Considering how important financial skills are for successfully navigating life, it’s surprising how little we learn about it during school. Our financial education tends to be the sole responsibility of our parents mixed with a variety of lessons given to us from books, TV shows and movies (many of which aren’t helpful).
A poor financial education can have very serious effects, especially when it comes to the consequences and benefits of risky activity like investing and taking out a loan. For many young adults today, this represents a significant source of anxiety. Here are some money lessons you may not have learned in school, from your parents or from the movies.
The Difference between Good Debt and Bad Debt
Ask someone what their opinion is about debt and they’ll either view it as a tool for building wealth or a sign of mismanaging money. Someone who’s savvy with money will tell you it can be both depending on the situation.
Put simply, good debt is debt that will generate more wealth for you in the future, e.g. a house or a university degree, whereas bad debt doesn’t generate income or is used for depreciating assets, e.g. a car loan or a credit card. The distinction is important. If you’ve got bad debt, getting rid of it should be high on your priorities list. If you’re interested in building wealth, it’s time to consider how good debt might help.
The Magic of Compound Interest
Compound interest is when you earn interest on the interest earned on your principal investment or deposit. For example, when you save money, the bank adds interest to your savings account at regular intervals. If you leave the interest untouched and let it add to your lump sum, you begin earning interest on that interest on top of the savings.
This is one of the simplest and most effective ways of growing your personal wealth. If you invest $10,000 for five years with an interest rate of five per cent, you would earn $500 a year in simple interest. If interest is calculated yearly and added monthly, the compound interest earned would account for another $2,834 over the five years!
Live within Your Means – Seriously
This is one lesson that you may have heard before but it’s essential to reinforce. As a young adult, the prospect of buying something right now tends to outshine future needs. It makes sense; we work hard for our money and want to enjoy it.
However, it’s essential to save and invest some of that income. Without cutting your expenditure and ensuring you have savings, you cannot build more wealth with good debt or compound interest. Saving is about more than squirreling money away for your retirement, it’s about getting on track to build a passive stream of income so you can live a more prosperous life while working less. The sooner you start, the sooner you can reap the benefits.
About Kaboodle Finance
At Kaboodle, we strive to offer friendly, practical and easy to understand advice to help you realise your financial goals. Whether you’d like information about home loans or various forms of insurance, we can help figure out what’s best for your circumstances. Get in touch today to see how we can help.