This is a guest post by Adam Goodman, author of “Following The Goods.” If you like what you see here, please check out his weblog and subscribe to his RSS feed.
Itâ€™s unfortunate, but my story isnâ€™t original. Iâ€™m 29, educated, and up until four years ago, I never saw the need to understand how to manage my finances. For some reason, I always assumed that my finances would magically manage themselves. Thatâ€™s how I ended up owing the bank a huge student loan, having no savings, and living in my momâ€™s basement, wishing I had done things differently when I was younger.
Many young people arenâ€™t interested in financial management, and who can blame them? The name alone must scare people away. It sounds intimidating, but itâ€™s an important topic that needs to be taught at an early age. And therein lies the problem… It needs to be taught, but it often gets left at the sidelines until itâ€™s much too late.
Few parents talk about finances at the dinner table, and even fewer K-12 education systems mandate learning how to manage your finances. This is somewhat ironic, because people use financial management every day, whether they know it or not (remember, bad financial management is still financial management – itâ€™s just ineffective). I should note that there are some great programs out there to help teach young people about finances.
Without a burning platform, people arenâ€™t motivated to learn. If your parents are always helping you out financially, youâ€™ll never know why compound interest is important. If your spouse is always paying the bills, youâ€™ll never know why you need to pay off high interest debt first. If youâ€™re always living paycheck-to-paycheck, youâ€™ll never know why a budget is important. If you donâ€™t understand how budgeting works, youâ€™ll never know why you need to start saving for retirement as soon as possible.
Where to Start
Itâ€™s never too late to learn and change your habits, but imagine if you could start following sound financial management advice when you were 15, as opposed to 30. Thatâ€™s 15 extra years of doing things right, and no matter how much money you make, the earlier you start budgeting and saving, the better off youâ€™ll be. As a side note, if you donâ€™t know what compound interest is, now would be an excellent time to look it up.
So what does a person need to do? Well, there is a lot of great information out there, but you have to look for it. Not only that, but you have to want to learn about it. Iâ€™m sure many of you are convinced of the importance of doing this, but don’t know where to start. At a minimum, you need to understand the basics of financial management, including (in no particular order):
- Understanding what the equation Income â€“ Expenses = Savings means
- Knowing where you spend your money (what is an expense?)
- The difference between things you want and things you need, and knowing how to prioritize them
- The future cost of living – how much will that 4 bedroom house really cost you?
- Setting financial goals and making budgets to meet them
- How compound interest works (both for and against you)
- When is credit good, and when is it bad?
- The basics of investing
- Why you need to start saving for retirement today
- How to maintain your education (and share what you learn with others)
Remember, personal financial management might sound scary and complex, but itâ€™s really not that hard. In fact, it’s nowhere near as scary as scary as meeting your in-laws for the first time. Financial management is not something that youâ€™ll learn overnight. It takes time to master your finance, but the payoff is well worth the trouble. Take ownership of your finances and start your education today.