Get tyour personal finance lessons straight

Alexis Ohanian–young millionaire, founder of Reddit, and spouse of Serena Williams–recently lamented the lack of personal finance lessons in public education:

I didn’t get a basic course on personal finance until college or later. I didn’t really understand or appreciate the value of compounding interest. It’s a concept I wish I would have learned a lot sooner.

There is definitely a need in this country to have personal finance as part of the curriculum. I went to a good public school in Maryland, and I was pretty upset when I realized what I was missing in terms of personal-finance knowledge, and, meanwhile, I’m taking cursive classes.

There are fundamental lessons that anyone who is financially successful learns, one way or another. Let’s review.

(Read the full Ohanian interview with Marketwatch.)

Where Do You Get Personal Finance Lessons?

Ohanian said that he learned much about personal finance growing up in Brooklyn with his immigrant parents. I, too, learned most of my early personal finance lessons from my parents.

On the other hand, some parents are pushing for personal finance lessons as part of public education. Given that not all parents have solid personal finance skills, it is probably a good idea to offer the option of personal finance lessons in high school.

Of course, you can find plenty of personal finance lessons on websites like this one. There are also plenty of good books to help you learn personal finance.

You probably don’t want to learn these lessons the hard way. I once served on the board of a nonprofit organization for credit counseling. The organization helped consumers negotiate down their credit card debt as part of a plan to take control of their financial lives. It’s an excellent service that recovers creditors’ money and reclaims consumers’ lives. But every client of the nonprofit would tell you that life would be much better if they learned their lessons earlier.

The Six Personal Finance Lessons You Need

As with all subjects, personal finance holds a lot of details, history, trivia, and connections. That’s what makes it interesting. But if you’re not working on one of the following six topic areas, you’re probably wasting your time.

1. Spend less than you earn and in line with your priorities.

Most people understand that companies need to make a profit to survive. For some reason, they don’t apply this knowledge to themselves. Until you become personally profitable, you won’t be going anywhere. Becoming profitable is what budgeting your money and paying yourself first is all about.

2. Make compounding work for you.

Compounding puts your money to work for you and makes your financial work much easier. Over time, it can earn the majority of your retirement savings for you. Don’t pass up this free help.

3. Allocate your assets.

In investing, how you divide your money among different classes of investments matters more than the specific investments you choose in a particular class. For example, the percentage of stocks, bonds, and cash in your portfolio directly influences your level of risk and earnings. The same goes for allocating investments in small, medium, and large companies across retail, financial, energy, technology, healthcare, and other industries.

Don’t despair because some, or even most, of your investments are turning in mediocre results at the moment. It takes only one or two winners to lift an entire portfolio to exceptional performance.

Your time and spending are also assets that you can and should allocate. Are you spending your money, time, and energy in line with your goals and priorities?

4. Diversify.

When you allocate your investment money, you need assets that behave differently from one another. It doesn’t help to focus all your investments in just technology companies, even if you pick small, medium and large technology companies from around the world. Likewise, don’t choose just big companies across multiple industries.

Warren Buffet says that personal investors can make a good portfolio with just six investments–if they are the right six. After about twelve investments in a portfolio, you will start to see diminishing returns.

In these choppy economic times, many people realize they need to diversify their sources of work and income, as well. That’s why you see so much financial porn about passive income and side hustles. It’s not easy, especially at first, because it’s all work. But hard work always pays off.

5. Manage your risks.

A level of risk doesn’t guarantee you a level of reward, but it’s close. What types of risk do you face, and how much risk will you tolerate?

Here are just a few types of risks in personal finance:

  • Market risk: prices rising and falling, political and economic events
  • Liquidity risk: having your money tied up and not easily transferable or spendable
  • Credit risk: meeting your obligations from borrowing money
  • Opportunity cost: missing out on an opportunity because you choose a different, competing option

Risks, both seen and unseen, are why you need emergency savings and insurance.

6. Be smart about transaction costs.

Transaction costs are mainly taxes and fees. Making a financial choice almost always involves one or both of these. The choice may be the right one for you to make, but be sure to factor in the taxes and fees you spend in exercising your choice. Otherwise, these costs can steal your money if you’re not watching.

School is Now in Session

Now that you know these six lesson areas, you’re ready to start building your knowledge and applying your knowledge to your financial success.

What have been some of your best financial lessons? Share them in the comments below.

The Six Personal Finance Lessons You Need

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