Financial Knowledge All Adults Should Know?

[kyphysics]

What financial wisdom, concepts, and knowledge do you feel all adults should know to be literate/functional/successful in society?

If you have kids/will have kids, what would you want them to know by the time they enter the work force?

 

[russ_watters]

1. Start saving early.
2. Buy low, sell high (or better yet, buy and hold).
3. Diversify, but keep most of your savings in the stock market.

 

[Borg]

Ditto what Russ said.

4. Recognize the difference between 'needs' and 'wants'.
5. Live within your means and don't spend more that you earn.
6. Phrases like "I deserve that", "I'm worth it", etc. should be treated with suspicion if being used to justify a purchase.
7. Wait a while before making unnecessary purchases. It's funny how something you had to have loses its appeal just by waiting a week.

 

[WWGD]

There are companies that provide financial services other than those promoted by banks, Wall Street, which give access to the " little guy" , to resources available mostly to those high up. I worked as an intern for one a while back, though I was an IT intern and not concerned with the financials specifically. And, of course, the other advice given here also works.

 

[vela]

To expand on Russ's advice:

1. Don't invest in individual stocks without doing proper research on them.
2. If you're too lazy to do the research or you don't know what the right questions to ask are, just go with index funds.

 

[newjerseyrunner]

If you plot your savings to an equation, the first and second derivatives should be positive and the second should be higher than inflation.

 

[Vanadium 50]

Buy low, sell high

My favorite advice along these lines is "Buy a stock. When it goes up, sell it. If it doesn't go up, don't buy it."

 

[Borg]

My favorite quote is this one from Jimmy Snyder.

My wife and were advised by Bear Stearns to buy, but Merrill Lynch said we should sell short and that's what we did. But the stock went up so we had to drop our shorts and go with Bear Stearns.

 

[mheslep]

My theory: A good way to impart financial sense into adults is to buy a stock for kids. A share or two of Mickey Mouse causes interest, and an understanding of that what goes up might come down, and that saving over the long term adds up.

 

[Stephen Tashi]

What financial wisdom, concepts, and knowledge do you feel all adults should know to be literate/functional/successful in society?

If you have kids/will have kids, what would you want them to know by the time they enter the work force?

You could ask the same question for "if you have parents...".

Elderly people need to know what to do when they receive urgent notices in the mail that that their car's warranty has expired.

 

[infinitebubble]

Interesting topic. Wished they had financial planning when I was in High School and even during college. I learned my knowledge from watching the practices my dad and mom had during the years. They mentioned saving, saving everything I can, going to school having others pay the bill, buying property or a home early in my career. Well I listened well...

Today I live almost with no debt whatsoever, house is only thing left with a 10 year mortgage recently refinanced so we can pay off before retirement in 5 years... no car payments as new cars are bought and paid cash, thereby minimizing break downs and repairs. My two kids went to college free of tuition (Georgia has Hope Scholarship) something I learned about in Seattle so I moved to Georgia (Savannah) when the kids got to elementary school. We still have all the tuition we saved up for them and will put into a trust for them. We own a sailboat free and clear, only payouts are slip fees, insurance, and monthly hull cleaning.

Our financial accounts are handled by Schwab and it's accruing nicely for our retirement. My wife is a teacher here in Georgia so she has a very nice pension plan along with the bennies the state provides them when they reach retirement age. We both have Roth IRA accounts so put the max amount in them... but savings over the years and two homes that have ballooned since 1995 here in Georgia are what really is the financial arrow in the nest egg that we'll use to live comfortably in retirement years.

 

[Gigaz]

I bought my first stocks recently, mostly EU tech, but it's too soon to tell if I will see a proper return.

My advice would be:

1. Buy things which you are generally familiar with.
2. Interest is something you get for taking a risk.

 

[Greg Bernhardt]

"It's not about how much you make, it's how much you spend"

 

[infinitebubble]

d

"It's not about how much you make, it's how much you spend"

Exactly... it is how much one spends that determines how one can save or invest. While my co-workers making similar incomes as I were buying homes many times what in reality they could manage with adjustable rate mortgages, I was buying property that was modest with fixed rate mortgages... when the ARM came to it's end they could not afford their homes anymore, sold for a loss or lost their home in the mortgage fiasco of the late 2000's.

I've had stocks since my early days of UTC employment and the stocks have grown since 1978 when I went into the plan, 1988 is when I got out of UTC but the stocks remain with me since they have fully matured... I think they'll continue to grow until we sell them during our retirement. Since we put the max amount in Social Security (due to income) we are sure to max out on the payout for Social Security when that time comes. I think early planning is of upmost importance... Though it helps to make a great salary... that comes through many years of employment and moving up the ladder... I've been in this engineering stuff for over 39 years and will work it another 5 years before I close the door to my office and call it quits.

 

[russ_watters]

"It's not about how much you make, it's how much you spend"

The way my favorite investment book put it is: "A penny saved is TWO pennies earned."

And even that is conservative.

 

[DrDu]

2. Interest is something you get for taking a risk.

I think this is one of the most important and fundamental insights in financial mathematics and has led even to Nobel prices (e.g. for Black and Scholes). Nevertheless, I doubt is general knowledge.

 

[WWGD]

This is not a brilliant insight, but buying generics can save you a good amount over the long run.

 

[russ_watters]

This is not a brilliant insight, but buying generics can save you a good amount over the long run.

Actually, it is brilliant: most people don't recognize that buying things is "investing".

I've recommended this book before:
https://www.amazon.com/dp/0547447256/?tag=pfamazon01-20

The author spends a significant fraction of the book explaining the investment value of the purchasing of goods. Among the other advice besides buying generics (which is a good one):
1. Buy in bulk (non-perishibles particularly).
2. Store items long term if you can/if you see a deal.

These are related of course, but if you buy and hold, that's an investment. Not only do you lock in the sale price, but you also beat inflation. If you maintain an average inventory of, say, 50 cans of tuna fish, eating them in order from oldest to newest for 20 years, at the end of the 20 years you have the equivalent of 50 cans of new tuna bought at 2007's price.

 

[Mikezilla]

Basic algebra -specifically exponents- is really all a kid needs to know as far as math. The laws of thermodynamics would help too: for every gain, there is a loss. This applies to financials as well (no such thing as "printing" money). A primer on how the banking system works (available on the Fed Reserve website) would help as well. Most high school students should be able to comprehend.

More advanced topics would entail how mom and dad are getting screwed by politicians left and right in relation to healthcare, and why it's not a good idea for them and junior to spend tens of thousands of $ on a college degree that's approaching worthlessness.

 

[russ_watters]

The laws of thermodynamics would help too: for every gain, there is a loss.

Welcome to PF!

You need to be careful with that one -- it sounds a lot like the common fallacy/fallacies that wealth and the stock market are zero sum games. That for one person to gain money, another must lose it. It isn't true for a growing economy. Everyone can win at the same time.

...and why it's not a good idea for them and junior to spend tens of thousands of $ on a college degree that's approaching worthlessness.

The investment value of a college degree is dropping, so people should do what they can to maximize it -- but it is nowhere near worthlessness for most degrees/colleges.
http://www.economist.com/news/unite...-return-higher-education-would-be-much-better

 

[kyphysics]

Anyone here listen to Dave Ramsey? What do you all think of him?

I always feel: 1.) guilty and 2.) motivated after listening to him.

So much more I could be doing to improve my finances. And I get motivated to do so after hearing him scold people.

 

[Astronuc]

Make sure one uses a registered investment advisor, or fiduciary, otherwise, invest in companies that provide reasonable dividends and have reasonable price-to-earnings ratios.

Learn about compound interest.

Do research on low cost investment/financial products, and minimize use of debt, especially high interest rate credit cards.

Consider the following:


Even more surprising, or shocking

 

[Borg]

Even more surprising, or shocking

This doesn't surprise me at all. I've been telling my wife for years that you can't tell how rich someone is based on their home, cars or spending habits.

 

[Vanadium 50]

c.f. "The Millionaire Next Door" (Stanley and Danko)

Excerpt from the beginning:

* On average, our total annual realized income is less than 7 percent of our wealth. In other words, we live on less than 7 percent of our wealth.

* Most of us (97 percent) are homeowners. We live in homes currently valued at an average of $320,000. About half of us have occupied the same home for more than twenty years. Thus, we have enjoyed significant increases in the value of our homes.
...

* We live well below our means. We wear inexpensive suits and drive American-made cars. Only a minority of us drive the current-model-year automobile. Only a minority ever lease our motor vehicles.

I am a millionaire. My net worth is approaching $2M. None of my neighbors have a clue that that's true: there are only two clues - I have a service cut my grass because I am often on travel, and I have a nice car that is only a year old. (However, I tend to drive them for a long time) Other than that, it's a modest house in a nice, but not rich, neighborhood. My watch isn't a Rolex. I got it at Target. I shovel my own snow. I don't have a maid.

In about 3 years I will be able to retire - substantially sooner than retirement age. My plan is to keep working as long as a feel like it, then retire and do something else for as long as I feel like it, and when I die, anything leftover goes to charity.

 

[kyphysics]

Compound interest is awesome.

That's what I'm learning. The save/invest early (albeit, you can never be too old to improve your finances) principle is key! Time is the friend of money well invested.

I've been keeping an expenditures log and next to every purchased item I write "necessity" or "want"...I'm trying to eliminate a lot, if not nearly all, wants to use that money to place into savings and investments (which can grow over time with compound interest in ways that cannot be grown in a shorter period of time even if putting in double the money).

Another things I'm learning: DON'T TOUCH THOSE INVESTMENTS if you want them to compound. Lots of people put money in and then treat it like a bank account and take money out before time and interest can go to work on them. Gotta have discipline!

 

[Greg Bernhardt]

Compound interest is awesome.

With bank interest rates so low where can you go to store money that actually earns respectable interest? Perhaps there are some stocks with nice dividends, but even then you need a lot of shares to make it worth it.

 

[kyphysics]

With bank interest rates so low where can you go to store money that actually earns respectable interest? Perhaps there are some stocks with nice dividends, but even then you need a lot of shares to make it worth it.

Yeah. The financial success stories I read about were from people who invested in the 70's, 80's, etc.

The growth rate of our economy in the U.S. is not the same today. We're in the dumps.

I'd invest in low cost index funds if I had the money.

 

[Greg Bernhardt]

I'd invest in low cost index funds if I had the money.

But how do those generate compound interest?

 

[russ_watters]

With bank interest rates so low where can you go to store money that actually earns respectable interest? Perhaps there are some stocks with nice dividends, but even then you need a lot of shares to make it worth it.

The stock market. It isn't called "interest", but the principle is the same.

 

[Imager]

To retire, the average used for budgeting is you can spend around 4 to 6 percent of your total investments per year. Investments don’t include your house, car or silverware. This should cover reasonable inflation.

Remember it is just an average...

 

[kyphysics]

But how do those generate compound interest?

Not really compound interest, but just a place to get a higher return than a savings account. I was just saying that it's a better place perhaps to invest one's money these days (low cost index funds that is).

 

[DrClaude]

I suggest those interested in these matters listen to the podcast The Phil Ferguson Show. It is 1/3 skeptical (i.e., evidence based) investing and 2/3 atheism, but you can skip that latter part if you are not into it.

 

[Bandersnatch]

Even more surprising, or shocking

The only thing I find shocking about it, is people trying to repaint their spendthrift and living beyond their means as 'financial illiteracy', to gain sympathy.

Reminds me of that recent thread about 'struggling' silicon valley employees.

 

[TeethWhitener]

I'm constantly amazed at the number of people who don't take advantage of employer matching for retirement funds. I want to shake them and say, "They're actually offering you free money! Why wouldn't you take it?"

 

[Vanadium 50]

I'm constantly amazed at the number of people who don't take advantage of employer matching for retirement funds.

I am amazed at that, amazed that people don't put enough in it, and amazed at how many put their 401K's into cash or similar.