Through my 30 years of living, I’ve had moments where I’ve been great with money and moments where I’ve been down right bad. I don’t have any big ticket purchase regrets, but I’ve bought loads of small items that were a complete waste. And you know why? I didn’t realize the consequences of irresponsible spending until I was much older (and I even had good financial role models in my parents). I was lucky to not get myself into more trouble because of my lack of knowledge. When you’re a teenager you don’t necessarily concern yourself with the future but poor spending habits can be established at that age, and you can get yourself in a debt hole real quick.
If you follow the blog regularly, you already know that I have pretty strong feelings about financial literacy (see here and here), and that’s because learning about money earlier is always better than later. So without further ado, here are the 5 concepts I wish I understood sooner:
1. Compounding Really is Your Best Friend
You know how people always highlight the importance of starting to save for retirement as soon as you can? Listen to them! The reason it’s such a huge deal is because of compound interest. You invest a little bit of money, it grows, and you have more money. Then that larger amount grows even more, and you end up with even more money. On and on and on until you’re rich! If you need a little more convincing (some hard numbers) then check out this post, it breaks down compounding with a bunch of examples to show how much less you need to save overall if you start early.
But both are important! There’s a time and place for saving money, and there’s a time and place for getting some (most) of that money invested. Saving is the act of setting aside money for a later date, whether that’s for a vacation next month or retirement in 30 years. Investing is the process of taking that money you’ve saved and actually purchasing stocks, mutual funds, ETF’s, etc. to hopefully earn more money. If you just transfer money to a standard savings account every month, you are not investing it. You’ll earn a small amount of interest, but you’re never going to be bragging about how you beat the market. And that’s fine…sometimes. This is 100% the method you should use for your emergency fund or for any other short term goals. That money, by its very name, is there for emergencies and you need it be accessible and not have gone down in value.
For longer term savings (especially retirement), you need to get that money into the market. That’s how you make your money work for you. Even if you are a novice investor, there are options out there for you. You can ask for help from friends or family or find yourself a financial advisor to get you started. Get yourself into a balanced mutual fund that will provide you with some upside but minimal risk, at least until you can build up your investing knowledge. There’s no need to take crazy risks, but growing your money is essential to hitting your savings goals. And I get it, the stock market can be scary and volatile, but the historical trend is upwards. Even more incentive to get and stay invested for the long term.
2. Starting Small Is Better Than Not Starting At All
When I was younger I put off saving money because I didn’t think it was worth it when I only had a small amount of excess income. I was wrong! Even if you can only spare $20 a month, you should do it. Early on it’s more about creating the habit than the actual amount of money you’re putting away. It will be much easier to continue this habit and increase your savings rate if you start small.
You don’t need a high income or even a specific balance to be an investor. You can start investing with an online platform like WealthSimple with no minimum balance and they often have promotions that will waive the management fee on set amounts for twelve months. Even better, you can easily set up monthly contributions in any amount to start building those good savings habits!
And as we saw with the compounding example above, even small amounts add up when they’re invested for the long term.
3. Budgeting Doesn’t Have to be Hard (or Time-Consuming or Restrictive)
There’s this impression that creating and sticking to a budget is all work and no play, but that doesn’t have to be the case. Yes, you need to do the initial set-up and check-in every so often but once you’re in the habit of budgeting, it practically runs itself. I have a budget spreadsheet (you can get it for free by subscribing to my newsletter) that I use to guide spending, but I don’t track where every dollar goes. Once you’ve spent a few months working within your budget, you’ll know when you have money to spend and when you don’t. And budgets don’t have to be set in stone. Give yourself a little leeway to make changes as you go along.
The important thing is that you know how much money comes in each month and how much money goes out. Then it’s a balancing act with your bills, your saving and your spending. Some people get real joy out of super detailed tracking of their spending and budgeting down to the last penny, but it’s not at all necessary. Do it once and make it a habit and you’ll be surprised by how little time you actually need to be one of those financially savvy people 😉
4. There’s NO Such Thing as Good Debt
Debt can be a controversial subject for us personal finance folk. It’s obvious and agreed upon that high-interest debt, like credit cards or unsecured lines of credit) are bad news, but there are differing opinions on whether low-interest loans should be bulked in with the rest of the bad debt. These would include mortgages, secured lines of credit or student loans. In my opinion, all debt is bad…there is just some debt that is worse.
Let’s take mortgages as an example. Interest rates have been very low for almost a decade. If you’ve had a mortgage in that time period, it’s likely that the rate you’re paying (mine is currently 2.49%) is significantly lower than the returns you’ve seen in your investment portfolios. That makes a strong case for why you should invest instead of paying off low-interest debt…you can basically use the bank’s money to make money. And you know what? I’m not actually against that, and it’s the reason I’ve kept my focus on investing instead of making additional payments to my mortgage. But does that mean that I think my mortgage is good debt? Nope. If I didn’t have that mortgage payment I would have an extra $1,300 to invest each month, I wouldn’t be paying any interest to the bank, and there would be no risk of losing my house if rates suddenly skyrocket or a job is lost. The bank still owns your house until that mortgage is paid in full and they’ll come collecting if you stop making those payments. Priorities can shift in importance between paying off debt and investing, but I will always take the position that no debt is always better than any debt.
5. Clearance Does Not Equal Love
I used to be a huge sucker for a bargain. When I was younger, I used to go shopping all the time (total mall rat), and I had a hard time resisting the temptation of a sale. There’s nothing wrong with seeking out a bargain if it’s for something you actually NEED. My problem was that I would end up buying a terrible item of clothing just because it was cheap, and it would sit in my closet with the tags still on until I finally threw it out. Might as well have just burned that $10 for entertainment.
Looking back now all I can think about is the lost compounding…ok not exactly, but there’s definitely spending guilt. I’m going to refer to this not so rare phenomenon as ‘Clearance Blinders’, and guess what? There’s a cure! Remember that budgeting thing we talked about a few minutes ago…that’s step one. Step two is removing the temptation. If you suffer from ‘Clearance Blinders’, then stop browsing the mall, remove yourself from promotional email campaigns, and make a pact to only buy things you need. I’ve come out the other side and promise there is currently no item in my clothing that still has the tags on.
If there is one thing I know, it’s that everyone has made mistakes with money in the past. If you could go back and teach your younger self one thing what would it be?