Four things they should teach at school: an investor's letter to his younger self
If you're a young income earner, or know one, there are four valuable lessons that should be passed on or instilled as basic financial literacy.
For the youth of today, understanding money is as essential as maths, English or science – and everything in between. Yet, most of us graduate without a clear understanding of how to manage it.
If I could go back in time and hand my younger self a letter upon completion of Year 12, this would be it.
Dear James,
You’re about to start earning money. Congrats! This means you can finally afford your own Netflix account, instead of mooching off your Mum and Dad’s.
If you crave complete independence, though, you should seek to become financially independent. The goal is not having to live pay to pay - that is true freedom.
To do this, you’ll need to follow these rules. They’re simple and will save you some awkward phone calls to your folks asking to borrow “just a little bit extra” until payday.
1. Spend less than you earn
It sounds obvious, but it’s not.
Almost every adult you come across spends all the money they earn, and some even spend more than they can afford. I would say 9 out of 10 adults fall into this category.
These people live their lives in a constant state of worry, stress and anxiety.
There is a better path. Save at least 10 per cent of everything you earn and live off the other 90 per cent.
Unless you learn to spend on things you ‘need’, and not on things you ‘want’, you’ll find that your expenses forever equal your income (or more).
2. Invest your money
The money you save will only get you so far. Very few become wealthy – at least not wealthy enough to be financially independent – by saving money alone.
The cost of everything increases over time. A packet of sugary snacks (a want not a need, by the way) that costs $5 today, will one day set you back $10.
The $1 you save today is worth less tomorrow, and even less in the days to come.
To avoid this, you need to get your money working for you. Your money needs to do what you do: get a job. But instead of flipping burgers, it should be turning $1 into $2.
3. Only invest your money in things you understand
If you manage to spend less than you earn and decide to invest your money, you have three options.
- Financial products – Giving your money to banks, governments or businesses in exchange for interest or dividends. It’s like giving money to your sister, except you get it back, and you get more money back than you handed over.
- Property – buying a house or unit, renting it out, and ideally seeing it become worth more than what you bought it for in time.
- Businesses – starting one, buying one, or owning part of one. If the business makes a profit, you will be paid some of that profit (a dividend). If the business grows, the value of your investment will also grow.
All three of these work – if you know what you’re doing.
My suggestion is that you pick one and understand it fully. The most financially successful people have invested the majority, if not all, of their money into financial products, property or businesses.
4. Pay for value
Don’t worry that your knowledge and experience are limited. That’s ok. Keep in mind that there are people out there with more knowledge and experience than you – pay them to invest your money for you.
If you find someone who:
- invests in what they tell you to invest in
- has helped others do it successfully
- makes money only when you make money
- explains things in a way that doesn’t make you want to fake a bad internet connection …
pay them; not for advice, but for results.
Whatever you do, never pay for advice from someone whose car is worth more than their net worth.
And in closing, accept that you will make some dumb decisions. That too is OK. Just don’t make the same dumb decision twice.
If you follow these rules, you will be the one out of 10.
If you ever forget or go off track, just re-read this letter.
Yours sincerely,
Future James
