10 Things Schools Don’t Teach You About Money
One of the main reasons for setting up this channel was to try and get people a bit more engaged with financial planning. When I got started in this profession, it surprised me how much I learned about personal finance which is really essential which we don't really sit people down and go over it, yet it can have a massive impact on people's lives.
In this video I'm going to go over 10 things schools don't teach you about money;
1) You don't need a reason to save
This may seem obvious but understanding this is huge. So often saving is considered with a goal in mind, be it a house, car or whatever. Saving for a goal makes sense in a predictable world… but our world isn't predictable. The ability to understand that in life putting a bit of money even if you don't have a specific purpose for it can be the difference between incredible amounts of stress when those unpredictable moments come up and being ok.
So 'saving' is boring isn't it? Yes, it is. Although what the outcome of saving can bring you that can genuinely change your life going forward HOWEVER if you are always only doing it when it's in preparing for a specific goal, which let's face it, is normally a buying a thing, then it can then get entirely depleted. If that happens then you will lose the real benefit of having savings. The protection and flexibility against uncertainty.
2. You are your most valuable asset
This has 2 meanings in this statement. The first is a broader statement to say you need to invest in yourself, your skills and your health as much as possible as you are likely the biggest wealth creator so improving this makes sense.
The second is really under-appreciated. You really need to think about insuring yourself if you haven’t already. Chances are your entire financial plan is reliant on your ability to get up and go to work, your human capital.
3. There is good debt and bad debt
So the distinction here is debt taken out for an asset that is going to grow in value over time. The most common one tends to be buying your home. Now it is possible to go bankrupt on ‘good debt’ if it's not managed right. But it's just about creating that distinction between the 2 and what they can do for future you.
‘Good debt’ tends to be secured on the value of an asset that can grow over time. So really you are taking out leverage in the hope it will increase your net worth for the future. Does that mean you are guaranteed to turn out better!? Of course not but you are paying interest and getting something back in return. The expected growth of the asset.
‘Bad debt’ is generally unsecured debt that has no real purpose apart from allowing you to purchase whatever it is at the outset. The problem with bad debt is that it starts small but compounds. Let's be clear, this is dead money. You gain nothing from it, you are making a bank richer at your expense. What do you get at the end, nothing?
Unlike building wealth you're in a position now where your time has gone from working for you to against you:
To BUILD WEALTH time works for you and to DESTROY WEALTH time works against you.
4. The difference between savings and investing
Sometimes these 2 get conflated but they are very different you should be coming at both with a very different mindset.
Saving is something you are doing for a specific goal normally over a shorter period of time. So generally around 3-5 years. Building an emergency fund is also a completely legitimate reason to save, it doesn't have to be something you buy.
Investing is for your future consumption. So you are putting the money to work normally for at least 5 years and ideally multi-decade. The ups and downs along the way are part of the deal going in.
You should be going in with an understanding that these are 2 different things and mentally approaching it in a different way. You need to get your saving in order so you are financially in the position to invest. Investing is what will make you wealthy.
5. Starting early is better than finishing strong
Starting to invest early can be more important than finishing strong because of how compounding works and that really is the magic Let’s see how this works with an example. Below, Person 1 and Person 2 experience the exact same 6.5% annual investment return funds after of fees & charges. The only difference is when and how often they save:
Person 1 invests £10,000 per year beginning at age 25. At age 35, they stop. they have invested for 10 years and £100,000 total.
Person 2 invests the same £10,000 but begins where Person 1 left off at age 35. They begin investing at age 35 and continue the annual £10,000 investment all the way until they retire at age 65. Person 2 has invested for 30 years and £300,000 total.
Person 1 ends up with £950,588
Person 2 ends up with £919,892
So despite they being £200,000 more put in by person 2. The time they started and the impact of compounding meant they finished at 65 behind
6. Cash is not always king
The biggest mistake I see is people holding a large amount of money in cash as it's 'safe'. For over a decade it's been very difficult to beat inflation. Watch my video on Managing Inflation where I go over where that can be such a problem. It's basically a one-way ticket to a sure-fire way of losing the buying power of your wealth. Cash can be king in the short but a pauper in the long term.
7. Investing isn't gambling when it's done right
Ok, so my personal gripe with the financial services industry is that we throw around risk warnings with no context and there's no actual education in this which leaves people confused. Maybe you've seen in bold CAPITAL AT RISK weirdly in bold. Investing has a ‘risk scale’ which is in the video below for a bit more context but a diversified mix of assets is not gambling. It is what your pension is invested in and what it represents is a fundamental part of our day to day interactions with businesses.
8. Don't neglect life admin
There are 2 big documents that if you have any sort of assets or a family that depend on you that you need to be thinking about.
1) A Will - this basically is how your instruct your estate to be distributed if you die. If you don't in the UK, it will fall under the rules of intestacy.
2) Powers of Attorney - This means that should you be incapacitated your designated attorney can keep things moving instead of being locked out of all your accounts. You can have a power of attorney for financial decisions or health and wellbeing decisions.
9. Risk is generally misunderstood
One of the biggest differences between a successful investor or a finance professional and someone who's just learning is that experienced investors don't associate risk as just volatility. Volatility is how much investment goes up and down. It's a completely natural byproduct of a functioning market. Instead of seeing risks as the ups and downs you should try to see risks coming in different types which is.
The risk of inflation eroding your buying power
The risk of losing all your investments/capital that's a permanent loss risk.
Then volatility which is the ups and downs. Watch this video for more details on this.
10. Money can't buy you happiness but it can give you choice
Money is not the most important thing in life and in fact being too money-driven or money for money's sake can be destructive. Although we must remember - it is a good thing to try and be financially secure and I think is something we all can try to achieve. Not because anyone has to have a certain type of consumerist-fed lifestyle but because being financially secure can give you choice. Money is a tool to help you achieve your goal. Not the goal itself. The goal can be as individual as life is. But what a financially strong position can lead to though is choice which can have a huge impact on how you shape your life AND I think THAT.. is worth thinking about. To quote Brian Portnoy:
“True wealth is the ability to underwrite a meaningful life”
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