Belinda White, Fierce Girl Finance
That’s because they don’t teach this stuff in school.
Well, maybe they do these days. But most of what I know about money, I’ve cobbled together along the way. Sometimes through hard life lessons, sometimes through listening to people who are much smarter than me, and of course by reading.
So here are a couple of really important things that I wish someone had sat down and told me straight, early on in life.
The only way to build wealth is to spend less than you earn
In one of my favourite Charles Dickens stories, Mr Micawber is a sad character, always in debt and often locked up in debtors’ prison (yep, that was a thing in Victorian England). He struggles because he knows this simple fact but can’t apply it to his own life. The ‘Micawber Principle’ has become famous (well, among Dickens nerds like me and my dad).
“Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
Not only does debt have a pesky way of sticking around once you get used to it, it takes away the money you would otherwise be able to invest in your future.
We build wealth by earning a certain amount, spending less than that, and putting the remainder to work as savings and investment. It’s that little gap between the earning and the spending where all the magic happens. That’s where you find some cash to put into your share portfolio, or add to your super, or save for a home – whatever the goal is.
Unfortunately, today’s world doesn’t really set us up for the magic savings gap. We’re bombarded by ads for things we don’t need, and fed a steady diet of messages that happiness is to be found in what we buy and own.
And we are offered almost endless credit to buy these things – whether it’s credit cards, buy-now-pay-later, car loans or personal loans. Whatever money you’re paying off is money that isn’t earning investment returns or bank interest.
It’s worth thinking about that every time the checkout asks if you want to pay in four instalments, or you wonder if your car needs upgrading, or whether you can live without renovations for another year.
Boring is better than cool when it comes to money
Look, I’m not going to sit here and crow about the fall of cryptocurrency, because it has a long way to play out from here. But the recent collapse of FTX, a global crypto exchange, has seen thousands of people lose hundreds of millions of dollars. The ‘crypto bros’ who have been telling us we’re missing out on the future are suffering huge losses in their crypto portfolios – Bitcoin is down over 70% in a year (as at 18/11/22, S&P Bitcoin Index).
At the end of the day, some things are sexy but unreliable. Boyfriends included.
Of course, you would be right in saying nearly all asset classes have fallen in value right now. The difference is that the boring old assets like shares and bonds have a loooong track record to comfort us, and suggest that in due course, they’ll recover.
While it’s a good idea to look at new trends, research the market and learn about interesting stocks, boring is generally best over the long run. Reputable asset managers, established super funds, shares in blue-chip companies – these are the building blocks of slow-and-steady wealth accumulation. Sure, you might miss the rising wave of the latest tech company or cryptocurrency, but you’ll be far less likely to get dumped when the wave crashes.
Some experienced investors will carve out a small ‘play money’ section of their portfolio, where they can take a big bet on a high risk investment idea. If it pays off, happy days! If it tanks, then the money was always an amount they could afford to lose.
I personally don’t have any money that falls under the ‘ok to lose’ banner at this stage of my life, so I’m just hanging out, being boring and sleeping soundly.
And damn if I don’t feel good about it.