 to $100,000. Going from $100,000 to $200,000 only takes you 5.1 years. In fact, it’s worth noting that going from $700,000 to $1 million takes less time than going from $0 to $100k. This is the nature of compound interest, it is excruciatingly slow in the early years and astonishingly quick in the later ones.
Another way to look at it is to realize the following aspect: On your path to accumulating $1 million, 26 percent of the journey is spent going from $0 to $100k, while only another 17 percent is spent going from $100k to $200k.
Understanding this notion is especially crucial for new investors who may feel as though the path is agonizingly slow at first. The key is to understand that accumulating wealth takes time at initially. This keeps you from being disheartened too soon on your journey to financial freedom.
5. Why Income is More Important Than Investment Returns Early in Life
Many young individuals believe that picking the next unicorn stock is the “sexy” way to create wealth early on. Unfortunately, identifying particular stocks is difficult, and most young people lack the financial resources to make lucky stock picks even worthwhile.
For example, putting $1,000 in a single stock that doubles in value in less than a year would be a great investment, but it would result in less than a $1,000 gain after trading costs and capital gains taxes.
The best strategy to start building wealth is to focus on obtaining a high income and hence a high savings rate since savings account for far greater growth than investment returns early on.
It’s a good idea to begin investing as soon as possible, but keep in mind that the amount of money you save counts more in the beginning. Concentrate on being an income machine rather than an investment guru.
6. Don’t Be Afraid of Market Crashes
One of the most prevalent errors that many investors make is believing that they must time the stock market. After all, by buying and selling at precisely the right times you may improve your investment returns. The bad news is that predicting how the stock market will perform in the near term is extremely difficult, and attempting to buy and sell at the right time often results in far smaller returns.
A better technique is to understand that market collapses do not go on forever and that the stock market tends to rise dramatically over time. By equipping yourself with this information, you raise the likelihood that you will stay true to your preferred asset allocation despite market ups and downs.
As a general rule: Stocks have a fast rate of growth and a high level of volatility. Bonds on the other hand have limited growth and but also low volatility. This means that if you purchase equities, you may expect a rough, high-growth trip to higher prices. In contrast, if you buy bonds, you may expect a steady, low-growth trip to higher prices.
Your asset allocation refers to how much money you put into equities vs. how much of your money you invest into bonds. The mix of this allocation should be determined by when you need to sell your assets to make use of the invested money. As a result, when the market crashes, you are not forced to act but instead can remain calm.
If you don’t intend to sell your stocks for several decades, a market collapse offers an opportunity to buy more shares at a lower cost. After all, you shouldn’t be concerned with how much money you can obtain if you sell today. You should be concerned with how much you can obtain several decades from now when you need to sell.
And, if you need to sell equities in the next several years to support your lifestyle, your asset allocation shouldn’t be significantly tilted toward stocks. This way, you won’t have to panic if the market falls.
7. How to Make Better Money Decisions
While most schools do not teach personal finance, you are not required to attend a formal class to learn about money. Everything you could possibly want to know is available online.
Here are a few resources that you could find useful if you wish to become more financially educated:
Blogs: Reading personal finance articles is a simple method to improve your financial knowledge a little bit every day. There are many personal financial blogs available for you to choose from. Check out a few and then decide on whose writing style you prefer.
Books: One apparent strategy to improve your financial understanding is to read personal finance books. Good books to get started are “Your Money or Your Life” by Vicki Robin and Joe Dominguez as well as “The Millionaire Next Door” by Thomas Stanley and William Danko.
Podcasts: Another simple approach to learn about personal finance is to listen to podcasts. Similarly to blogs there are many great podcasts to choose from. Listen to a few different ones at first before deciding to which you will stay subscribed to.