Financial Lessons People Wish They’d Known Earlier
Financial education is a journey; as we navigate through it, we often encounter lessons that we wish we’d known earlier. As part of the Stordahl Capital Management family, we want to share some financial wisdom we’ve gathered over the years. This discussion aims to shed light on financial lessons for all ages, from children to adults, as well as various milestones and savings ideas.
Financial Literacy Should Start Early
Starting from the beginning, we recognize the importance of teaching children about money.
Parents can cultivate the understanding of saving, spending, and sharing using a three-jar system, where one jar is designated for saving, one for spending, and one for giving.
This early-stage financial education can help children understand budgeting and get excited about philanthropy.
Financial Stability Helps Cultivate Peace of Mind
As teenagers, it’s essential to realize that while money doesn’t equate to happiness, financial stability can significantly contribute to peace of mind.
Understanding the basics of investing, the magic of compound interest, and how credit works becomes paramount at this stage. Encouraging teenagers to manage their allowances or job earnings responsibly can promote healthy spending habits and a clear understanding of needs versus wants.
Know Your Age’s Milestones
Each decade of our lives ushers in financial milestones that require distinct planning and action.
In our 20s, we lay the foundation for a robust financial future. This is the perfect time to begin saving for retirement and to manage debts, especially student loans. The power of compounding makes this an ideal time to start investing in retirement accounts.
In our 30s, the focus often shifts to family life and potential homeownership. Simultaneously, it’s wise to increase retirement savings and start planning for children’s education expenses.
Entering the 40s and 50s, it becomes increasingly important to ramp up retirement savings, particularly as income typically rises during this time. Furthermore, understanding the basics of estate planning and starting to draft wills or set up trusts can be part of the financial roadmap at this stage.
Once we reach our 60s, preparation for retirement becomes paramount. At this stage, you should have a retirement plan outlining the lifestyle you want and the financial resources supporting it. It is a good idea to stress-test this retirement plan before retiring. Stress testing can help identify vulnerabilities in the plan, allowing for necessary adjustments ahead of time.
Get Creative to Save More
Creative savings challenges offer a unique approach to bolstering savings. Consider the “52-Week Challenge,” where you progressively save $1 more each week throughout the year, resulting in over $1,300 in savings.
Alternatively, the “No-Spend Challenge” encourages setting aside periods where no money is spent beyond necessary bills.
Families can adapt these activities to help kids tangibly understand the benefits of saving.
Differentiate Between Good and Bad Debt
Understanding the difference between “good” and “bad” debt is a critical lesson. Not all debts are detrimental; sometimes, taking on debt can be a strategic move toward financial growth.
For instance, a mortgage for a home or a loan for further education could be considered good debt. They potentially enhance your financial position in the long run.
Conversely, bad debt, such as high-interest credit card debt for unnecessary purchases, can set back your financial health.
You Can’t Predict Emergencies, but You Can Prepare for Them
Another key insight is the importance of having an emergency fund. This is a safety net of money set aside to cover unexpected expenses or financial emergencies. It cushions against unforeseen circumstances such as job loss, medical emergencies, or urgent home repairs. Without one, these situations can lead to debt or financial hardship.
We generally recommend saving three to six months’ worth of expenses. Keep the emergency fund liquid—for example, in a savings account. You don’t want to jump through hoops to get your money when you need it in a crunch.
Understand Taxes 101
Understanding taxes and how they affect your income and investments is crucial. It’s essential to know how different types of income are taxed and how to take advantage of tax-efficient investment strategies.
Work with a Fiduciary Financial Advisor
There can be advantages to working with a fiduciary financial advisor. Such advisors are legally bound to act in your best interest, offering objective advice on investments, taxes, estate planning, and more.
Financial Planning Doesn’t End
Finally, recognize that financial planning is not a one-time event but a continuous process. Your financial plan should evolve with your life circumstances. Regular reviews and adjustments in response to changes like marriage, children, new jobs, or retirement can keep your financial health on track.
Final Thoughts
It’s never too early or too late to embark on financial education. From teaching children about money to planning for retirement, understanding finance is a lifelong process that can help you cultivate financial well-being at every life stage.
We offer a complimentary 15-minute call to discuss your financial situation and concerns and share how we may be able to help.
Stordahl Capital Management, Inc is a Registered Investment Adviser. This commentary is solely for informational purposes and reflects the personal opinions, viewpoints, and analyses of Stordahl Capital Management, Inc. and should not be regarded as a description of advisory services or performance returns of any SCM Clients. The views reflected in the commentary are subject to change at any time without notice. Nothing in this piece constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Advisory services are only offered to clients or prospective clients where Stordahl Capital Management and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Stordahl Capital Management unless a client service agreement is in place. Stordahl Capital Management, Inc provides links for your convenience to websites produced by other providers or industry-related material. Accessing websites through links directs you away from our website. Stordahl Capital Management is not responsible for errors or omissions in the material on third-party websites and does not necessarily approve of or endorse the information provided. Users who gain access to third-party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from the use of those websites. Please note that trading instructions through email, fax, or voicemail will not be taken. Your identity and timely retrieval of instructions cannot be guaranteed. Stordahl Capital Management, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.