5 things about money that should be taught in school

I remember learning about the sum of the angles in a triangle, how to solve quadratic equations, calculus, principles of heat, types of soil, nomenclature of species etc. in my school. I hardly use any of it in my day to day life. Most of us spend our life times in the pursuit of health, wealth, and happiness – I don’t recall any of these being taught in the school.

Managing money is something many people find a challenge. People are working too hard or too little without understanding how much they need. They are not saving enough or saving too much and missing out on life. They not investing at all or are taking unwarranted risks with money. Most of this can be avoided by teaching this at school. Teaching kids about money, I believe, is relatively easy and should be done at schools so that the kids feel equipped with the right tools in their life’s journey.

  1. Spend less than you earn – most people don’t understand that creating wealth (and happiness) is all about managing ones expenses than managing ones income. People have much greater control on their expenses than the income. The trick is to figure out what one needs and then work towards it rather than constantly pursuing and upgrading ones “wants”. Many people are on a constant treadmill to earn money without having specific goals and when they have the money they upgrade their lifestyle by taking a bigger mortgage or car loan and get back on the treadmill. I am not against working, I believe it’s a privilege to work and one should work as long as one is able and willing. But work should be its own reward and it should not be only in the pursuit of money. One should look to do the work that one really enjoys.
  2. Borrow cautiously – We are now living in the world of “everything on EMI”. Borrowing has become very easy and convenient. Borrowing is trying to have things that will be paid for by tomorrow’s income. We are also paying the lender fees (as interest) which effectively reduces tomorrow’s income. When we borrow and purchase something we are paying a premium for it – you can read our article “Real cost of your loan”. One needs to use borrowing very cautiously especially for consumption – does one really “need” that phone or car on EMI. Borrowing and investing rarely leads to creation of wealth. Please think about it, if it was so straight forward, why that person would lend you money instead of investing it in the same asset.
  3. Power of compounding: Principle of compound interest is taught in schools without driving home its significance. Albert Einstein said “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” Compounding and how to use this in ones investments should be taught at school. Compounding can ensure that your money is working as hard as or harder than you are.
  4. Basics of financial products: Building blocks for all financial products are Equities, Fixed income products, Real-estate and Commodities. One needs to understand how and why these products work (risks associated with them and the potential rewards). To understand financial products one needs to understand the concepts of value and value creation.
  • Commodities are not creators of value but a store of value. Value of Commodities is predominantly determined by demand and supply. Indian’s are obsessed about gold – gold in the long run has been a poor investment.
  • Real estate, like commodities, is an ingredient to creation of value – building used as a factory, agriculture, or an apartment complex. It is that business that is deploying the real-estate that is creating value. For a large part real-estate is similar to commodities where it is also a store of value or an ingredient to creating value. Owning the primary residence when one can reasonably afford it is a good decision. But owning real-estate for wealth creation may be a risky bet.
  • Fixed income products help create value by lending capital to a business for a predetermined return. The risks with debt are lower and so are the returns generated. Prudent businesses will take on debt only when they are able to create value for the owners – i.e., return on debt has to be lower than return on Equity.
  • Equity is taking a partnership in a business – this has significant risks and rewards are commensurate with the risks. Investing in equity should be taken up only if one understand the underlying business or one can take an overall exposure to equity through Index funds.
  1. Invest wisely:

One needs to remember significant part of happiness is determined not by having more but by wanting less.

 


 IndusWealth:Making your money work for you

About Praveen Reddy

http://in.linkedin.com/in/praveenreddyinduswealth

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