Do you remember that old phrase of years gone by, “ignorance is bliss”? Even if you never have heard that one (although I doubt that), it is something that seems to be true. After all, you aren’t going to worry about that big pothole on the road just a few hundred feet ahead of you when you’re driving to work on this sunny morning—if you are totally unaware of it, right? How can you? You don’t know it’s there. You haven’t heard any problems about it and your mind is drifting along with the latest tunes on the radio as you sip your coffee from your freshly brewed homemade K-cup coffee machine that you made just 10 minutes earlier. Life is good. And then…kaboom! What you don’t know can hurt you.
Funny thing about that “ignorance is bliss” thing, it has a tendency to sneak up on you and hit you squarely in the eye or even worse, your rear end and lower back like driving over a huge pothole does! That simply proves the premise doesn’t it? What you don’t know can and will hurt you!
The Definition of Ignorance
Ignorance is defined as “the state or fact of a lack of knowledge, education, or awareness”. When it comes to money, one would think that you’d almost never be ignorant about it. Doing so will have both negative short- and long-term effects on you and your wallet, and that isn’t a good thing. And yet, it happens every day to some people and has probably happened to you, too.
When we are young, we are literally babes in the woods when it comes to money and personal finances. If you are really fortunate in life, you never ever have to think about money when you’re a kid. Your mom and dad do all the worrying and planning and dealing with money issues. You get to coast along without much concern other than an occasional hissy fit about wanting some toy or other experience that the other kids have or are doing and you need your parents to supply the means to get it. In most cases, middle class kids and up get those things with minimal distress and sort of grow up thinking that money isn’t anything to really get too concerned about. But…
At least now, truthfully, we all know a couple of reality wake-ups that are 100% true once we get out in the real world.
First of all, there are millions of people here in America and hundreds of millions all over the world that just don’t grow up in a home where Mom and Dad handle their finances so well that you’d never ever be aware of money issues. It’s a fact that a lot of kids do learn all about money and it’s in a completely upside down way, very different from what I just described above. Things like getting food, clothing, and shelter just to survive can be anything but an “ignorance is bliss” scenario and those families struggle just to make it through until tomorrow.
One big problem is that our school systems traditionally don’t teach much if anything about personal finances and many parents feel ill-equipped to pass on any lessons about earning, spending, saving, or investing to their kids as they grow. If that happens to you, then you may be in trouble.
A truth about being a kid and learning the money realities we need to know is simply this one: If your parents don’t teach you about money when you are young, you likely grow up unprepared or even as a spoiled brat with an expectation of entitlement that can ruin your life in many ways.
The guarantee that you will never “drive over a pothole” in life is just not there. Being ignorant about the money potholes or any kind of pothole is a very dangerous way to live.
Some Basics About You and Money
Ok, let’s call this Money 101. The very first rule of thumb everyone must understand is so basic that I am a little embarrassed to even write it down. But sadly, the way people act and function shows me every day that some of us just don’t get it.
Rule #1 – Earning and Spending
Rule #1 is simply this:
You have to earn more than you spend
Look, it’s simple math. In order to remain financially solvent, you have to earn more than you’re spending in order to come out ahead. Yes, it is possible to breach a money gap with a short-term loan or responsibly use a credit card to get you through a crunch period, but overall you have to bring in more than you’re shelling out or guess what? Can you say big worry, big debt, or even the really big one… bankruptcy!
Rule #2 – Budgets
There isn’t anything more important than knowing where your money comes from and where your money is going. The exact method of how you budget is not nearly as important as the fact that you actually keep track of what you earn and what you spend. If you don’t do that, one most basic thing is that you will lose track of your money and control pretty quickly and that will lead you to many problems and regrets. What sounds so darn simple perplexes millions.
Until you understand where you spend your money and ensure that you are spending less than you earn, you are not in a good position to use any of the other financial information that you have gained as part of your financial literacy.
Rule #3 – Learning the skills of saving early and saving more
One thing you did probably hear and learn about in school math class as a kid was compound interest. What you learned then hasn’t ever changed and it never will. The gist is that the earlier you start putting money away—say for retirement, buying anything like a house or just having money for an emergency fund—the more that will accumulate thanks to the growing powers of compound interest.
It’s the “geometric” wonder that time plays on money placed into an interest bearing account that if you had smart parents was even started for you when you were just a baby! If that were the case, you may have been one of the lucky ones with a leg up on college expenses or on your first car or some other goal that every parent dreams of for their child. The big lesson here is that whether they did it for you or not, you need to learn that compound interest is one of your very best friends when it comes to saving for the future!
Is What You Buy Worth the Money?
Not everything you purchase in life is going to be valuable and grow in value down the road. Not everything you buy is an investment, and it’s important to understand the difference between an appreciating asset and a depreciating asset.
Many of the things that people purchase (a prime example of that is a car) will decrease in value over time. In fact, the second your new car rolls off the lot and into the street it is worth less that it was just a second before! How many things like that are there?
But even having said that as my prime example, it does not mean that they are bad purchases to make because a car may actually be an important factor in your overall well-being and earning potential. But what it does mean is that you should be purchasing a car at the best price you can “afford” and never buying more car than you actually need. By understanding whether a purchase is likely to appreciate or depreciate over time, you can use this information to your advantage by buying a three- to five-year-old used car and actually save money and reduce depreciation. I call that “smart depreciation”.
Learn the Essential Financial Terms and Prevent Ignorance
Risk, Retirement Planning, Stock Market and Investments, Taxes, your Credit and Mortgages and Loans…all of these are items you will come across in your adult life that will affect you in a big way for years and years. The more you can learn about them before you have to make the money decisions you may need to make, the better off you will be!
How? Well, the fastest and easiest way is to read a book, attend a lecture, or simply look on the internet for a reliable source of information. Not every resource qualifies, but the more you study, the more your ability to recognize the best ways for you will become evident!
It might just be that you never were taught any of this good stuff as a kid when it comes to money and finances. You are not alone if that’s true. But even when that is a reality, you have to come to the realization that you still have the opportunity and that you will never ever be done with learning all about it.
Financial conditions around the world are constantly changing, with everything from politics, resources, science, and financial rules forcing all of us to come up with new ways to save and better ways to spend our money. To make sure you’re making the best decisions for your own finances, read up on all the factors that affect you and understand all the changes in your own money experiences. Stay abreast of the changes in the laws and the world that can impact you and you can avoid most potholes, both big and small. Don’t bury your head in the sand, because what you don’t know can hurt you!
Are you one who learned about money as a kid? Did your parents teach you the ins and outs of good money skills? Do you have the skills now and are you teaching others those skills? Will you be able to help your children when they need it?