Remember when you were sitting uncomfortably in your poky school desk, harsh square chair jabbing you in your shoulder-blades, your prehistoric maths teacher explaining complex algebra equations – and you scratched your head and thought – why?
Why are they teaching me this? How will this help me get a job next year? Can this help me get rich?
We’re taught a lot of complex functions and equations during school, but, we miss out on a lot of relevant, practical lessons that would help us get drastically ahead in life.
Our Youth Lack Financial Skills to Thrive
According to the OECD, our young are increasingly heading into adulthood lacking life skills and personal financial literacy – they are leaving home at a later age and heading straight into debt; credit cards, personal loans, high-cost rent and lifestyles. But, can we blame them?
When are we teaching them the financial vitals to help them thrive in adulthood? I’m talking about the stuff that can really help you excel in life – like, managing incoming and outgoing expenses, the dangers and the benefits of interest, and relatable, relevant home economics.
Five Financial Lessons I Wish We Were Taught At School
There are a few important lessons I’ve learnt on my financial journey that I wish we were taught at a younger age. Lessons that could help turn $10,000 into $1.3 million over 30 years. Lessons that keep you out of financial debt and subsequent stress. Lessons that lead you to a healthier, more balanced, and enjoyable life within your means.
So, in the spirit of making life healthier and easier for everyone, these are the five financial lessons I wish we were taught at school to fast track our path to financial security:
1. Respect for the Savings Process
From a very basic level, we need to all learn the value of savings. More than just setting up a token Dollarmite account when children are 6 – we need to teach them the ‘Why’ behind savings. Why are you putting your $2 per week pocket money into your savings account? What is the benefit? What is the desired outcome? Are you saving for something? How much do you need to put away each week to buy your ‘something’ by X date?
2. Budgeting and Management of Household Expenses
Children are staying at home with mum and dad longer as they put themselves through university / TAFE. This usually means a healthy spending budget each month – without the demands of rent, electricity, internet, food, and in some cases, phone bills – some ‘children’ don’t experience the financial demands of life fully until around 25 years of age when they finally leave home.
Teaching budgeting and management of known expenses from an early age will mitigate the risk of high credit card debts, outrageous phone bills, unnecessary personal car loans, and the subsequent poor credit rating when time comes to buy a home!
3. Compounding interest
Compounding Interest can be your friend or foe. Foe if it applies to a loan or credit card interest. But, friend if it applies to a savings account – which is what I’m going to talk about here.
Compounding interest is where you earn interest on your interest.
Say you created a high interest savings account that calculated and paid interest on a monthly basis – You will earn interest on your deposited amount, as well as the interest you’ve earned each subsequent month. It’s like ordering a Sundae and getting two cherries on top.
In comparison – a term deposit is simple interest and is calculated at the end of its term in one lump sum. Check out the MoneySmart website for a simple calculation.
4. Investing Using Index Funds
I’m not talking about going to university and working your butt off for a fancy piece of paper that says you can work in the ASX and invest $millions of client dollars in volatile markets. #pressure
I’m referring to a very simple and effective approach to investing – Indexing. That is, putting a small, but manageable chunk of your money in an index fund when you’re in your 20s and letting it ride the market over a few decades. It *should* perform better than a high interest savings account, however, there are many factors that can affect individual results so it’s best to talk to a financial planner for personalised advice.
Ill touch on this briefly to say that when you’re young – it’s not really explained to you how superannuation will affect your life. You think ‘well, that doesn’t affect me now, that’s something to think about when I’m ready to retire’. Unfortunately, by that stage it’s too late.
So, whether it’s basic management of your super fund, like, choosing one fund only and not signing up to a new fund with each new job! – or, exploring Self-Managed Super Funds once you have some money in your kitty after about a decade in the workforce. Super provides a solid investment opportunity – and the earlier you start thinking about it, the better your return come retirement.
Why Financial Literacy Matters
Financial literacy is an everyday life skill – it’s choosing the best mobile contract, electricity provider, and rental accommodation for your means. It’s managing your income to cover the everyday bills and expenses before you go crazy shopping the mid-season sales. It’s choosing to use cash instead of credit.
And, it’s knowing how to make your money work harder for you to reap extraordinary returns in the long-term over instant gratification today.
Get in touch if you need some extra-curricular tutoring to enhance your financial literacy. I can help you get a read of your financial situation and recommend the best plan of action to gain control of your finances and build a more secure future for you and your family.