3 Financial Lessons I Wish I Had Learned in High School

3 Financial Lessons I Wish I Had Learned in High School

I’m back.  I know it’s been a long time since my last post.  After a year of weekly blog posts, amidst all of the other time commitments I have, I just felt like I needed to take a break from blogging for awhile.  Now I’m back and ready to do some writing again.  

I recently had the opportunity to speak to a small group of high school students in our church youth group about personal finance.  Many of them graduated this year.

Over the 2-3 weeks leading up to speaking to them, I asked myself what lessons I wish I had learned at that young age about how to manage money.  As anyone who reads this blog knows, I am a big time personal finance geek.  I love learning about investment asset classes, retirement accounts, and the tax code.  I could talk about this stuff for hours.  But when you speak to teenagers, their attention span is limited.  So, I had to decide on a very finite, and pertinent, amount of information that I was going to talk about.  I came up with 3 lessons that I wished I had really learned and internalized when I was that age.

Lesson #1: “A portion of all I earn in is mine to keep”

If this phrase sounds familiar, that’s because it’s from one of my favorite personal finance books, The Richest Man in Babylon by George S. Clason.  The simple financial lessons contained within the pages of this book have stood the test of time.  In fact I believe in them so much that I gave each of the graduating seniors in our church congregation a copy of the book as a gift to help them start their adult lives on the right financial path.

One of the first lessons in the book, and perhaps the most important, is that a portion of all you earn is yours to keep.  As would most people, the man learning the lesson in the book states that he thought ALL he earned was his to keep.  But such is not the case.  When most of us earn money, we tend to spend a significant amount of it (if not all of it), whether it be on food, clothing, shelter, travel, fun, or whatever.  So in reality, we don’t keep a large portion of our money; it is given to the grocer, the landlord, the merchant, and others.  Before you know it, all the money is gone and you didn’t keep any of it for yourself.

Instead of spending all the money we earn, commonly referred to as living paycheck to paycheck, we have to shift our financial paradigm and understand that a portion of that money is our’s to keep.  If you can learn this one lesson, it will change the entire course of your financial life.

The action underlying this lesson is to pay yourself first.  When we earn money, the first thing we should do is set a portion of it aside to save and invest.  Only then should we spend the rest of the money on other things.  In so doing, we build security and wealth for ourselves over time.  

The majority of people, however, do things in the opposite order.  They pay their bills and buy things first, and then try to save whatever is left.  Unfortunately, all too often there is nothing left to save for ourselves or our future.  

I wish I had learned and started this habit as a new high school graduate.  If I had, I know I would be financially further along than I am today.  

I recommended these students begin by saving 10 percent of all they earn for themselves.  Some young people state they don’t earn enough money to save any of it yet, let alone 10 percent.  I would argue that if you are truly committed, you can always find a way.  But if 10 percent seems out of reach, then start with 5 percent.  More important than the percent you save is developing the habit of paying yourself first and truly believing that a portion of all you earn is yours to keep.

Lesson #2: Avoid debt

While lesson one was to make a positive behavior a habit, lesson two is avoid a negative and destructive behavior: going into debt.  

When I was in high school, I certainly didn’t have the same aversion to debt that I do today.  As I furthered my education, like many people, I took out student loans.  As the years passed and I sank deeper into student loan debt, the numbers got so big that it didn’t even seem like real money anymore.  I became numb to debt.  I remember saying to myself many times as the debts piled up that it was “just another drop in the bucket.”  

Only now do I more fully understand the crushing burden that debt can be, and that eventually you will have to pay for every single drop in that bucket, PLUS INTEREST!

We live in a society that emphasizes consumption and instant gratification.  We are constantly bombarded with marketing for the newest cars, clothes, gadgets, and trends telling us we’ll be happy if we have these things and unhappy if we don’t.  Combine this with the ease of getting high interest rate credit cards and it’s no wonder that so many Americans are deep in consumer debt.  According to a recent article, the average credit card balance in America is $6,200 and the average American has 4 credit cards.  

The problem with debt is that it not only ties up all of your extra money that you may have (keeping you from saving and investing), but it also robs you of the time that your money could have been working for you as you pay off that debt.  For many people it takes years to get out of debt.  Some never do.  They will never get these years back, years where the miracle of compound interest could have been working for them.  

My advice to these students was to do all they could to avoid debt.  Learn to live within your means, and better yet, below your means.  If you don’t have the money to buy something right now with cash, you can’t afford it.  And you don’t deserve it, no matter what everyone else around you is doing.  If they could learn this financial discipline now, it will benefit them their entire lives.  

After making my own financial mistakes and learning important lessons, my advice would be to only consider going into debt for two things.  The first would be an affordable home.  To me, this means a monthly mortgage payment that is less than 20% of your gross income, and certainly less than 30%.  The second would be student loans, but only after exhausting all other options to pay for school including grants, scholarships, part time jobs, savings, and help from parents/family.  I would not recommend people go into debt for a vehicle.

Lesson #3: The power of compound interest

At the young age of 18, I didn’t fully understand the concept or power of compound interest.  In fact, I don’t think I really understood how powerful it could be until two decades later.    However, if  someone at that young age can grasp what compound interest is and how it works, it can literally make all the difference in their financial future.

What do I mean by that?  Well, there are three things that affect how an investment grows with compound interest: the amount you invest (principal), the rate at which it grows (interest rate), and how long it is invested (time).  

I know that for most 18 year-olds it will be difficult, if not impossible, to max out their Roth IRA, let alone any other retirement accounts or investment vehicles. And I don’t expect them to.  But if they can learn how much time plays a factor in this equation, they may start saving/investing even at a younger age. Even if it is just a small amount invested regularly, it could help set themselves up for the rest of their lives.  

Let’s look at two examples to demonstrate how much time is a factor in growing wealth.  Let’s make some assumptions for simplicity.  First, we will assume both of our investors contribute a consistent amount of money over time, not taking into account any future pay raises, career changes, etc.  Second, let’s assume an interest rate of 8%, which is the approximate rate of return of the stock market from 1975-2015, adjusting for inflation with dividends reinvested.  Third, we will assume an all stock portfolio until retirement for the constant rate of return.  Finally, we will assume these investments are made with post-tax dollars in Roth accounts, so taxes won’t be a factor.

Investor #1

Jill is a go-getter.  In high school she took a ton of AP classes and scored 4’s and 5’s on her exams, earning college credit.  She also graduated high school a little early at the age of 17.  Because of this she was able to graduate college by age 20 and get a good job.  It wasn’t a great job, but a good entry level job.  Her take home pay was $2,500 per month, or $30,000 per year.  She understood the power of compound interest and wanted to invest her money early.  She was also a super saver.  Rather than saving the 10% her parents recommended, she saved 20%, which equaled $500 per month.  She invested aggressively given her long time horizon and kept this habit for the next 45 years until she retired at age 65.  

Jill ends up investing a total of $270,000 over her 45 year working career.  Based on the above assumptions, she earns $2,132,883 in interest over that same time period, for a total of more than $2.4 million.  Based on the 4% rule, this could provide her with a consistent annual income of nearly $100,000 for the rest of her life.

Investor #2

Jack is also a pretty sharp guy, but a little less focused than Jill.  He graduated from college at age 22 with an engineering degree.  He was able to get a great job right out of college, earning $50,000 a year.   However, Jack likes to play a little more than Jill.  Right out of the gate Jack inflated his lifestyle and spent everything he earned, living paycheck to paycheck.  He didn’t save or invest any money for retirement.  He figured he could do that stuff when he was older.  YOLO, right!

However, Jack wised up sooner than most of us and realized that he should be saving for retirement.  At age 30 he started saving $500 a month and continued this for the next 35 years until he retired at age 65.

Jack ends up investing a total of $210,000 over his 35 year working career.  Based on the above assumptions, he earns $861,283 in interest over that same time period, for a total of $1.07 million.  Based on the 4% rule, this could provide him with a consistent annual income of about $42,000 per year.  

Now let’s compare these 2 investors.  Jill started 10 years earlier than Jack, but both contributed the same amount of $500 per month until retirement at age 65.  Very doable for most people.  

Because Jill started 10 years earlier, her principal investment was larger by $60,000.  But because time is so important with regards to compound interest, that extra $60,000 certainly paid off.  

Jill has more than double what Jack does and can live on nearly $100,000 per year, while Jack only has $42,000 to live on per year in retirement.  Starting earlier can make all the difference between an amazing retirement and just scraping by.  

This is the lesson I wanted these students to understand.  The sooner they can start saving and investing, the more they can harness the power of time compounding their money, exponentially increasing their future returns.  

Conclusion

While most of you reading my blog are no longer in your early 20s, these are still critical financial lessons to review and internalize.  Here are some take home points to consider:

• Do you understand these principles fully?  Are you paying yourself first?  Are you avoiding debt at all costs?  Are you harnessing the power of compound interest for your financial future?  If not, there is no better day to start than today.

• Do you know anyone graduating from high school or college this year?  Perhaps one of your own children, a nephew or niece, or a neighbor?  Have a heart to heart chat with them about these financial lessons and make sure they start their adult lives on the right financial foot.  

Thanks for reading.  I hope you are doing well in your progress towards reaching FI.  If you have any questions or comments that might help other readers, please list them below.  In the meantime, keeping working towards Freedom Through FI!

If you enjoy this content, please support the blog by subscribing below (the only emails you will receive are my weekly posts).  You can also share this post through the links below to your social media accounts.  Both these actions increase the blog’s rankings in search engines, which helps me reach more people.  Thanks for your support.