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  • Matthew Dunham

They don't teach this in school...

School is out! It’s that time of year, caps are flying, lockers cleaned out, teachers breathing a sigh of relief that they will get a little break. Thousands of hours are spent in school, yet there are so many practical life skills and information that somehow isn’t taught. 



Finances are one of these areas – I’ve seen some schools adding some more practical life skills classes, including finances, but this is still a largely ignored area. A study by MarketWatch showed only 57% of adults in the US are financially literate. This isn’t to say we leave school not knowing anything about money, we probably picked up a lot of what we think about money and how to spend it by watching peers or family members.


For a lot of us, including myself, I wasn’t explicitly taught much about money. To be honest, we didn’t have a lot growing up. My parents both worked to pay the bills, but beyond that I had no idea about budgeting, saving, investments, interests on credit cards, let alone how to make my money go further. I’m going to share with you what I wish I had learned growing up, and what somebody finally shared with me, sitting at the firehouse table almost 25 years ago that put my life on a different path. 

 

 1. Start Now

Everyone can come up with a list of other things to do with their money besides saving and investing. The truth is, most of those things are keeping you from your financial goals. If you haven’t already, you need to start now! Anything,10, 20, 100 dollars a paycheck or month. Something. Start with a high yield savings account to establish an Emergency fund. Once you have a start, you will take notice of number two on this list and then it will all take off.

 

2. Learn what compounding interest is

Read a book, ask a friend (or Financial Advisor, I’ll excitedly explain this for free to anyone who asks), you need to understand this concept. A very simple example will do for now. If you invest $1000 for 5 years at 5% interest rate, with no other deposits, at the end of five years you’ll have an extra $283 (free money).


In the first year, you earn $51. The second year, you earn 5% not only on the initial $1000 but also the additional $51 dollars earned in the first year. So in the second year, you earn $54. This gets added to the invested balance and continues on until you take the money out. When it comes to your retirement savings that you are/will be contributing to on a monthly or bi-weekly basis, the numbers are bigger, but the concept is the same. This is also why starting now is so important. The longer your money has time to grow the more powerful compounding interest becomes. If you let the example above play out for 14 years, you will double your initial investment of $1000 and have a total of $2,011, not bad.







 

3. Know how much you are spending

Everyone knows how much they make. It’s on your paystub and shows up in your bank account on payday. Where people get themselves into trouble, is not knowing how much they spend each month or pay period. Living within your means is a common phrase but requires a little work to ensure you are actually doing it. This is where the dreaded “Budget” word comes in. Some people love them (me), some people don’t. There are many different techniques that use different titles such as Spending Buckets, Envelope method, Activity based…….. Call it what you want, you need to know how much you spend against how much you earn, Budget.


4. Investing isn't just for rich people

In fact, if you weren’t born rich, you need to invest. Invest in yourself through education, invest in your security through an emergency fund and insurance, invest for your retirement with low cost index funds, invest for your families future prosperity through a well designed and tailored financial and estate plan. If you want to better your position, you have to invest. Sometimes this is a change of mindset that can be accomplished through educating yourself or you may want to get some outside guidance. Either way, investing isn’t only for rich people, it is for anyone who wants to do better for themselves and their family.

 

These are just a few important lessons people need to learn about money. The sooner you learn and apply them, the greater their impact on your finances and life. If you want to learn more, give me a call.




Dream Lake Financial is a fee only firm, providing comprehensive financial planning investment management, and tax advising


This communication is for informational purposes only and is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This communication should not be relied upon as the sole factor in an investment making decision.



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