students graduating from school

I was pretty good academically, and came out of school with a feeling that I was capable of overcoming most obstacles. This stemmed from my ability to grasp and solve complex mathematical problems. What I wasn’t really taught at school (or home) was how to deal with life challenges…of which there are many! I personally wish I was taught these things in school;

#1 – Understand your personal balance sheet

Understanding a balance sheet, the components, i.e. assets, liabilities, income and expenses – and how to apply it to your ones’ situation. Essentially knowing your equity position, i.e. (assets less liabilities), and monitoring and managing your income and expenses. Of course, as a student it is unlikely that you own assets, probably have liabilities (student loan), have minimal income, if any – and many more expenses.

Despite this, students should be taught to understand their own balance sheet, the importance of building/acquiring assets and ensuring their income generally exceeds expenses each month. Only then will they understand their financial position.

#2 – Difference between good and bad debt

Students are graduating with even more debt, with the average UK student loan outstanding being more than £50,000 tied with an interest rate of 6%. This leads to a vicious cycle of seeking more debt to pay this down existing debt. One thing we all should be taught from a young age is the difference between good and bad debt.

Debt is ‘good’ if it enables you to purchase and acquire income-producing assets, i.e. a business, equity stake, property. These assets will improve your balance sheet position in the long run, yield returns (to pay off the debt interest) and provide collateral (and more) for the debt you take out.

Many people take out loans to acquire assets that don’t produce any income. This is known as bad debt, and includes car loans, credit card debt, quick cash loans. Cars and most consumer items depreciate (reduce in value) in the long run and produce little or no interim yield to pay of the monthly debt interest. What’s more is that the interest on this ‘bad’ debt tends to be much higher.

You can argue that a student loan will help to acquire those skills that are valuable in the workplace, and the lifetime earnings from employment can help repay the debt. However, graduates don’t earn enough upon leaving school to pay off the debt in their first few years of employment. Furthermore, life gets in the way as you take on more expenses and mortgage debt. All of which means that without a sensible payment plan, the student loan can hang around for a long time.

#3 – Power of Compounding

We should all be taught about the types of return available from different assets, i.e. interest from bank deposits, dividend income from equities and coupons from fixed income investments. Only then can we utilize the power of compounding from a young age.

Compounding is basically the ‘snowball’ effect that takes place when your earnings (from interest/returns) generate even more earnings. So your money grows faster and faster as the years roll on.

Students should be taught the huge benefit of investing a little now each month to realize the benefits in the future.
If one is patient and disciplined, their money can work for them and make a real difference in their account balance over time.

Albert Einstein once said that “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t… pays it.” He’s not wrong. The key is to start early. Another way to look at the power of compounding is to compare how much less initial investment you need if you start early to reach the same goal.

For example, a 25-year-old who wishes to accumulate £1m by age 60 would need to invest £880.21 each month assuming a constant return of 5%.

A 35-year-old wishing to accumulate £1m by age 60 would need to invest £1,679.23 each month using the same assumptions.

A 45-year-old would need to invest £3,741.27 each month to accumulate the same £1m by age 60. That’s almost 4 times the amount that the 25-year old needs. Starting early is especially helpful when saving for retirement, when putting aside a little bit early in your career can reap great benefits.

The point being, start investing from a young age and take advantage of compounding returns!

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#4 – There are other ways to make money than just the 9 to 5!

Call it my lack of entrepreneurial spirit, but when I was growing up I always thought there was one way to make money and that was through employment. Yes, I knew that certain jobs paid more than others, but it didn’t occur to me that there were other ways to earn an income.

I wish I was taught more about digital skills, and leveraging the internet to focus on passion projects – and earn money that way. With increasing numbers of people undertaking commerce and interactions online, it makes absolute sense that students should be taught the basic building blocks of an online presence, i.e. a website, providing value and marketing methods. It’s certainly something that I’ll emphasize to my son.

With so many ways to earn money online, students should be made aware of the how they can learn skills to start a venture online so that they’re not dependent on a salaried income, and can choose how they wish to work and what hours they work.

If you wish to start learning about the tools and avenues available to create a successful online business, and to get started in building your business – then click here to learn more. If this type of learning was available to me when I was a student, there is no limit to what I could have achieved by now in the online space.

If 20 years ago was the best time to start something, the second best time is now!


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