5 Money Lessons I Wish I’d Learned When I Was Younger
There are many life lessons we learn as we get older, and we often wish we’d learned them sooner. For example, it’s important to clean out your dryer’s lint filter regularly, and don’t expect others to make you happy.
There are important money lessons we often learn later in life, too. Here are five of my own — maybe learning a few of them now can help you save money or headaches.
No. 1: Pay bills online
This one may seem like an obviously smart thing to do, but for some reason, while others around me were paying their bills online, I was resisting. I figured that it wasn’t so hard to pay bills the old-fashioned way, and perhaps a little voice in the back of my head was wondering whether it might be unsafe to pay bills on my computer.
Well, I’m a convert now. Yes, it can be unsafe to pay bills online if you’re using the public Wi-Fi network at your local coffeehouse. But if you’re on your home computer and a secure network, you should be fine. Financial-services companies have ways to keep your accounts safe, too, such as requiring passwords and offering two-factor authentication.
So why is online bill-paying worth it? Well, it saves time, as all I have to do is log into my account, pull up the list of companies I regularly pay, enter the amount due for a given bill, and click “pay now.” It also saves money. With today’s postage stamps typically bearing the “Forever” label, many of us have lost track of what a first-class stamp costs: It currently costs $0.50 to mail a regular envelope of up to 1 ounce. If you pay 10 bills per month, you’re looking at $5 per month in unnecessary postage — that’s $60 per year and, over a decade, a more meaningful $600. (Probably more than that, as postage is likely to keep rising.)
No. 2: Avoid most debt and pay most debt off quickly
I was late to appreciate just how destructive debt can be to one’s finances, but I was also fortunate not to ever get too loaded down with debt.
Carrying a lot of debt can keep you from attaining lots of financial goals. If, for example, you’re spending $400 per month on debt repayments, that’s $400 that isn’t going into a retirement savings account or a college savings account or a down payment for a house. Even worse, a big debt load can easily grow bigger if you’re paying high interest rates and aren’t able to pay down the principal.
The most common culprit of high-interest-rate debt is the credit card. Low rates these days are still in the teens, while many people are being charged 25% or close to 30% — often because of the dreaded “penalty APR” feature that many cards have. A penalty APR jacks your interest rate up high if you pay just a single bill late or commit some other infraction. If you’re carrying $20,000 in debt and are being charged 25% on it, you’re facing $5,000 per year in interest costs alone! It can be hard to pay off your balance in such a situation.
Some debt can be unavoidable in life, such as for college costs, a car, or a home. If your mortgage interest rate is low, it’s not a big concern, but aim to pay off most other debt soon — so that you can plow more dollars into saving and investing. Don’t be saving and investing while paying steep interest rates, either, as that’s essentially paying, say, 20% while hoping to earn, say, 10% or 15%.
No. 3: Start saving and investing immediately
Next is the most powerful lesson that I wish I’d learned earlier: It’s vital to start investing for your future as soon as you can, and to keep at it in a disciplined manner. I did learn this in my 30s, which isn’t too bad, but if I’d learned in my 20s, I’d have a bigger retirement nest egg at this point.
For most people, their best road to long-term wealth-building is the stock market. The long-term average annual return for the stock market has been close to 10% over long periods, but there’s no telling exactly how it will perform over the specific period that you invest, so in order to see how much you might amass over various periods, let’s use a more conservative 8% rate:
|Growing at 8% For:||$5,000 Invested Annually||$10,000 Invested Annually||$15,000 Invested Annually|
|25 years||$394,772||$789,544||$1.2 million|
|30 years||$611,729||$1.2 million||$1.8 million|
|35 years||$930,511||$1.9 million||$2.8 million|
|40 years||$1.4 million||$2.8 million||$4.2 million|
You may only be able to sock away a few thousand annually when you’re young, but that can still be powerful. A single $3,000 investment at age 25 can become $65,000 if it grows at 8% annually (on average) until you’re 65. As you earn more, save and invest more. If you can amass a nest egg of $600,000 over 20 years, for example, that would be enough to generate about $24,000 in your first year of retirement, if you use the 4% rule.
No. 4: Minimize the fees you pay
Another lesson too many people learn too late (or not at all) is that fees can really eat into your savings. Whether you’re banking, using credit cards, getting a mortgage, investing through your 401(k) at work, or shopping for a good mutual fund, be sure to find out what fees you’re being charged and if there are lower fees to be found elsewhere.
To appreciate the destructive power of fees, let’s take a closer look at mutual funds. The median expense ratio (annual fee) of stock mutual funds in 2017 was 1.18%, according to the Investment Company Institute, with plenty of investors being charged even more than that. Meanwhile, broad-market index funds, such as those tracking the S&P 500, can be found with annual fees of 0.10% — and even less. The SPDR S&P 500 ETF (NYSEMKT:SPY), for example, charges 0.0945%.
Now, imagine investing $10,000 each year over different periods and earning an average annual return of 10% — while paying either 1.1% or 0.1% in annual fees. That seemingly small 1-percentage-point difference will give you very different results:
|Over This Period||Growing at 8.9%||Growing at 9.9%|
|30 years||$1.5 million||$1.8 million|
Paying the extra percentage point could cost you tens of thousands of dollars over many years — potentially even hundreds of thousands of dollars.
No. 5: Avoid penny stocks
Finally, this mistake is one I don’t generally think of myself as having made, but if I’m honest with myself, I have — and I’ve paid the price for it. Investing in penny stocks — stocks that trade for less than about $5 per share — is a classic rookie mistake in the stock market. Penny stocks are usually tied to unproven, volatile companies and are often easily manipulated because of their having relatively few shares outstanding.
Many people fall into the penny-stock trap because they’re enticed by the idea of being able to buy, say, 2,000 shares of a company for only $500. But remember: A $0.15 stock can still plunge and become a $0.03 one, and there’s a decent chance it will, too. Meanwhile, a $250 stock can always grow into a $450 one. Don’t read too much into a stock price. Before investing any of your hard-earned dollars into a stock, do your due diligence into the company. Make sure it’s healthy and growing and is not overvalued. Learn how it makes its money and what its competitive advantages are, too.
The more you learn about investing and managing your money, the fewer mistakes you’re likely to make — and the more money you can earn, while losing less.