Editor’s note: This article was first published in July 2014, and its figures reflect Spain in 2014: avoidable bank charges of €150-300 a year, monthly salaries of €1,200 and €1,500, and self-employed earnings. This crisis refers to the post-2008 downturn.
When it comes to managing and handling money, most young people and adults would fail the test. But rather than failing at financial education, since they are aware of many of these points, they would fail at financial discipline and at building good money habits.
I hope this short guide, with a few lessons about money, helps you clear up some points about this raw material and sparks an interest in getting your personal finances right.
Here are 34 financial education lessons to help you with your money
1. Know where your money goes
You will never know where your money goes unless you keep track of your spending and income (as companies do). These days there are many apps that will help you with your financial education, at least by recording where every euro that leaves your pocket ends up. The old trick of writing it down in a notebook with a pen still works too. It is the only way to find out which expenses are toxic and which can be cut, so you have more money left to save and invest.
2. Have a budget for your money
It is a way of making sure you are not spending money you can’t actually afford to spend. In this budget we set out how much money we will earn each month and how much of it will go to fixed payments, putting part of it into an emergency fund.
3. What paying yourself first really means
Paying yourself first does not mean saving whatever you can afford from the money left over at the end of the month. It means sending a fixed amount of money to your savings account as soon as you get paid, and only then starting to spend what is left. It sounds like the same thing, but it is nothing like it. That is paying yourself first.
4. A savings account is not the same as a current account
We need to get used to the idea that our money should make more money, and that we should not pay for the favour we do a bank by depositing our money with it. In a current account, all kinds of fees are taken out of our money. In a savings account, we want to be paid interest (however small) on our money.
5. Never pay to use an ATM or to cash a cheque
The moment you have to pay for any of these things, you are better off finding another bank. These points lead us to the next essential one.
6. Negotiate with your bank or switch banks
Don’t be afraid to walk into your bank and say that you don’t want to pay a single cent to keep your money there or for the services linked to your account. Many people pay between €150 and €300 a year in avoidable charges. That may not sound like much, but it is our money, and remember that small leaks can sink big ships.
7. Don’t confuse debit cards with credit cards
With debit cards we can only spend the money we have, whereas with credit cards we can spend even money we don’t have, multiplying the real cost of the purchase. Before using a credit card, make sure you really, urgently need what you are about to buy.
8. Don’t use your credit card if…
If you won’t be able to pay off what you have spent by the end of the month, you shouldn’t use the credit card. Almost everyone struggles even to imagine the situation you can end up in if a credit card gets out of control. Hardly anyone believes it until it happens to them. Then they get to hear “I told you so”.
9. In fact… do you know what a credit card is?
Many people think they know what a credit card is, but they don’t, and many of those who do never fully understand it. A credit card is a type of loan with the highest interest rates on the market. In fact, it is legal “usury”.
In the past, the strategy of credit card companies was not to look for good payers but for customers who had already had trouble paying, so they could bill them for the whole package, which sometimes meant taking your house over what started as a €150 debt.
10. People will never give you money you don’t ask for
If you never negotiate your salary, you will never get a raise until your boss feels like giving you one. In the same way, if you never negotiate with service providers, you will always pay what everyone else pays.
11. In finance, size is strength, and bigger numbers mean better terms
In a family, having every member on the same mobile phone company can give you leverage on price, just like having the full package (internet, mobile, ADSL and cable) with the same company. Likewise, having all your insurance (home, car…) with the same company can help you push the price down. Negotiate or switch, because money saved…
12. Saving more is exactly the same as earning more
At the end of the day, we can balance the household budget either by cutting spending or by raising income, although earning more is always much better.
13. The true concept of money
Not everyone gets a clear grasp of this concept of money. Money that leaves your pocket and doesn’t come back with a return is lost. Would you leave a €20 tip at a café when paying for a €1 coffee? No, right? Well, there is no difference between paying €150 in avoidable bank fees and giving a waiter a €150 tip. You take the first for granted and the second seems strange, but believe me, both are equally strange.
See also: Treat every euro as an investment
14. Most people think they know how much they earn, but they don’t
Many people say they earn €1,200 because they take home €1,200 in an envelope or a cheque, but they forget that the money we earn is money minus taxes. And watch out, because in many cases an extra €50 of income can leave you with a hole to fill in your annual income tax return.
I am not a tax expert, which is why, when the time comes, I like to be advised by someone who is. Getting advice on how to pay less tax also means earning more. If you are one of those people who has to pay a large sum every year when filing your income tax return, a financial adviser may have something to tell you. And it will pay for itself.
15. You won’t get rich working for someone else
That statement is not entirely accurate, because of course you can get rich working for someone else. Many people have got rich that way. So let me put it another way: “It is impossible to get rich earning €1,500 a month.” That statement is not negotiable and shouldn’t spark any debate. And there is nothing wrong with earning €1,500, as long as you don’t want to be rich, but it can be dangerous to settle into a payslip whose long-term continuation doesn’t depend on you.
16. Being self-employed is not the same as being a business owner
The other day I read that a high percentage of self-employed workers (autónomos, in Spain) don’t even make €1,000 a month. There are two types of workers: the business owner (who works for himself) and the worker (employed by someone else). In between is the self-employed worker, who unfortunately has the worst of both worlds, and whose existence, as a rule, only benefits the government, because he is one less unemployed person and one who pays more.
In fact, he may end up paying even more than he manages to earn. I’ll go further: he pays even if he earns nothing.
The self-employed worker, at least in Spain, is the worker with the worst conditions there are, and like elite athletes, he has to make sure that during his working life he can make enough money for when his career ends.
17. It is never too early to save for retirement
In personal finance, the earlier you start, the more time you give compound interest to do its work. From your very first payslip you should start saving instead of spending, but…
18. Automate your savings
It is a very good idea to have a savings plan in which every month the bank takes a fixed amount from our account, however small (30 or 40 euros), and that money goes into an interest-bearing account. This kind of standing payment creates the adult obligation of having that money in the account, as well as our first “mental stress” of not having it unless we do something about it. It may seem a bit twisted, but it is very useful.
19. Avoid pension plans
Sorry, but I am a real enemy of pension plans. Although this is a personal opinion, the truth is that I could explain 100 different strategies that would give us much more money and many more advantages than taking out a pension plan. This brings us to what is considered one of the most important points.
20. Keep your money liquid
Unless you are a real estate shark (property being an illiquid investment), make sure every investment you make is a liquid asset. That is one of the many reasons why I would never open a pension plan: the opportunity cost can be very high. (Read: What liquid and illiquid assets are.)
21. Investing is safer than saving
We have talked about this before. Thanks to inflation, not investing means we are making an investment that is losing us money. It is a matter of knowing our investor profile and our risk tolerance in order to choose which type of investment suits us, but saving without investing is not what smart people do.
22. Investing in the stock market isn’t dangerous; you are
The stock market is like the road: the more you drive like a kamikaze, the more likely you are to have an accident. Financial ignorance and a lack of preparation are what make investing in the stock market risky, but it is the most profitable investment.
Many people say: “However good you are, something can happen and you can lose your money.” That’s true, but statistically there is also some chance of having a heart attack while making love, and for now that is a risk I am willing to take.
23. Getting rich is easy
It is genuinely easy to become a millionaire. The problem is that nobody explains how at an early age, and if they do, we tend not to listen. If you start earning money very early, don’t get into debt, live frugally and put a large share of your money into investments, getting rich is a process that happens through sheer momentum. (Read: How much you need to save to retire with 1 million.)
24. Interest is neither good nor bad; its direction is
There are two kinds of interest: the kind we pay on our debts and the kind we are paid on our investments. I prefer the second. It is more profitable for our purpose, as long as our purpose is to build wealth.
25. There are no compound interest accounts; you have to build one yourself
As far as I know, there are no compound interest savings accounts. But since compounding simply means adding the interest earned on an investment (the money made) to the principal, it is something we can all build ourselves, whether by investing in the stock market, in term deposits or in bonds.
26. Start calculating your everyday spending on a yearly basis
We have already talked about bank fees and the like. Now let’s talk about a coffee or a beer. A coffee costs about €1, which is €30 a month, adding up to some €360 a year. But it is not really that, because that is €360 today which, had it been well invested in the stock market at a compound annual rate of 12%, would have cost us more than €1,200 after 10 years. Add the coffees accumulated over those years and we estimate you would have spent about €8,000 on coffee. Add beers, cigarettes and a few other things, and you will understand why we are not rich.
However, if you enjoy having coffee with friends, my advice is not to cut out that luxury, because we also need to allow ourselves plenty of small treats.
27. Small pleasures rather than big luxuries
And that is the secret to being happy. If you like massages, don’t get one €200 massage a month. Get six €30 massages over the month. Various studies have shown that people who dream of a big luxury discover how unhappy they were once they get it, while those who enjoy small pleasures more often enjoy life much more.
28. Appearances matter, but…
It’s true. Dressing well and looking after yourself physically, as well as being polite and respectful to others, are appearances that say who you are, but…
29. A luxury car also says who you are
There are only two types of people who drive a luxury car: 1. those who can afford it, and 2. fools. It seems obvious, but this crisis has revealed that there were more fools than we could have imagined. And no offence meant to anyone. Remember that owning a luxury car doesn’t mean you are rich, just as owning a mid-range car doesn’t mean you are “poor”.
It often means that the owner of the luxury car has more debt than the owner of the mid-range one.
30. Don’t spend money on the lottery
Playing the lottery is a waste of time. Statistically, you are more likely to be run over by a car on your way to buy a lottery ticket than to win the lottery. Save and invest the money you spend on the lottery. That way, after a few years, you will have built your own lottery.
31. You alone are responsible for what happens to your money
You and your money are in a relationship. Your job is to protect your partner, not share it and not lend it out lightly. Don’t blame anyone if you lose money, because you alone are responsible for what happens to it. It is not the bank manager who advised you to invest in preferentes (the preference shares Spanish banks sold to retail savers), nor the analyst who recommended investing in Pescanova (the Spanish fishing company that went bankrupt in 2013).
See also: 3 financial formulas that will help you achieve financial freedom
32. Ignorance costs money
Money that is well managed through investments can multiply quite simply. It is not so simple that anyone is ready after reading a few books, but it is not so complicated that it can’t be done with dedication and an interest in everything related to financial education and investing.
Whoever decides not to learn about investing has to rely on the advice of people who tend to be wrong more often than right, and when they get it wrong, we blame them to hide the fact that we didn’t know how to protect our money.
33. And when it comes to making money from investing, teachers can’t help you
Most of what is taught about investing at school or university is useless theoretical nonsense in the world of real investing. That is why very few professors are rich. Many professors can explain what shares, futures or options are (they may explain it well or badly), but very few of them have ever experienced how theory vanishes when stress and fear show up in an investment.
In fact, when I look at university students’ syllabuses on stock market investing and financial instruments, I understand perfectly that they were written by someone who: 1. has never invested in the stock market, 2. doesn’t want his students to invest in the stock market, or 3. wants his students to lose money when they do.
34. Pay off debt before investing
If you have debts such as personal loans or credit cards, don’t even think about putting money into investments before getting rid of those debts.
Further reading
Featured image: Keith Williamson, CC BY 2.0, via Flickr.
