It pays to have financial knowledge. I learned why the hard way
If I learned anything from my parents’ financial struggles, it’s that you have to make informed decisions when it comes to money.
We lived well growing up. We were the typical Southern California family with a ranch in an expensive Los Angeles suburb with several (rented) cars and a boat.
That is, until my father lost his job of over 20 years in a large public company. I was 11 years old. We lost our home and moved to Oregon to find cheaper housing. After about three years there, my dad took a new job in Southern California and we were all ready to come back.
But then, after putting a down payment on a house in California after we had already sold our house in Oregon, my dad lost his (new) job. Long story short, we ended up spending over $20,000 on a summer trip when we were virtually homeless. Spending on travel instead of saving triggered my family’s financial problems.
If you don’t understand personal finance, you are more likely to experience financial difficulties. Indeed, you will constantly worry about money and wonder if you are making the right decisions with your finances.
Financial stress can harm your mental and physical health and can even lead to relationship problems. In reality, a study showed that 70% of married or cohabiting Americans have had a disagreement with their partner about finances in the past year. It also showed that financial “infidelity” is enough to end about 40% of relationships.
My parents stayed together and are now enjoying life in Florida, but we need to rethink how we talk about financial literacy. Most of us don’t learn about money until we are older, if at all. And often it’s because we have to (you’re buying a house) or you’re in trouble (you’re behind on a car loan payment).
Part of the reason we are not taught this is that it is not required. Getting access to financial education earlier in schools is a huge step, but it’s only half the battle.
The other half takes ownership of your education. There are real costs to not having financial literacy. You don’t need to know everything, but understanding the basics of interest, investing, and taxes will go a long way toward building wealth over time.
Why is access to financial education so important?
Good financial decisions impact almost every area of your life. They affect your retirement, the quality of education you receive, the foods you eat, your access to health care and much more.
If you don’t know anything about personal finance, you’re missing out on money-saving opportunities. This doesn’t just mean putting money in a savings account; it also means knowing how to invest in a 401(k) or how to take advantage of tax-efficient accounts like IRAs. As a result, you could end up paying thousands of dollars more in taxes than necessary.
In today’s economy, many employers are looking for candidates who have a basic understanding of financial concepts. If you don’t have this knowledge, it can be difficult to find a job after graduation. My advice to students is not to skip accounting or finance courses. In fact, I encourage you to take electives that cover these topics in greater depth.
If you’re unfamiliar with major financial topics, you’ll likely be less prepared for unexpected expenses. On a small level, it could be something like your broken down car. But the problem gets worse as the stakes rise: what if you lose your job or getting sick and having to miss work while racking up medical bills? You may not have the savings or credit available to cover these unexpected costs. As a result, you could find yourself indebted or even bankrupted by these unexpected financial events.
So let’s look at some of the ways a basic understanding of personal finance can help you move forward.
One of the most important aspects of personal finance is learning how to manage debt. Credit cards, student loans, and other types of debt can be difficult to pay off if you don’t fully understand interest rates and other financial concepts.
For instance, a 1% difference in your mortgage rate can make a substantial financial difference to both your payment and the total amount you’ve paid over time. Or you may decide that a $20,000 car is better for your future finances, even if you qualify for a $40,000 car loan.
Without a complete understanding of your overall financial situation, that shiny new car might be too much to resist.
Another important aspect of financial education is learning how to build wealth over time. If you do not have a good understanding of financial concepts, it will be difficult for you to make informed decisions about save for retirement or invest in a 529 college savings plan when you have children, for example.
However, if you understand high yield savings accounts, how banks work and what it means to own sharesyou’ll be able to make smart decisions about how best to save for your (and your family’s) future.
Failing to save properly for your future means that financial emergencies are likely to wreak havoc on your life.
Make smarter investments
If you don’t understand basic financial concepts, it can be difficult to make wise investment choices.
Investing can be intimidating which keeps many people from getting started, but when you know the basics it can be much more accessible.
I know from experience – both good and bad – that a single investment decision can change the outcome of your entire portfolio for years, if not forever. It sounds dramatic, but imagine putting all your money into Bitcoin at $61,000 thinking it would hit $200,000. As of this writing, it is hovering around $19,000.
It is a dangerous game to play. However, if you’ve spent time understanding markets (and, now, unregulated markets) and how they work, you’ll be able to make sound decisions about which ones are right for you.
Achieve financial goals
One of the most important concepts I learned in college was the time value of money.
It’s simple, but when you understand how money can grow exponentially, it can dramatically change the way you make financial decisions when you have a long-term view for the future.
So whether you want to buy a house, retire early, or send your kids to college without a student loan, take advantage of financial education — through blogs, videos, podcasts, and courses, many of which are available free online – will help you develop a rock-solid plan to reach your personal financial goals as soon as possible.