11 Basic Financial Principles They Should Teach At School

June 25, 2021

1. Budgeting

Keep track of your expenses every month

Pay yourself first and then spend what is left after saving for emergencies and investing

Make sure you know where your money is going instead of wondering where it went

Assign a job to your money and let it work for you

2. Accounting

Assets are bringing money to your account

• Stocks

• Real estate

• Personal business

Liabilities are taking money from your account

• Expensive clothes

• Brand new cars

• Status items

Focus on buying assets instead of liabilities

3. Taxes

As Benjamin Franklin said taxes and death are inevitable

Educate yourself on

• Non-taxable investment accounts

• Corporate structures for side projects

• Tax deductions for your personal and business expenses

Learn how to take advantage of the tax code like the 1%.

4. The 4% Rule

Calculate your FIRE number, i.e. how much you need in assets and cashflows to retire early and become financially free

Multiply your desired annual expenses adjusted for inflation by 25

Then withdraw each year in retirement 4% to never run out of money

5. Diversification

Never keep all your eggs in one basket

Diversify your

• Investments

• Income streams

• Skills and knowledge

• Network and connections

Always have a backup plan for a rainy day

6. The Rule of 72

This simple rule helps you calculate how many years it will take to double your investments on a given annual return

You just divide 72 by the return number (e.g. 8 for 8% annual return)

Use it to create a timeline for your investments

7. Compound interest

Learn the power of compound interest and how it works for you and against you

It works against you in credit card or loan interest

It works for you in your investments

Einstein called it the world's 8th wonder

During the first years, your investments may not seem to grow much

But after that, once the wonder of compounding starts working they will skyrocket

Warren Buffet acquired more than 99% of his net worth after his 50s

8. Index fund investing

The best option for everyday investors with not much time or interest for investing is a low-cost index fund

Index funds are simply tracking an index of companies, with S&P 500 being the most notable one

Set it and forget it

9. Opportunity cost

This principle represents the potential benefits you miss out when making a specific choice versus another one

You need to weigh all the potential benefits and costs between two options before making a choice

This applies to investing and in everyday life

10. Dollar-Cost Averaging (DCA)

Stop trying to predict what's the best time to invest in the market or a specific company

Instead, invest consistently every month in regular installments, also know as Dollar-Cost Averaging

11. Inflation

Inflation is the rise in prices of consumer goods over time

It eats away the purchasing power of your money every year

Your weapons against it?