Schools are doing a better job than in previous years of preparing students for life post-school. That is with one glaring exception - personal finance! When we consider how much personal finance shapes our entire futures, this omission should be a significant cause for concern for parents and students. It’s a financial jungle that young people are walking into, ill-prepared to handle the many temptations and predatory companies that are out there. There is also a positive side to the financial jungle – with some forearming and money discipline, there are enormous opportunities to build significant financial wealth and enjoy the fruits of that for the rest of their lives.
Here are a couple of key lessons I wish someone had taught me when I was at school
Start Saving and Investing Early and Don’t Ever Stop
Einstein called compounding the eighth wonder of the world. It is an incredible force in personal finances, but it does take time to work. So, the earlier you can start, the better. Start early, and your fourth decade of investing will earn you three times as much as all the 30 years before then, for no more significant effort! That is because you see the power of interest on interest on interest, and the results are truly astounding. The average annual return on American stock markets over the last 90 years is over 10%, which well exceeds inflation. So, getting your money into broad market indexes and leaving it to compound away over your lifetime will pay you rich dividends.
Build a budget and measure what you spend
Controlled spending is the foundation of any sound financial plan. Look closely at what you are spending to ensure you are not wasting away good investing dollars on today’s wants instead of building yourself an abundant financial future. In short, you must make sure your income consistently exceeds your expenditure. That way you create a surplus that you can invest monthly, building your wealth steadily over time. Prioritise your budget between obligations, needs and wants so you cover your critical expenditure, and you can then pare down on the wants if necessary to make sure you consistently have a surplus that you can invest. Bank statements are easy to download to a spreadsheet and there are some great budget apps out there that can also do the work.
Be very wary of going into debt
When you leave school, receiving your first credit card can feel like an empowering entry into adulthood, bestowed on you by the kind banks. It is anything but that! The banks and financial institutions will lay every temptation they can, from minimum monthly payments, zero interest to start, cashback rewards and stories of the importance of credit scores to get you using your credit card. What they hope is that your good intentions of paying off your credit card each month will wane over time, and you will slip into recurring credit card debt, thereby paying interest month after month. Credit card debt is incredibly lucrative for the financial sector, earning it close to $200 billion a year in the US alone. Credit card debt is a cause of financial despair for hundreds of millions of people worldwide. Don’t let yourself be one of them!
Build an Emergency Fund
One of the many negative impacts of COVID-19 was the loss of jobs, leaving millions of people in desperate financial positions because they had no savings or emergency funds. Keeping emergency funds set aside for such events may not seem an attractive use of your money, but it is one of the wisest things you can do. Work on building that fund up to cover six months of living expenses, and keep it in a readily accessible savings account with the best interest rate you can secure. Home equity loans and other credit lines do not constitute emergency funds. They are only another debt burden that you will have to be pay at a future point in time.
Learn Your Way Around Stock Markets
The myriad of investment options can seem overwhelming at first, often enough to deter first-time investors from putting their toes in the water. The trick here is to start small and with something simple that you can understand. Your bank or stockbroker will gladly open an account for you, after which you can transfer a small sum of money in and begin your investing journey. To start with, I would recommend simply buying a broad stock market investment ETF (standing for Exchange Traded Fund) with mega-funds like Blackrock, Vanguard or Fidelity. This can be as broad as the entire Nasdaq, Toronto Stock Exchange, S&P 500 or the Russell 2,000 index. Just go small and make a start – you will find it’s not nearly as scary as it seems from the outside.
Invest in yourself - the best investment money can buy
The other step here is to start investing in yourself by building up your investing knowledge. There are loads of great podcasts out there, such as Investing for Beginners Podcast or the Canadian Investor Podcast, that will help you get up the learning curve. There are also some excellent simple investing books from Peter Lynch, Joel Greenblatt and Phil Town that will educate and get you going. As the saying goes, there is no better investment than investing in yourself.