While I am thankful for the education I received growing up, looking back I wish I would’ve had classes like cooking, sewing, and personal finance. If I would’ve had these classes, or had someone in my life who could have taught me these important life lessons, I would have made different decisions – especially money decisions!
Instead of dwelling on the past, I know now that I get to change my family tree for my kids when it comes to personal finance. Here are seven money lessons I wish I knew sooner that I’ll be teaching my kids…
#1: How To Budget
In the past, being asked if I had a budget put a sour taste in my mouth. I thought budgeting was something that took away my ability to spend. However, once I found a budgeting format that worked for me, it actually gave me the freedom to spend. Now budgeting is like my best friend! We talk every day, it knows my (spending) problems, and we make plans at least once a month.
I discovered that a zero-based budget works best for me. A zero-based budget is a way of budgeting where your income minus your expenses equals zero. With a zero-based budget, you have to make sure your expenses match your income during the month. However, there are many different types of budgets out there and it’s important to find the one that works best for you.
#2: Setting Financial Goals
Setting financial goals is another one of the money lessons I wish I knew sooner. Growing up, whenever I received money, I was afraid to spend it. I felt like I didn’t have control over my money because I didn’t have a grasp on what to do with it. I didn’t have financial goals.
As I got older, I started practicing financial wellness routines and dreaming about what my goals were in life. Setting financial goals helped me stay motivated and work on having positive money habits. I’m a giver and want to be able to bless others besides myself financially. That’s why I decided to set financial goals to pay off my debt, build an emergency fund, and start investing young.
#3: Be Cautious Of Credit Cards
When I got to college, there were people, mail, and ads everywhere telling me to get a credit card in order to thrive as an adult. Nevertheless, there are things you need to be cautious of when it comes to credit cards before diving right in.
First, do not overspend. I’ve heard lots of friends, family, and strangers call credit cards “free money,” but that is not the case. While credit cards can provide a quick way to put money in your pocket, you are responsible for paying back everything you spent to the company, in addition to any interest accrued. This can become dangerous when we start living outside of our means, interest builds, and we find ourselves in a lot of debt.
Second, it’s important to understand what a credit score is. Our society puts a lot of pressure on people by saying a high credit score is what truly defines a wealthy person. In spite of that, a credit score is essentially built on how much debt you are entangled with. According to Investopedia, a credit score is calculated by five main factors. They are payment history (35%), total amount owed (30%), length of credit history (15%), types of credit (10%), and new credit (10%).
Overall, it’s important to consider the pros and cons of a credit card before you decide to apply for one.
#4: Compound Interest
The power of compound interest is massive. Compound interest is the interest you earn from the original amount (or principal) of an investment plus any interest you’ve already made through that investment. Basically, you’re earning interest on top of interest.
Here is an example of compound interest:
Nick starts investing $2,400 every year at age 21 and then stops contributing at age 30. His total contributions total $21,600. Nick’s friend, James, learns what he is doing and starts investing $2,400 every year at age 30. At age 67 he stops contributing and his total amount contributed was $88,800.
At age 67, Nick’s investment has grown to over $2.1 million, and James’ has grown to more than $1.2 million! Nine years made a difference of close to $1 million.
And that is the power of compound interest and investing young!
#5: Never Invest In Something You Don’t Understand
Speaking of investing, it’s important to never invest in something you don’t understand. Warren Buffett is a true testimony to this as he is a billionaire Wall Street icon who follows this exact money principle.
So why not invest in something you don’t understand? Because it’s your money! If you work with someone who helps you manage your investments, don’t let them pressure you into investing in something you don’t know – even if it is very successful.
#6: Save With A Purpose
Growing up, I was always told “Save your money! Save your money!” So that’s what I did. However, as I got older, I found it hard to stay motivated to save. I knew it was important to save for retirement, a house, and for emergencies, but I was lacking in understanding why I was doing it.
So I started asking myself the question “Why?” when thinking about my savings goals. I save so that I can travel more when I’m retired. I save so that I can pay for my kids to go to college and have a better future. I save so that I can live and give like no one else in the future. What is your “why” for saving?
#7: Don’t Keep Up With The Joneses
No matter how young or old you are, it can be hard to resist trying to “keep up with the Joneses”. Seeing other people buy a brand-new car, shop, eat out, take big trips, and more can make it very tempting to try to keep up with that lifestyle. I was always wondering how so many people could afford it, and the reality is, most can’t.
According to a press release, 78% of Americans are living paycheck to paycheck. Essentially it means almost 8 out of 10 people probably can’t afford the trips they’re taking or the clothing they’re buying. It was important for me to have a mindset shift and keep this in perspective when thinking about my present and future goals in life. This also helped me become more confident in who I was as a person.
Thankful For Money Lessons Like These
Despite having to learn a lot of these money lessons the hard way, I am thankful that I now have a better grasp on how to manage my money. I am also grateful that NuMoola is available for families to download so kids can have a better chance to understand basic money principles and build positive money habits.