Many years ago (26 to be exact), I left teaching and became a financial planner. I love to teach and will coach anyone who’s interested in listening, but I grew frustrated with curriculum limitations and some of its relevance after graduation. Today we send wonderfully knowledgeable students into a dynamic world: they are literate, they can count, and most are socially aware. Yet they share a common shortcoming for life beyond school – most enter adulthood knowing nothing about money!
Managing cashflow, how to handle debt, investing the extra – these are subjects that every graduate will experience in their future. The consequence of ignorance negatively affects family, future business, and even future community. Increasing financial frustration, artificial intelligence goodies track behavior and ensure we are always in shopping mode. Credit is readily available to most anyone who asks. Access to goods and services are immediate, and Amazon is more than happy to fulfill. Life is viewed from a short-term lens focused on immediate gratification and FOMO (fear of missing out)!
Perhaps it’s time to re-visit classic publications on personal finance:
With timeless wisdom, they lay out a conscious and structured way of money management and investing that is separate from emotion. Aside from five-minute clips on YouTube, allow me to highlight three key money lessons from these two masters.
This was a term coined by George Clason and refers to setting aside a specific dollar amount on a regular basis, the idea being that if you don’t see it, you won’t spend it. Put aside 10-20% of each paycheck in a separate investment for a future goal. I like to use the metaphor of a pair of jeans with two back pockets: one saving and one spending. Every payday move 10-20% of your paycheck to the savings pocket and use the spending pocket for lifestyle needs and wants. You will have a chance to learn how to operate within the income you are given and save for the future. This discipline can be life changing.
The word to note here is invest, rather than speculate! Building wealth and financial comfort takes discipline and time. Have a short-term goal of 24 months? Nothing wrong with getting a guaranteed return using 5% GICs! Looking at a longer-term objective over five years? Consider a small investment portfolio of quality dividend paying businesses. Feeling a little unsure of how to invest? Nothing wrong with spreading your cash into multiple choices through an exchange-traded fund (ETF). The point is to take the savings pocket money and steadily grow it. We strongly advise against investments that cannot be valued and are loosely regulated. Investors are not gamblers! Ask us – we are here to help!
When you are young, time is on your side. Those still living at home have the extra advantage of fewer financial commitments. Most don’t have kids, a mortgage, or other family financial responsibilities that eat into the spending pocket. Small amounts in the savings pocket can grow considerably over time. Dollars saved today have time to compound and grow – TFSA’s (tax-free savings accounts) are built for this kind of program and offer flexibility.
Let’s consider Steve, a 23-year-old labourer who lives at home and has only a few fixed expenses. He decided to save $750 bi-weekly to save for his first real estate purchase. Given the short-term nature of his goal, he selected GIC investments at 5%, and to bolster the growth, he used his saving pocket in a TFSA account. Using standard future value calculations on a financial calculator, here is the net result:
PV (Present Value) = $0 (He presently has no money since he is just starting)
i (Investment Growth) = 5% (He is investing in a 1-year GIC currently giving him 5% inside a TFSA, so there’s no tax on the growth)
n (Time period for investment to grow) = 24 months (His chosen investment duration to reach his goal)
PMT (Investment Payment Schedule) = $1500 ($750 on 1st of month; $750 on the 15th)
FV (Future Value) = His future value is approximately $66,753 in just 2 years.
Enough for a 10% down payment on a $600,000 property at age 25!
Class dismissed!!
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In this months Money Minute Mike Erickson and Mark Smigel revisit three key money lessons from David Chilton’s The Wealthy Barber and George Clason’s The Richest Man in Babylon.
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