The 10 Most Important Financial Skills to Learn
Your personal finance decisions could set you up for a bright future and an early retirement, or conversely restrict your upward mobility for decades. And unfortunately, personal finance skills aren’t commonly taught in schools; instead, you have to learn them on your own.
Learning core financial skills fully and early in your life can make a dramatic impact in the quality of your life for decades to come. But what are the most important skills to learn?
Why Learn Financial Skills Early?
First, let’s cover why financial skills are so important to learn early.
· Compound interest. Compound interest refers to interest that continuously applies to a growing principal; if you earn 5 percent a year on an investment of $10,000, you’ll earn $500 the first year, $525 the second year, and so on. Each year you have to grow your investments and minimize your debts can multiply your eventual net worth.
· Changing risk tolerance. Over time, your risk tolerance shrinks. Young people have a much higher risk tolerance and can afford to make risky or dumb decisions. Older people need to plan more conservatively, so they have less flexibility.
· Learning and development. Learning a skill early gives you plenty of time to fully develop it. You can apply the lesson over the course of decades and perfect its application in your daily life.
It’s never too late to learn financial skills, but the earlier you learn them, the better.
The Most Important Financial Skills to Learn
These are some of the most important financial skills to add to your repertoire:
1. Reading supply and demand. In economics, almost everything is dictated by supply and demand. The higher the supply and the lower the demand, the lower prices fall. The lower the supply and the higher the demand, the higher prices rise. This simple concept can help you make smarter investments, especially if you plan to buy and sell real estate. It can even help you make better personal purchases on a daily basis.
2. Planning a budget. Everyone needs to have a budget in place. Your budget will help you understand the true reach of your income, your full living expenses, and even your path to achieve your long-term financial goals. It’s the backbone of any serious personal finance strategy, and it should grow with your increasing experience.
3. Calculating compound interest. Remember the power of compound interest? You should also be familiar with how to calculate it, so you can estimate the growth of your investments and understand the true nature of the debts you take on.
4. Balancing a checkbook. Most people don’t have a physical checkbook these days. But you should still be able to read the account balance statements of your online accounts and make sure everything adds up.
5. Building and managing credit. Your credit score is a measure of your financial trustworthiness, and it has a major impact on your ability to get loans and make big purchases. It’s important to know how to build a credit score and keep it in good shape indefinitely. Paying all your bills in full and on time while minimizing debt is a great start.
6. Setting long-term goals. What do you want to achieve in your financial life? Do you want to retire by a certain age? Do you want to achieve a specific net worth? How are you going to get there?
7. Investing. Everyone should be investing. Opening a retirement account like a Roth IRA, or even a basic brokerage account, can be the gateway to significant long-term growth. These days, trading stocks, ETFs, mutual funds, bonds, and even REITs is remarkably simple.
8. Reducing debt. Less debt means a higher credit score, more financial freedom, and a faster path to building wealth. Consolidating debts, making principal payments, and negotiating terms can all help you here.
9. Living below your means. One of the best personal finance moves you can make is living below your means. Spend your money like you make far less than you actually make; this will prevent you from overspending and give you far more money you can use to invest in assets that can generate long-term gains. It’s also a good way to build financial discipline.
10. Creating backup plans. Even the best financial strategies often fail to pan out as intended. All it takes is a sudden medical expense, the loss of a job, or a divorce to completely undermine your long-term financial goals. To accommodate them, it’s important to have backup plans; creating multiple streams of income, saving up an emergency fund, and considering contingency options for your career can all help here.
Most of these skills are easy to self-develop. You can read a few online articles about them, talk to friends about them, and then incorporate them into your daily life. Don’t be surprised if you struggle to learn some of these basic concepts, especially if you have minimal personal finance experience previously; if you’re patient, in time they’ll come naturally to you.