Editor’s note: This article was first published in December 2012; the 28% APR on credit cards it cites was the figure at the time, and card rates in Spain have changed since then.
In personal finance there are several factors that work in our favour, others that work against us, and a few extra ingredients or accelerators that can carry us faster either towards our goal or towards failure. We are going to focus on time, because time is our greatest enemy when it comes to our finances: the more time passes, the harder it becomes to reach our financial goal (or at least that is how it feels).
Even so, if we know how to manage time, it can turn into an ally. So our greatest enemies on the way to a financial goal would be spending, debt and time.
Basic principles of financial education
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The sooner you start a financial plan, the better. If you start at 17 or even earlier, your chances of success go up considerably.
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The longer you put off taking on debt, the less time you will need to reach your financial goal.
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The longer you put off an expense, the better, because you will save money by doing so.
A few examples
I would venture to say that if I had known at 17 everything I know today, I would probably be very rich, but nobody explained any of this to me at that age. Since I started working I have earned a great deal of money, and so I have spent a great deal of money too, and I could have saved and invested a large part of it.
When I bought my first car, I financed it, so I paid €6,500 in interest. The funny thing is that if I had saved for just four more months, I could have paid for the car in cash. I have used credit cards to pay for things I could just as well have paid for in cash, or that I wouldn’t have needed if I had thought about it.
I spent more than €18,000 on trips, dinners and weekends away before I turned 26. If I’d had a clear financial plan from the age of 18, and you add up the avoidable spending that came from my lack of financial education, by 28 my savings account would have held around €40,000 more, even without investing a single cent. If I had gradually invested 50% of that avoidable spending in fixed income, my savings at 28 would have come to about €55,000. These are all rough estimates, kept deliberately low so it doesn’t look as if we are overselling the idea; I have sometimes done more detailed calculations with my own finances, and the figure is much higher.
Luckily, I never fell into the trap of dangerous debt.
Time: an enemy in the subconscious
As a rule, people want to draw up a financial plan and see visible results right away, in as little time as possible, and in personal finance it doesn’t work like that. We always advise getting rid of debt first, especially credit card debt, because the interest rate on a credit card can be 28% APR, and we will rarely get a return on our investments that beats that.
Without realising it, if we have to spend 8 or 12 months paying off our toxic debt, we lose interest in the financial plan, because there are no immediate results. If we tell a 39-year-old that they will need more than 3 years to clear their toxic debt before they can invest, they will feel lost. Of course, when they turn 42 they will realise they are in the same place, and they will probably now need 4 years instead of 3 to clear that debt. That is why time is our greatest enemy: first, because it keeps moving no matter what (we get older), and second, because of the psychological barrier it creates, especially for someone who is impatient.
Time, together with its two friends, spending and debt, are our biggest potential enemies. Once you avoid unnecessary spending, keep the kind of debt you take on under control and accept the time you need, you will be much closer to getting there.
Our greatest allies are time, credit and risk
Just as time and debt are our enemies, we can also turn them into allies.
When we talked about the perfect investment method, we said that the stock market is a manipulated market, moved every day by big speculators. These speculators can beat everything and everyone, but they cannot beat time: if a listed company keeps increasing its revenue quarter after quarter, however hard they try, sooner or later its share price ends up rising. So if we choose well and are patient, time (the long term) will be on our side.
Now, if you are one of those people who don’t like waiting, then to cut the time it will take to reach our goal, or in other words to get there faster, we will have to take on more risk. Risk is a very dangerous factor unless we add a special ingredient: knowledge. Taking on more risk does not mean gambling or spending more money in casinos.
To get bigger results, we can use credit. Of course, toxic debt is one thing and healthy credit is another. As we explained in our article on investing without money, what we would basically be doing is multiplying our capacity to invest: investing 10 or 20 times our real capital so that our gains are bigger. Of course, if we don’t do it properly, what we could end up multiplying are our losses.
In a future article we will explain how to use leverage correctly and which product to use it with. We will talk about CFDs, a product that, used correctly, can generate big profits and lets us limit the risks.
Always remember that one of our greatest allies is knowledge: the more “time” you devote to financial education, the less time you will later have to spend on the headaches that come from not having done things properly. Making money is very easy; the hard part, it seems, is keeping that money with us for a long time or multiplying it, when in reality that is very simple.
Further reading
- 5 tips to improve your personal finances
- The best books on financial education
- Warren Buffett’s 10 keys to financial success
Featured image: Thamizhpparithi Maari, CC BY-SA 3.0, via Wikimedia Commons.
