Disclaimer: This information is meant for educational purposes only. For tax and financial guidance, see a licensed advisor and do your own research.
The Drawbacks of the Education System
The lack of financial education in the school system prevents students from succeeding in the modern world. Instead of teaching students how to start a business, make money online, invest in real estate, etc., the school system focuses on subjects that prepare students for a 9-5 job.
The old-age schooling concept of using school as a place to train “workers” is outdated. Instead, schools need to update their curriculums to provide students with the best resources possible for creating success. For example, curriculums should include valuable skills that teach students to use their talents and passions to build a business instead of defaulting to a 9-5 job. In conjunction with a basic curriculum, these resources would prevent students from surrendering to the rat race and living potentially unfulfilled lives.
Here’s What You Need to Know About Finance
To help you gain insight into what I have learned, I rounded up five critical financial lessons you weren’t taught in school. In my own journey of building multiple successful businesses, I learned what type of education could help me become successful and I want to share it with you.
1. Not All Debt is Bad
When people hear the word “debt,” they automatically think it’s bad to have debt. The idea that debt is bad has been drilled into our brains by our parents, family members, peers, and the media. However, there are actually two kinds of debt: good debt and bad debt.
There is such a thing as good debt. Good debt is borrowing money to purchase assets, things that put money in your pocket. This debt is considered good because these purchases can appreciate in value over time. Here are some examples:
- House: A house goes up in value every year (usually), especially if you put equity into your home to increase the value.
- Education: Spending money on your education increases your value by training you in various areas of study to help you generate income.
- Business Loan: Taking out a loan to start a business that generates money over time is an asset. (Note: Any business venture comes with potential risks that must be considered)
- Real Estate: Purchasing or investing in real estate is considered good debt because real estate increases in value over a period of time.
- Credit Card Debt: Although many consider credit card debt to be bad, credit card debt can be good if you use it to purchase assets. For example, I used a credit card to purchase an affiliate marketing course when I was learning how to start an affiliate marketing business.
Bad debt is borrowing money to purchase liabilities, things that remove money from your pocket. These loans are considered bad debt because they reduce your net worth and do not generate wealth over time. You might want to avoid bad debt as much as possible when trying to grow yourself financially.
Here are some examples of bad debt:
- Car Loan: Getting a loan on a car increases your monthly expenses and may come with a high interest rate.
- Credit Card Debt: Credit card debt is considered bad debt when you use it to purchase liabilities that will not improve your net worth, such as consumer goods.
- Store Credit/Rewards Cards: Store credit/rewards cards are considered bad debt because they have limited rewards, typically have high APRs, and aren’t worth the risk in the long run.
- Cash Advances: Cash advances are considered bad debt because they have high interest rates and start accruing interest immediately.
2. Don’t Keep All Your Money in Savings
My financial rule of thumb is to put 10% of your monthly income into a savings account. However, you should only do that if you have nothing in your savings. Once you hit the threshold of around $6,000 in expenses, stop putting your money into savings.
Once you hit the threshold of around $6,000 in expenses, stop putting your money into savings.
Instead, put the money you would typically save into investment accounts such as index funds and Roth IRAs.
An index fund is an investment account that mimics a financial market, such as the S&P 500. Index funds have very low risk and are a great way to generate passive income.
A Roth IRA is a retirement account that you invest in monthly and are eligible to take tax-free money out of at 59 ½ years old.
3. Don’t Succumb to Lifestyle Inflation
Lifestyle inflation refers to getting a raise or a job with higher pay, and you start spending more because you’re “making more.” However, your annual raise and income are usually less than the inflation rate, which means you’re actually losing money.
When you succumb to lifestyle inflation, especially as a single 20-something, you’re setting yourself up for failure. Your 20s and 30s are when you should be putting as much money as possible into investments and assets to grow your net worth.
Living Below Your Means
The best way to avoid lifestyle inflation is to live below your means. Here’s what living below your means looks like:
- Reducing your expenses
- Increasing your income
- Investing your money to increase your net worth
Instead of buying a brand new car when you get a raise, keep your old car or buy a used car in cash. This way, you don’t have a brand-new car payment sucking up the “raise” you just got.
4. Don’t Get a 15-Year Mortgage
You’ve probably been told by your parents or peers that a 15-year mortgage is better because you can pay it off quicker. However, most people live in their homes for an average of 13 years, which means you’re paying a higher mortgage for a house you’re not going to live in for 15 years. On the other hand, if you get a 30-year mortgage, you pay less per month on your mortgage, which minimizes your expenses.
Most people live in their homes for an average of 13 years, which means you’re paying a higher mortgage for a house you’re not going to live in for 15 years.
What You Could Do Instead
Let’s say you’re buying your first home. You’re probably not going to live in that house for 15 or even 30 years. So, it doesn’t make sense to increase your monthly payment.
I suggest you take the difference between a 15 and a 30-year mortgage monthly payment and invest the difference each month.
For example, a 15-year mortgage might be $2,000, and a 30-year mortgage might be $1,000. Take that extra $1,000 and invest it monthly.
Take the difference between a 15 and a 30-year mortgage monthly payment and invest the difference each month.
5. Purchase a Rental Property ASAP
Purchasing a rental property as soon as possible is one of the most valuable investments you can make.
Benefits of Purchasing a Rental Property
- Real estate appreciates over time
- You could potentially deduct the mortgage interest, operating expenses, property depreciation, and ownership expenses on your tax return to reduce your taxable income
Don’t let the weaknesses of the education system derail your chances of creating success. Look into these financial tips and start unlocking your potential.
2 thoughts on “5 Financial Lessons You Weren’t Taught in School”
Wow. Those are good advice. Thank you.
Thank you, Bashir! Which lesson resonated with you most?