College is often one’s last chance to live a care free life before adulting hits. I was your typical college student during the first three years of college. I spent money on alcohol, ate out all the time despite having a meal plan, and eagerly awaited the next source of income that likely did not come for another ten days — luckily ramen noodles and pizza rolls existed! However, during my senior year of college, one class forever changed my perspective on money.
Rather than taking a corporate accounting class that I could likely learn on my own, I decided to take something a little more fun, and quite honestly more important. I took a personal finance class. I learned about topics such as emergency funds, investing, and much more. If anybody has the opportunity to take a personal finance class, whether it be in college or a side class, I highly recommend you take one!
Here are some key perks of being financially literate before I graduated. Bear in mind that even if you have graduated many of these tips are still relevant to your own life.
Time to Make Mistakes
Everybody hates making mistakes. It can be very time consuming to fix a mistake or extremely costly depending on your situation. One of the perks of becoming financially literate early on is that you have a lot of *time* to fix your mistakes.
A real life example of this is actually a friend of mine who regularly reads my blog. This individual used to have a similar salary to me but lived far beyond his means. They were racking up credit card debt, and struggling to keep up with the minimum payments on their loans and credit card payments. Luckily, they saw my Facebook post about my blog and really immersed themselves in the world of personal finance. Since they have learned about FIRE and abolishing the paycheck to paycheck lifestyle, they are rapidly crushing their debt and are striving to build wealth.
This is not an uncommon story as thousands of people who read personal finance blogs have their financial epiphany. Imagine knowing that you had a higher net worth as a baby ($0) than you did at the age of 25 due to debt. That is scary… luckily time is on our side to fix our financial situation and begin building wealth.
Time to Compound Wealth
Albert Einstein famously said, “Compounding is the eighth wonder of the world.” When it comes to building wealth, compounding is arguably your second greatest asset. Wonder why? The answer is simple — time is the greatest asset. Without time, compounding will be minute in its effect.
One of my favorite examples is the example my professor showed the class on the very first day. Person A is a 25-year-old with no invested capital who contributes $10,000 a year into the stock market at a rate of return of 7% for 25 years. Person B is a 30-year-old with no invested capital who contributes $12,500 into the stock market also at a 7% rate of return. Both individuals are depositing a total of $250,000 by the age of 50 but one person comes out with a far superior net worth.
At the age of 50, person B would have a stock portfolio worth $548,315. Not bad for a $250k investment! While this surely is not a small sum of money, person A would have accumulated a whopping $676,765 by 50. This is the power of compounding and the power of having time on your side. Starting five years earlier generated an additional $128,000 in wealth.
Time to Develop a Wealth Building Strategy
Having a strategy to building wealth is crucial. You cannot just save your money and aimlessly invest it without knowing what your strategy is. For some, this strategy may be a simple, yet effective, index fund only plan. It involves minimal stress and has historically had 7-8% returns per year. For more savvy investors it may involve a mix of stocks, real estate, crowdfunding, P2P loans and much more.
It is important to understand that over time your strategy will evolve. Nothing should be static. Right now I am only investing in stocks because that is what I deem the best use of my limited capital. However, within the next three years, I have hopes of entering the real estate market to supplement my passive income from dividends.
While there are certainly other perks of being financially literate early in life, time is the common theme. Whether it be time to fix your mistakes, or the additional time to allow compounding to take effect, it pays to be financially literate early on.
Rather than wasting 5 or 10 years of my life blowing through my paychecks purchasing materialistic items that do nothing to benefit my life, I am building wealth. If I were not financially literate, I cannot guarantee I would be on the same course as I currently am.
How has being financially literate changed your life? If you are not financially literate, what are you doing to change that?