Ryan Modesto, CFA, is CEO at 5i Research, a conflict-free investment research provider for retail investors offering research reports, model portfolios and investor Q&A. 5i Research provides content under an agreement with The Globe and Mail, which receives royalty compensation. Try it.
With financial literacy month upon us, there will hopefully be increased attention given to the topic of financial literacy. While we hope there will be a vast set of resources through which individuals can learn more about their finances, we thought we would cover some of the less popular truths about personal finance that you may not hear about over the month of November.
You need to invest
In the financial literacy and personal finance circles, I think this element gets overlooked a lot. If saving is the workhorse to get you somewhere, investing is at least the reins that help to steer you to your destination. This analogy may even be underestimating the importance of investing. Investing is only going to become more important as pensions get leaner and less prominent and living costs rise while wages stay stagnant. Investing those savings is how one can bridge the gap. So if you are saving money, give yourself a pat on the back, but don’t stop there – you are only part of the way through the journey.
You need to be able to save
Spending is fun; saving usually less so. The whole issue of delayed gratification really is the crux of why people prefer to spend today than save for tomorrow. This unpopular truth has two parts to it. The first is that if you are financially unable to save money, something needs to change. Financial literacy does help here, as it can show someone how to trim unnecessary costs, as well as how just a little bit of money saved every week can compound and grow over time.
Personal finance is not fun (for most)
If you are reading this, you are likely the exception to the rule. Much like math, for better or worse, a lot of people simply find personal finance boring and even a daunting topic. That is why we have always maintained that financial literacy needs to be taught in a mandatory fashion. Like math, many – if not most – will not learn personal finance on their own, even though it’s one of the few topics that impacts absolutely everyone in a big way. Educational strategies cannot simply be thrown out there in the hopes the material will be consumed. There needs to be some incentive or encouragement to first help individuals realize how important financial literacy is. Understanding that those who may need the help most likely have little interest in the subject may be a good starting point.
Personal finance is rarely black and white
The key word here is “personal.” Different financial strategies work for different people. You see this a lot in the media when people talk about taking loans, holding credit cards balances or buying a house. Yes, at all times you should keep fees and costs as low as possible and pay down as much debt as you reasonably can. But it’s much easier to pass judgment on someone who struggles to buy a house, put food on the table or presents under a Christmas tree when far removed from that individual’s situation. While the numbers can offer a guideline, the answers to personal finance questions are rarely black and white.
The second part of this is the willingness to save, which is more psychological. You need to be both willing and able to save money to be able to help yourself in the first place. There are no silver bullets when it comes to finance. At the end of the day, you need to be willing and able to save money for anything else to matter. Personally, I love investing, and that’s what encourages me to save. The more that I can save; the more I can invest those funds. If you are having trouble saving from a psychological point of view, try to think about what you can do with that money down the road. Try to make saving fun and rewarding.
You have to treat yourself
At the end of the day, we make money so we can provide for those who rely on us, live a particular lifestyle and hopefully have a bit of fun. Focusing too much on saving and ignoring the importance of discretionary spending and fun will drive most people crazy. So treat yourself! Go out for a nice dinner once in a while. Buy that nice TV (but not too nice). Get that gym membership. Personal finances are a life-long grind, and as long as the little things stay under control, they are not going to be what makes the difference in 80 years. When you’re buying a house or passing your savings on to your loved ones, no one is going to say “I just really wish you didn’t buy that flat screen TV 10 years ago!” It may be an unpopular truth, but you can’t take the money with you, so you have to spend some of it.
But just some of it.