With all that you will learn in university, one thing you won’t learn much about is personal finances. And when you graduate, and enter the adult world for keeps, you’ll probably be exposed to many financial concepts that will be completely alien to you. The best way to deal with it is to learn as many of the most basic financial concepts as you can. Here are five you to help you get started.
Compound Interest
You’ve probably touched on this concept either in high school or at university in a math course. But math courses tend to teach compound interest as yet another mathematical concept, rather than as one that has a profound financial impact on your entire life.
Compound interest works in two ways. When you are a lender – or a saver, in the conventional sense – compound interest represents the growth of your money over a prolonged period of time. Compounding is not just interest on your basic savings, but also the interest that you earn on the interest on the money that has already accumulated (“interest on your interest”). It’s a concept that enables you to grow money much faster than surface factors indicate.
Related: Investing Series – Compound Interest Magic
Perhaps even more important is the impact that compound interest has when you are a debtor. The same compounding factors that work as an advantage for you as a saver/lender work against you as a borrower. Interest magnifies the impact of the debt you pay. For example, if you borrow $200,000 for a mortgage to buy a home, you can end up repaying something approaching $400,000 in principal and interest based on today’s low interest rates.
Understanding the concept of compound interest is fundamental to realizing why it is better to be a saver/lender than a borrower. The earlier in life you understand it, the better your entire life will go.
The Basics Of Investing – Including The Time Value Of Money
Many students graduate from university having superior skills in computer technologies, engineering, healthcare fields and other specializations. But they have little understanding of the basics of investing.
This can lead to several built-in disadvantages as your life unfolds:
- Putting off investing until you are in your 30s – or even 40s – because you don’t understand the concept or importance of investing.
- Not investing sufficient amounts early in life. It is a fact that the earlier you begin investing, and the more that you put into it, the more that you will get out of it later in life (time value of money).
- Getting into the wrong investments. This is easy to do if you don’t understand the importance of diversification.
- Making bad investments – losing a lot of money early in the game, which discourages you from investing much of your life.
Some of the ways to avoid making these mistakes include learning about various investments – including stocks, bonds, mutual funds, and exchange traded funds – portfolio theory, and the time value of money.
Related: Check Out Our eBook on ETF Investing
That last point is important. The time value of money helps you to understand the importance of getting into the investment game early to have the greatest positive impact on your finances later in life.
Insurance 101
Unless you major in insurance – and not many people do – you’ll probably have very little understanding of the many kinds of insurance that are available and necessary. Most young people know about the importance of having life insurance, health insurance, and auto insurance. But there is also renter’s insurance, homeowners insurance, disability insurance, and various business insurance types, including umbrella coverage.
Related: All You Need to Know About Insurance For Students
Each of these policies provide protection against a specific kind of disaster, and having such coverage can avoid having you stuck in a financial hole early in life. You should try to familiarize yourself with these insurance policies sometime before you graduate, that way you’ll have some idea as to what kinds of coverage you will need going forward.
Managing Debt Burdens
Here in the 21st century debt has become the Great Enabler. What ever anyone can’t afford out of existing resources, they simply borrow as though it is a low risk, ready source of cash. While that may be true when you’re actually borrowing the money, when the time comes to repay it you could be building a financial crisis into your life.
This is the precise reason why so many university students take on such enormous student loan burdens. They see the loans as completely necessary in order to obtain their education, but commonly underestimate the negative impact that will occur once repayment begins. If student loan debts are too high, your entry into the adult world after graduation can be seriously impaired, and for many years.
Some understanding of the harsh realities of debt could keep you from facing this fate.
The Importance Of Cash Reserves
As a university student it often seems as if you are living life on little more than luck and a prayer. You’re doing whatever you need to do at the moment to get through that moment, but there is little time and few resources to allocate to the future. One of the most basic money concepts that you need to learn before entering adult life is the importance of having cash reserves.
Just by having a few thousand dollars saved up, you’ll not only have cash for emergencies and for contingency expenses, but it can also be a major stress reliever. Just knowing that you have some money put away can keep you from worrying about living the classic hand-to-mouth lifestyle that so many people live these days.
This is a simple concept, but one few young people grasp, and it is not taught in schools. You have to learn it on your own, and the sooner you do, the better your financial situation will be.
Do you spend much time trying to learn basic financial concepts, or do you assume that you’ll pick it all up later?
