I feel like overall I have made decent decisions with my money since I entered adulthood. By no means have I been perfect, but I have mostly avoided dumb mistakes. That said, I feel like there are a few concepts that I wish I had known when I was younger. Knowing these would have put me on an even greater financial footing. Here are five money lessons I wish I knew in high school.
The Magic Of Compounding Interest
The concept of my money making money was not something I was aware of in high school. The Motley Fool has a good graph on the magic of compounding interest. $10,000 invested over a 50-year period (at 8% return) is over $450,000; which is quite astounding. Knowing this concept at a young age can motivate you to put aside more for savings. Saving early and often, even if its just a little bit of money, can produce a nice nest egg over decades.
Advantages Of A Cash Reserve AKA Emergency Fund
A stockpile of cash to use if times get tough. That’s the one sentence definition of an emergency fund. The longer definition is a separate account that covers a set period of monthly living expenses or a dire situation that you are unable to pay for otherwise. Having a cash reserve is a fantastic buffer in the event you are unable to pay a bill. The ability to pay a bill and not go into debt keeps you from paying interest which keeps your hard earned cash in your own pocket. This fund can be built up slowly over years and can be a lifesaver if you need to use it.
The Real Cost Of College
What is the post graduation monthly cost of a few thousand dollars each semester for about four years? I have no idea now, and neither did I when I was 18 going off to college! But I think it’s an important calculation to know if you’re going to school now. The cost of college has outpaced inflation for decades and the monthly payments upon gradation can be crushing.
If I were starting school in the fall, here are the important pieces of information I would like to know:
- What is my expected salary upon graduation for my field? This will give me a good idea of my monthly income.
- How much do I plan to borrow while in school?
- What is my monthly payment when it’s time to begin paying off my loan? You can find an online calculator to estimate the payment amount.
Knowing all this information, make an informed decision about the real cost of college. Is it worth it? If not, what other options are there? Community college for two years then finishing up at a four year university? Work part-time and cashflow school? There are many other options, and knowing the true cost of college will help you evaluate them all.
Basics Of Investing
While I was diligent about putting away some money for retirement when I started my first job after college, I didn’t make the absolute best choices. In hindsight I really wish I put away more in a Roth IRA, even before I graduated college. Did I maximize my 401K options? I’m not sure, but probably not. Here are a few investment topics I wish I had known:
- Difference between Traditional IRA and Roth IRA
- Understanding expense ratios
- Basics of 401K and company matching
- Knowing terms like Index Fund, Mutual Fund, and ETF
- Understanding basic stock concepts like P/E ratios, dividend, yield, etc
- How to perform a few simple steps to evaluate stocks
At a basic level, you need to understand the concept of budgeting to succeed in adulthood. How much am I bringing in each month and how much am I spending each month? Income needs to be greater than expenses if you are going to survive. Beyond that core concept, breaking up yearly payments into monthly amounts, establishing a plan for the excess amount, and actively putting aside some of that monthly excess each month are topics I never really thought about when I was entering college.
While not directly related to budgeting, one concept I keep thinking about is that a little money over long periods of time can equal big money. Saving a few dollars each week over a year can add up! I wish I had put away money in small amounts frequently to really amp up some of my retirement accounts and savings goals. Knowing how much I had left over each month would have given me the confidence to save more.
There you have it, five money lessons I wish I knew in high school. These are not the only financial topics someone should know, but they really lay the groundwork to have a successful financial life. If you can grasp these concepts early in life you will set yourself up for financial success.
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