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Every now and then I wish I could go back in time and talk to my past self. I would tell myself what stocks to buy, give warnings of relationships to avoid, and teach myself some key money lessons.
I have compiled that financial advice (minus the hot stock tips) into 9 money lessons everyone should know.
1) Spend less than you earn
Duh. Spending less than you make is one of the most fundamental and important money lessons. In order to save money and reach any financial goals, you must spend less than you earn. The opposite spells financial ruin.
The easiest way to accomplish this is to keep a budget. A budget is simply an accounting of all your income minus expenses.
If your budget is tight, try a side hustle to make more money.
2) Recognize needs vs wants
Identifying needs versus wants is a cornerstone to long-term financial success. Needs are essential to life, like transportation, housing, and food. Wants are everything else. Every expense can be categorized into needs or wants.
If you are not saving enough, cut back on your wants or change to a cheaper alternative. For example, food is a necessity, but you can save a substantial amount of money by cooking instead of eating out.
3) Minimize lifestyle creep
As life progresses you will earn promotions and raises. Without focus and attention, it is easy to let lifestyle expenses creep up. This can lead to big financial mistakes. That's not to say that all lifestyle increases are bad, but they should be monitored so that they don't become a financial burden.
One easy way to apply this money lesson is to follow the one-third rule. Every time you receive a raise or bonus, allocate one-third to long-term goals, one-third to short-term goals, and spend the last third. With the one-third rule, you get to enjoy your success today while also making tangible progress towards improving your future.
4) Start saving and investing early
Younger people have an amazing advantage in investing… time. Starting earlier leads to larger portfolios or lets you invest less to reach the same goal. The saying that time is money is extremely accurate.
The saying, “time is money” is extremely accurate.
Illustrated in the chart below, the money lesson of investing early can have a dramatic impact on portfolio value.
Source: J.P. Morgan Guide to Retirement 2017 Edition
Compare Chloe and Lyla. Lyla starts investing 10 years after Chloe and ends up with $400,000 less saved for retirement!
Use time to your advantage, save and invest early.
5) Own stock
Owning stock means that you have ownership in a company. Earn money and share in the company's well-being in two ways. You benefit when the company gives cash in the form of dividends, or the stock price increases and you profit when you sell the stock.
The real benefit of owning stock is compound growth and interest. Through growth and reinvested dividends, your investment earns even more money, and this effect compounds over time (see the previous money lesson, start saving and investing early).
That's not to say that investing in stocks doesn't carry risk. The stock price of the company could decrease and you might end up selling your stock for less than you paid for it. Also, sometimes companies go out of business and your stock could become worthless. One way to minimize risk is to make sure that you don't put too much money into any single investment, commonly known as diversification.
If you are new to stock ownership, consider opening an account with Stockpile. Stockpile has lots of resources to learn more about investing, has no monthly fees or minimums (seriously you can start with $5), and has access to over 1,000 stocks and ETFs. If you use this link you can also get $5 of free stock to get you started investing.
Stocks also make great gifts. Consider buying stock for your children or grandchildren. My grandfather bought me shares in a utility company when I was a baby and it had a huge impact on my life.
Among the 9 money lessons, owning stock is the most common strategy for reaching your long-term financial goals.
6) Don't invest emotionally
Everyone knows the most basic investment rule: buy low and sell high. Yet frequently people do the opposite because of emotion.
When the market is up people are typically feeling good and excited, and more likely to want to buy. When the market is down, especially if it dropped quickly, people feel concerned and scared, which causes them to sell.
Their emotions cause them to buy high and sell low. This money lesson is illustrated in the emotional roller coaster of investing chart shown below.
To combat the emotional roller coaster of investing, focus on the long-term.
To demonstrate thinking long-term, I ask two questions:
- Do you know how far it is from your home to your work?
- How many inches is it?
Don't break out your calculator, this is just a concept. You probably know how many miles it is, but don't know how many inches. Why? Because an inch is not a relevant measurement. It's the same in investing. If you have over 30 years to invest, what does a day, week or month of market performance matter? Stay focused on the long-term.
You probably know how many miles it is, but don't know how many inches. Why? Because an inch is not a relevant measurement. It's the same in investing. If you have over 30 years to invest, what does a day, week or month of market performance matter? Stay focused on the long-term.
It's the same in investing. If you have over 30 years to invest, what does a day, week or month of market performance matter? Stay focused on the long-term.
7) Use debt wisely
Of all the money lessons, use of debt is probably the most important. Excess debt limits flexibility, causes stress, and at worst can lead to bankruptcy.
Debt is a tool. You are borrowing future dollars for an expense today. The sensibility of debt depends on what you use the funds for.
Student loans-If a degree or certification helps you to achieve a higher income in the future, your debt acted as leverage to improve your life. However, if you didn't improve your employment outlook, you paid a significant sum for little value.
Credit cards-With high-interest rates, credit cards are an expensive way to borrow money from the future to buy something today.
Auto loans-Automobiles decrease in value over time. While vehicle loans typically have lower interest payments, the decrease in value makes auto loans tricky. A lot of people buy more car than they can afford because they feel they can “afford” the payments. A good rule of thumb is that if you can not afford to pay off an auto loan in 1 year or less, you should either wait or purchase a less expensive vehicle.
Mortgages-A house can be a great investment. It can appreciate over time and after the mortgage is paid off, it is usually inexpensive to live there. Before getting a mortgage do your research. Is the interest rate fixed or variable? What repairs might be needed? What are the property taxes, HOA fees, and other potential expenses? Understand and plan for future expenses to save yourself from a rough money lesson later.
8) Take advantage of the match
Participating in your employer retirement plan can be very beneficial. Most large employers offer a match on employee contributions.
An employer match is a huge benefit and an excellent way to increase your savings rate. The most common match is 50% of the first 6% of your income. Contributing to the max is like getting a 3% raise. Best of all, if you start early the company's contributions compound over time (again visit previous money lesson, start saving and investing early).
If your employer has a match, take advantage of it. Your employer is essentially paying you to save money!
9) Plan for the future
The most powerful advice of the money lessons is to have a plan. It's a lot easier to get where you are going if you have a map. Your goals are the destination and your plan is the directions to get there. Detours in life happen, so be prepared to update your route along the way.
Follow the above money lessons to master your plan and get a head start. Ideally, years from now your only use for a time machine will be to go back and give yourself a high-five.
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