Everyone knows they should do things that are good for their financial health like budget, clip coupons when shopping for certain items, and balance their bank accounts, just to name a few. But many of us have problems consistently creating, and much less following a budget. Also, balancing a bank account might be just as frightening to some as karaoke! The truth is, financial ignorance costs you much more than just time, but affects most aspects of adult life.
Saving 10% here or there doesn’t seem like much, but over the course of 30 years, if those saving are invested correctly, adds up to a major difference in financial status. There are some very good reasons to take your personal financial skill development more seriously. One really important reason is that it can help you become a better investor. If this seems like a bit of a stretch, let me assure you that it is not.
Let’s take a peek at how developing your personal finance abilities will help you become a much better investor.
You Learn to Save
The first way you benefit is that your brain becomes trained to reduce costs, and accurate assess opportunities for gaining more money. The more you closely watch your family’s spending habits keeping an eye out for negative trends, the more likely you are to have more money saved. This allows you to have a bigger portfolio of investments. Having a bigger portfolio spreads the risk of loss out over a greater number of instruments.
As you become more aware of tracking money through your own accounts and begin creating your own financial statements, it makes it much more likely that you will be able to decipher the financial statements of companies. Sure, it might take a little bit more self-education to work out the terminology, but in the end, your personal financial statement and that of the largest corporation boils down to the same two things. Money in, money out. The first should be bigger than the other. Once you are able to read financial statements you can begin to really separate the “wheat” from the “chaff”, thereby strengthening your portfolio even further.
Having more personal finance skills, and using them appropriately, also means you will be living well under your means. This is a great opportunity to maximize any pre-tax contributions you have available to you such as a 401(k) plan. To further improve the outlook on your retirement years, you will now also want to max out after-tax contributions to retirement funds. Sure, the money is put in after-tax, but your investment can grow undisturbed by the yearly tax on gains that Uncle Sam requires of us.
Some might worry that having all this extra money put away for retirement would leave them open to be ravaged by taxes in retirement years. This is where having an awesome financial planner and tax attorney come into play. Wealthy people are wealthy because they rely on experts to help them navigate potential monetary minefields. With your newly found skills, you will see the necessity of hiring the best experts you can to protect what you have so wisely built.
These are just some of the ways that your life can be significantly improved as your level of personal finance skill increases over time. Doing all of the above items along with other obvious actions like reducing debt, earning more, or starting side businesses, create a snowball effect that leaves your investment accounts far larger than they are today.
Becoming a better investor has a wide range of benefits which will definitely impact the size of your retirement nest-egg.
It Takes Time
No, learning to read financial statements alone won’t make you the next Warren Buffet, but it will allow you to accurately follow and decipher the information he gives in his annual shareholders meeting.
Having the ability to accurately size up your financial condition each month helps you to actually have more money left over each month. From there, it is only natural that you’d want that money to grow in the best possible conditions. This should be in portfolios that contain companies that manage their money the same way you manage yours: with frugality, economy, and wisdom.
Just think of what happens to most people who choose to invest without taking the time to understand even the basics of finance within their own homes. It leads to an investment style that is haphazard, full of risk, and subject to the whims of the current news cycle…and subject to extreme losses. That is not a place you want to be, right? Neither would I.
Joshua Gruss is the CEO of Round Hill Music