Why Investing is Part of Personal Finance
For many of us our personal finance stops at anything more difficult then balancing a check book or figuring out what bills we HAVE to pay. Investing is something done by professionals. I may use my personal finance skills to determine how much money I have for retirement, but that money gets thrown over the fence to a money manager where I don’t look at it until I need 401k loans.
If this sounds like you (and it sounded like me for years) you need to know what you are losing. By not knowing how to invest you’re losing the fundamental understanding of how compounding money works. When you learn stock market skills you learn how to determine value in things your purchase. If you combine these two skills you will make better personal finance decisions because you truly understand what you are losing by not investing the money.
For example, it’s easy to think that eating out is worth the extra $5 a day you spend because of all the hassle of cooking in cleaning. You don’t even mind when you hear that $5 a day adds up to $1,825 per year. Your money understanding is stuck in today dollars not invested dollars.
If you invested for yourself you’d know it’s not unreasonable to earn 10% per year from your money and that money you earn will earn you more money the next, otherwise known as compounding interest. In our example at 10% invested for 20 years you’d now have an account worth $104,000 when you only saved $36,500. How does that burger taste now?
Most would say personal finance is about planning your financial life. Having money earning money is what frees you up from working forever. When your investments earn more than you do you are free. How can you plan how much you need to save for this to happen until you understand investments, stock markets, real estate, bonds well enough to feel confident that you plan will get you where you want to go?
Without confidence you won’t follow the plan, spend on the short term pleasures, and end up wondering where all that money went.
