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Last week I had the privilege to talk to 6 high school students, ages 14-18, about personal finance for a couple hours. It was a tremendous opportunity, and the students were all eager to learn and engaged throughout the discussion. At the beginning we talked about the very basics, such as checking and savings accounts. By the end, we were discussing financial independence!
This “crash course” type format seemed to work well. It wasn’t a huge commitment, and it was less intimidating to meet in a small group. For this post, I want to pass along the key lessons I shared with the students so that more people could benefit from them.
1. Personal Finance Doesn’t Need to Be Complicated
I started off by telling them I was proud of them for attending in the first place. Most people don’t take any time to learn about how to properly manage money, so I was impressed by the initiative they were showing at such a young age. Personal finance doesn’t have to be complicated or intimidating. Like any other skill, it takes time to learn and grow your knowledge. Take it slow, the more you learn and practice, the easier it gets. Don’t be discouraged if you don’t understand something right away, keep working through it.
2. You Need to Be Better Than Average
The average savings rate in the United States is less than 5%. Most people can’t cover a $400 emergency without putting it on a credit card or taking out a personal loan. Almost 70% of people live paycheck-to-paycheck. These are harrowing statistics, but they’re true. Normal is broke, stressed, and unhappy. Caring about your personal finances is a HUGE first step.
3. Determine Your Why
Think through some key questions, such as what do you want out of life? What are your goals? What is important to you? That could be family, career, buying a house, travel, retirement, or many other possibilities. Building up savings gives you more options. Approach problems differently than most people do, by considering alternative viewpoints and viewing the whole picture.
4. Don’t Compare Yourself to Others
You don’t have to do what everyone else is doing in life. There’s no one right answer, it’s your own path to create. Don’t compare yourself to others, avoid getting jealous, and focus on your own life. You don’t know other people’s financial situations, and you’re only seeing the highlight reel of their lives on social media. The younger generations need to be able to practice delayed gratification to lead to long-term financial stability.
5. Choose Your College Wisely
Being high school students, college was at the forefront of their minds. I walked them through the different choices they had available to them, and the different price tags. Private schools and schools out-of-state are significantly more expensive, and some of the students were unaware of this. I also discussed ways to make college cheaper such as transferring from community college, applying for scholarships, and working while going to school. There are ways to avoid taking on student loans, but you need to be intentional with your decision making.
6. Covering the Basics
Find a job when you can (some of the students were still young, but are soon approaching the age where they can be looking for employment). Open a checking account, savings account, and IRA and begin contributing to those accounts. With each paycheck that comes in, contribute a portion to charity and savings, and then you can use the rest for spending/bills. We discussed how credit cards work, and how they can both be dangerous and also a useful tool when used carefully.
7. Track Your Expenses
Now is the time to get in the habit of tracking your expenses. Keep track of how you’re spending your money and whether it’s being spent on areas that you value.
8. Boost Your Savings Rate
Spend less than you earn, and boost your savings rate as much as possible. This gives you more options in life, including the ability to work less. Build up an emergency fund to protect against unexpected events. You can utilize multiple savings accounts to work towards multiple goals at the same time.
9. Avoid Debt
While explaining how credit cards worked, I also discussed the various different types of debt. Debt is a chain that limits your options. Avoid it as much as possible. Crush your debt as quickly as possible.
10. Think About Money in Terms of the Time it Takes to Earn
When you get out into the real world, life gets expensive. There are a lot of bills and expenses that need to be paid for. Don’t be intimidated, however you should value money and use it wisely. Think of money in terms of how long it took you to earn it. You’re directly trading your time to earn money, so think of that concept when you spend it.
11. Avoiding Lifestyle Inflation
The best way to become wealthy is to create a lifestyle that doesn’t cost much. Whenever you get raises or bonuses take a small amount to spend, and then put the rest straight into investments. Resist the temptation to inflate your lifestyle to match your income.
12. Putting Money Into a Savings Account Isn’t Enough
Savings accounts typically earn .1%-2% interest. Inflation is eating 1-3% of your money’s purchase value each year, meaning you need to pursue higher returns to maintain your purchasing power. Stashing money into a savings account isn’t good enough.
13. How to Invest
After covering inflation, it was clear the students realized the need for investing, but what is investing and how does it work? I started by explaining stocks, bonds, and real estate. Stocks let you own a small piece of a business. Many people think that buying and selling stocks randomly is a method of investing. This is very ineffective and risky.
Index funds let you own a ton of different stocks. Owning small pieces of 500 different companies provides diversification, which is avoiding putting all your eggs in one basket. Stocks go up and down, bonds help smooth the ride. Set a plan and stick to it for the long-term. The only people that get hurt on a roller coaster are the ones that jump off.
There are various accounts that you can invest in, including a 401k and IRA. Think of the accounts as a coffee mug, they are the vessel that holds the investments. Index funds are the coffee, which is what you’re putting your money into.
14. Invest Early and Often
Time is one of your greatest assets when it comes to investing. The sooner you start, the more compound interest does its magic. It was fun explaining to them the power of compound interest.
I walked them through the riddle about the choice between a penny doubling every day for 30 days or $1 million? For 27 days you might have been regretting your decision, but on day 28 you’d cross $1.3 mil. Day 30 you’d be at almost $5.4 mil! Compound interest is incredible.
Source: Newtraderu.com
Another example was for someone who invests $5,000 each year into the stock market and earns 7%. If this person starts investing at age 25, they’ll accumulate over $1 million by time they turn 65. However, if they wait to start investing until age 30, they’ll only accumulate $739k by age 65. 5 years made a $260k difference! This helped hammer home the importance of investing and why you need to start as early as possible. I shared with them that retiring with over $1 million in assets is completely attainable as long as they start early and maintain consistency.
15. You Can Invest Without Needing a Financial Advisor
Watch the fees that you’re paying for your investments, keep them as low as possible. This is another reason why index funds are such a good way to invest. You don’t need a financial advisor to do invest, you’re capable of doing it yourself. Don’t invest in anything you don’t understand, take some time to learn about it first.
16. Reaching Financial Independence, Gaining the Option to Retire Early
One of the most powerful principles I’ve learned in my life is financial independence. Financial Independence, or financial freedom, is commonly defined as the point where you have enough assets/investments to fully cover your living expenses. This means you no longer need to work for a paycheck, and you have the option of retiring. The more you save, the faster you can get to this point. When you save and invest you’re buying back your time, gaining freedom, and growing the options you have in life.
By following the US average savings rate of about 3%, it’s likely you will never be able to retire. A 5% savings rate takes 66 years to retire. Saving 10% takes 51 years. If you save 50% you can retire in 17 years, have more free time to do whatever you want in life. This may sound daunting at first, but start small and work on growing your savings rate by 1% per month. In no time, you’ll increase your savings rate to a meaningful percentage that helps you reach your goals much more quickly.
Final Thoughts
I’m very grateful I had the opportunity to speak with these students and I hope that they took some of the lessons to heart. Hopefully they’ll review those pages of notes and get their finances on track before even starting their full-time careers. I want them to live a life pursuing their passions, avoiding debt, building wealth, and giving back to their communities. I’d love to continue to teach at these “crash course” type discussions, and help as many people as possible learn about reaching financial freedom.
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