It's no secret that school failed to teach us a lot of things 🎓
These are 4 important concepts about money they didn't tell us about:
You've probably heard about the power of compound interest in school or on social media - or from Einstein's famous quote "compound interest is the 8th wonder of the world".
But with how few people start investing while they're young, it's worth highlighting here.
This chart shows the difference in returns of investing just ~$2,600 per year for 40 years, 30 years, and then only 20 years.
As you can see, the power of compounding shows itself in the overall returns.
✅ Get invested as soon as you can and let your money grow - your future self will thank you.
You've probably been told by parents or teachers that you need to make a budget.
Personally, I agree because you need to know where your money is going, but I think there's a better way to go about it.
I believe paying yourself first (aka reverse budgeting) is a better approach.
Paying yourself first simply means that whenever you receive your paycheck, a specific portion of it is transferred to savings before you spend anything.
By "paying yourself first", you're guaranteeing that money is being saved and then you can freely spend what's left over.
This is much easier than setting spending limits in each category, checking on them every day, and hoping you have money left at the end of the month.
✅ Transfer a portion of each paycheck you receive to savings before spending anything
(it's okay if it's only $10, anything more than $0 is a win)
One way to make paying yourself first a little bit easier is by automating your money.
With banking apps nowadays, you can set up automated transfers to send your money to different savings and investment accounts on a regular basis without you even thinking about it.
Here's an example of what automated transfers within Marcus by Goldman Sachs look like:
Depending on how often you get paid, you can set up transfers to happen once a month or bi-weekly.
For example, let's say you get paid on the 1st and the 15th.
Since rent is due on the first, you might not have much money left over after your first paycheck - so for that automated transfer, you may set it up to transfer $100 from your checking account on the 4th of every month to your savings account.
And then on your second paycheck, you can set a monthly transfer the exact same way but maybe you're able to do $700 on the 18th.
(It's recommended to try and save 10-20% of your monthly income so these numbers will need to be adjusted for your situation and what makes sense for your budget)
I also recommend setting the transfers for a few days after pay day since they'll happen automatically, you don't want it to transfer the money and then the account goes negative because the paycheck hasn't landed yet for whatever reason.
But once you've got those recurring transfers complete, your savings is now automated 🎉
Here's a quick graphic showing what automating your money could look like:
✅ Put your money on autopilot to remove the stress and human error from saving money
Also read: How to Put Your Money on Autopilot
After seeing the power of investing and compound interest, we know it's important to get invested.
But how do you know when to invest vs when to save?
I came up with this short phrase last year "save for security, invest for independence" and it's the best way I can think of to capture the difference.
The goal of saving is to create security, and flexibility.
The most common savings goal is building a 3-6 month emergency fund. This creates security because if any unexpected expenses were to come up, you'd have the money readily available to use - and you wouldn't have to rely on credit cards or take money from your regular spending.
The goal of investing is to create independence - whatever independence looks like to you.
You may want to retire early and travel the world. Or you may enjoy your work and not want to retire until your 50s or 60s. Either way, investing allows your money to grow over time, which gets you closer to independence.
Independence simply means having your investments provide you with enough money each year that you no longer need a job to fund your lifestyle.
✅ Save up a 3-6 month emergency fund for security, invest to let your money grow & create freedom
The game of personal finance is fairly simple.
Spend less than you make, invest often, and manage risks along the way — those 3 things are the foundation of financial success and financial freedom.
Money can be as simple or as complex as you'd like, don't make it harder than it needs to be.