Financial literacy is a really important subject to study and ultimately a skill to develop if you want to escape the rat race and build wealth that gives you a healthy balance of both time and money.
The problem is the vast majority of us were never taught any financial literacy in school. Given that many schools today function as standardized employee training factories for business and that our governments themselves are in record amounts of debt, it makes sense why something so important for personal autonomy and self-reliance is not a big focus in the school system.
This is a big problem for citizens living in a consumer society, where we are surrounded by the constant reinforcement of status anxiety through advertising and the ever present lure of instant gratification with the ability to buy new things on credit cards with money who often don’t have.
To make matters worse, there is a massive surplus of University graduates in many disciplines, a whopping 1.5 trillion dollar student loan bubble inflating the cost of higher education and an epidemic of qualification inflation, which has made many previously unskilled jobs require a University degree.
All these trends make financial literacy more important than ever before. To thrive in a fast-changing world, how you manage your money is often much more important than how much money you make (even many rich people live paycheque-to-paycheque).
I recommend thinking of yourself as an entrepreneur rather than as an employee and developing a long-term investment plan. With clear goals it’s much easier to direct your time and attention to get the results you desire.
It also helps to follow a budget by using a free budgeting tool like Mint or Personal Capital and there’s a new generation of investment automation tools like Wealth Simple that can help you grow your investments without hiring an expensive investment advisor.
11 Key Principles For Financial Literacy:
Contrary to the popular illusion pushed by television and advertising, most wealthy people with more than a million dollars of assets don’t flaunt their money, live in massive houses or drive really expensive cars.
In fact, many of them have never earned six figure salaries. What they did differently from the norm was they followed a budget where they saved and invested at least 15-20% of their income strategically to create long-term wealth.
Applying some of these financial literacy principles can exponentially increase both the value of your wealth in your investment portfolio.
#1: As long as you don’t worry about money, you’ll always have enough.
Money represents different things to different people. Some desire it for status it brings, others for security and comfort, or because it can set them free and allow them to live their dream lifestyle.
But the reality is that if you covet money too much, you’ll never feel you have enough of it. It’s important to maintain perspective. If you live in a highly developed economy like Germany, Canada or the United States you are probably in the global 1% of income earners (an income of $35,000 US/year qualifies you).
#2: Placing too much value on money and security means you’ll stay on the hamster wheel.
I have a friend who set a goal of making $80,000 a year and then he would really enjoy life and do work he enjoys. Five years after graduation, he achieved his goal but soon realized that $80,000 didn’t feel like enough so he’s still slaving away doing 60-hour week at a job he hates.
The only thing that has changed is he drives a nicer car and he can pay a mortgage for an even bigger house. If you want more freedom in your life, the time is now to start getting serious about planning for it so you can keep your expenses low and educate yourself in the skills that enable you to earn more of your income doing work you enjoy.
#3: Status anxiety can actually increase as you become richer.
Our cultural obsession with being rich leads even billionaires to measure themselves against even richer people and not be able to properly enjoy their money. Yet, I know lots of people who enjoy life and live comfortably on a modest income of $45,000 a year.
I also know people who make $200,000 or more per year and live paycheque to paycheque. Studies show that the wealth curve is most stratified among the top 1-2% of income earners (generally people making $200,000+ a year) and the status competition is much more intense among people at the higher parts of the curve.
#4: Live within your means and avoid unnecessary debts.
The reason the rich get richer and the poor get poorer is because rich people invest money and poor people borrow it. The wealthy collect interest and the poor pay it. Buy now, pay later.
Easy credit is the oldest trick in the book to enslave people and societies. Earn your money and invest it the old-fashioned way – by having good ideas, increasing your productivity through learning new skills and saving 20% of your income which you actively invest.
#5: Hire a financial planner or use an investment automation tool.
Smart investing takes a lot of research. Talk to people who are wealthy, read books on investing and get advice from people who are knowledgeable. If studying the stock market and investment strategies isn’t your thing then invest your money in a diversified way with an investment automation tool like Wealth Simple.
Be aware of the loss aversion bias, which refers to people’s tendency to prefer avoiding losses to acquiring equivalent gains: it’s better to not lose $5 than to gain $5. Some studies have suggested that losses are twice as powerful, psychologically, as gains. Look toward what you want as opposed to away from what you don’t want.
#6: Do what you love (while providing value to others) and the money will follow.
I have met a lot of people that will casually admit that they picked their careers entirely based on the earning potential. I think this is really short-sighted because if someone isn’t passionate about your job, then they’re not going to be very good at it long term.
It’s nice to have a good steady paycheque but I think it’s more important to do something you enjoy and which gives your life meaning and purpose. Find the intersection between what you love to do, your talents, what the world needs and what you will get paid well for doing.
#7: Don’t follow the crowd, unless you like jumping off cliffs.
Legend has it that one day in 1929, Henry Ford was wandering through one of his car factories and he overheard the man sweeping the floor talking about how he had put all his money into the stock market because it was the way to riches. Ford realized that if the floor sweeper, someone who normally wouldn’t be investing in the market, was buying stocks to get rich like everyone else then it was clear sign of a bubble.
So he sold his stocks and a few months later the stock market crashed. This same thing happened recently when the Bitcoin and Ethereal bubble popped last year. Think long-term for your investment philosophy and apply Warren Buffet’s dictum: when people are greedy, be fearful. When people are fearful, be greedy.
#8: Set realistic goals, make a budget and if you can, start your own business.
Setting clear goals is really important if you want to build wealth over the long-term. If financial stuff is really not your thing, then work hard at what you’re good at so you can hire a good accountant and wealth advisor to do it for you.
Once you’ve got your finances under control, then start researching how to start your own business if that’s something that interests you. Starting your own business often pays the best long term returns because you are investing your money directly in yourself.
#9: Love is more important than money. Don’t let money destroy your relationships.
Studies show that many couples only discuss money when they are arguing. It is important to talk openly about money and work together with your spouse to save money. Incredibly, the biggest cause of divorce is issues with money.
Avoid lending money to friends and family. It may seem like a good idea at the time but it is usually a terrible idea. If you have children, educate them about money at an early age and make them work for their own money. Handouts create dependency, a sense of entitlement and people only appreciate the things they work to earn.
#10: Don’t take financial advice from the mainstream media.
Recent studies have shown that most economic predictions made in the media end up being wrong. The reason why economics is often called the dismal science is because:
- There’s nothing scientific about many economic predictions and…
- It’s almost impossible to predict macroeconomic events (the big stuff).
- You can observe trends but the “animal spirits” of the markets work in mysterious ways and timing them is nearly impossible.
Usually, it is Black Swan events that few people anticipated that end up causing major corrections in the financial markets. In the United States, very few economic commentators predicted the housing bubble, the collapse of the investment banks or the 2008 financial meltdown. Even a highly-educated Ph.d economist like former Federal Reserve Chairmen Ben Bernanke is wrong nearly every time.
#11: Money is overrated. Be thankful for what you got.
If you’re reading this article on the Internet you likely enjoy a standard of living substantially higher than the vast majority of humanity. In fact, if you live in a house or apartment with the Internet, decent furniture, food in the refrigerator, electricity and heating, then you’re doing a lot better than most people in the world.
Be thankful for you what you’ve got and you’ll be much more likely to receive more and by observing these financial literacy principles, you will find a better balance of time and money.