A Common Complaint
Let’s be honest. We are always complaining or hearing complaints about what should and shouldn’t be taught in school. I’m a teacher, and I even complain.
So, I decided to start up a personal finance after-school activity. I called it ‘The Money Club’. I decided that this needed to be taught. My students voted by turning up and I’m hopeful that I can help them to better understand money.
But what about everyone else out there who is confused, burdened with debt or just looking for some guidance?
Well, it’s never too soon or too late to learn about money and to begin plotting your path to financial freedom. Make a start with me today, by considering these 10 things that I know I wasn’t taught at school.
And let me suggest some of the things that one of your teachers should have taught you and that you should start doing today!
1. How To Allocate Your Spending
Study hard, get a good job and life will take care of itself. That’s what I was told. I really don’t remember anyone discussing precisely what I should do with my income from this ‘good job’. So, I just decided to spend it.
I was happy to spend every cent of my income, enjoy life as much as I could and wait for the next payday. Often I would run out of money before the next payday and just wait until the next amount of money hit my bank account.
What you should have learnt and should now do
There are many ideas on what percentage of your income should be spent on certain things. How much to allocate to necessities like rent or a mortgage, how much for fun stuff like dining out and entertainment and how much should be saved or invested? The non-negotiable part really should be that you must save some percentage every single pay day. This should never be spent and should eventually be invested long-term. But what percentage?
The 50-30-20 rule is one possible approach that you could follow. Please read my post on this. Whatever formula you come up with, it needs to be one that prioritises savings and one that you can stick to.
2. Cars And Houses Are Not Really Assets
I was taught that cars and houses were assets because they had value and you could use them as collateral to get a loan. I borrowed money for cars but later sold them for much less than I paid for them. They cost me money in depreciation and interest repayments. I spent a fortune on cars. And they never ever gave me back anything.
Houses are the same unless they are rental properties. Houses cost in interest repayments, taxes and maintenance. They may appreciate in value, unlike cars, but they don’t usually provide income.
What you should have learnt and should now do
Wealthy people know that an asset is something that earns an income. Cars and houses generally don’t do that. You should consider not buying a new car. And when you do buy a car you should try to always pay cash. Long-term loan payments for cars represent paying too much for something that loses value. These payments also restrict your ability to save and invest. The cost is just too great.
As far as houses are concerned, well there is an argument for renting rather than buying. But I understand the desire to own a home is strong. The best advice is not to buy one that is beyond your ability to meet your repayments. Monthly payments of 30% or less of your income is a good limit to set. You need to also always still be able to save a portion of your income while meeting your home loan repayments. If you have no car repayments, then house repayments become just a little easier.
3. Investing Is Not Just For The Rich
I always thought that investing was something that rich stockbrokers did and nobody else did. I was never taught what investment could do for the average person. I may have heard about people investing in real estate. But I didn’t know how that worked either.
What you should have learnt and should now do
Investing is probably the most powerful tool that the average person has at their disposal to increase their wealth in the long term. And it should begin with your first job. I have other blog posts on this that you can read for a little more detail.
Investing can be very simple: long-term savings accounts, bonds and index funds are not complicated at all. A percentage of every weekly or monthly income should be invested into one of these. And this needs to be a part of a set-and-forget simple long-term plan that requires minimal adjustments over time.
4. You Need An Emergency Account
I wish someone advised me to put money into an emergency account. Kids need to know that sometimes life is tough and things come along that you just don’t expect. Car expenses, medical expenses, family members that need help and many, many other unforeseen expenses can really hurt if you don’t have a system in place to support you. A credit card is not a satisfactory emergency fund.
You need to save at least three months’ worth of expenses and ideally up to six months. If you have this saved in a separate account to your daily expenses account then you can cope when most problems arise. The other advantage of this is that after setting up your emergency fund you then have more ability to invest your monthly savings into investments without needing to access it.
5. Owning Assets Creates Income
I didn’t learn anything about business or investing at school. I really believed that the only option for most people was to get a job. Job = income. End of story.
What you should have learnt and should now do
I wish I learnt that we should always strive to buy assets. This means buying things that can earn an income. Shares, bonds, a small business, equipment that can be rented or real estate can all provide income. Rental properties have long been the go-to investment for generating income. This continues to be a great option for those who can access the finance required to buy a property.
6. How The Stock Market Works
This is the big one. How is this not an important thing to teach young people? If only there was a young investors club or a money club in my old school when I was a teenager.
What you should have learnt and should now do
Buying shares is basically buying a tiny part of a large business. You can own your very own piece of Google Starbucks or Netflix. These shares can grow in value over time and you can be paid a share of their profits in the form of dividends. Rich people know this. Poor people have been taught to fear it.
To lessen the risk you can buy an index fund which comprises tiny shares of hundreds of the best-performing companies. Since the stock market was set up, it has risen on average 10% per year. With the power of compound interest, this can mean low risk and substantial gains of wealth over the long term.
Buy index funds every month with your savings. Sometimes the value will rise and sometimes it will fall. Never sell. Just trust that it will always rise over time as it has for over a hundred years. If only I had known about this thirty years ago.
7. The Power Of Compound Interest
We may have learnt about compound interest in our Mathematics classes. But what I should have learnt is the power of compounding investment over time. Albert Einstein is believed to have said, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it”.
What you should have learnt and should now do
Compound interest means that on average investment will double in value roughly every 7 years.
Interest on interest can become a powerful force that takes time but becomes more powerful towards the later years of the investment. The numbers are almost unbelievable if you start early and stay the distance.
I’m repeating myself now, but anyone wishing to grow their wealth needs to invest regularly for a long time. Index funds are the best way to do this. You can start small with a micro-investing app like Raiz or Stake which are two that I’ve used. As you learn more, you can diversify and increase your portfolio.
8. Passive Income Is Really A Possibility
I was taught that I had to work to earn an income. I’ve since found out that actually, I can earn a substantial amount of income without doing any work at all. In fact, we all should be able to find a way to make money while we sleep.
The best businesses are those that run perfectly without the owner even stepping foot in the door. Shares earn dividends and properties earn rent. If you have enough invested in your retirement account you can withdraw a small percentage each year and the remainder will continue to grow.
9. Debt Can Be Dangerous
I didn’t learn about debt at school. I was taught by society that it was just normal to borrow money to buy a car and to do the same for a house. I was then taught that having a credit card was a good thing because it helped to improve your credit rating.
I was basically taught to expect to live my whole life in debt. But it doesn’t have to be this way.
What you should have learnt and should now do
We should have learned about the problems that being in debt can cause and that wherever possible we should save to buy things with cash. Credit card debt can be especially troublesome for those who can’t handle it. People become trapped in a vicious cycle that they never escape.
If you must have a credit card, make every possible effort to only use it in a way that allows you to pay the entire balance outstanding every single month. This will take your interest paid from around 18-20% to 0%.
10. You Don’t Have To Work All Of Your Life
Like most people, I expected to work full-time at least until I was 65. Get a job, buy a house, have the government retirement plan work for me, save a bit along the way and stop working at 65. If you live in the right country then you may receive a pension that will look after you in your retirement years.
What you should have learnt and should now do
It is possible to retire much earlier if you really want to. Being frugal, investing wisely, increasing your income and having a consistent retirement plan can give people financial freedom in their 50’s, 40’s and in some cases even in their 30’s. It has been done. Follow the advice of the many who have done it and then give yourself the choice of whether to continue working or not.
So many lessons that were never learnt . So many things that the average person still does not know. So many mistakes that could be avoided. And so many people could be a little closer to personal freedom.
I wish I learnt these things at school. I got there in the end, but things could have been so much better. Make the effort to learn these things now. And be sure to pass them on to your children too.
Links to relevant posts:
I found this article to be both engaging and educational. The points made were compelling and well-supported. Let’s talk more about this. Check out my profile for more interesting reads.