The 8 things they didn't teach you at school about money

You don’t have a rich family that can tell you stories about how well they have done in life? Nobody ever told you how to invest or save? Or maybe even nobody told you ever how to buy a house, take out a loan or how to make a budget? Well, this will change after this post!

We all want financial independence, but other than increasing your pile of money, there are some practical issues that you need to master. They do not necessarily have a lot to do with earning money but more so with knowing how the system works.

Most of these things haven’t been taught in schools, and even if have, most of the time just briefly.

So here we go, the 8 things most schools don’t teach you about money:

1. Getting a mortgage for your first home

Did anybody ever tell you how to get a mortgage? Imagine you done with college, starting your first job. You want to start early and buy a house, but now what?

It’s not easy and there are many steps involved in getting your first house and mortgage! Before starting, check your credit score, decide on the type of mortgage and check mortgage lenders.

Then fill out a mortgage application (with tons of paperwork, like W-2s, pay stubs, bank statements and tax returns) and compare the results of the mortgage lenders you applied to (details on how to apply for a mortgage in later videos). After reviewing, you pick the right lender and you answer all the questions they have. Finally before signing, check that you actually get what you expected!

Practical Tip: Did you know that if you pay less than a 20% down payment, you will have to get private mortgage insurance (also called PMI). This basically means you pay extra to protect the bank lending you the money. This adds to your monthly mortgage payment. So maybe you want to save up a bit more before buying the house and getting a mortgage.

2. Invest, not save!

Schools normally teach you to save 10-15%, but do you think 10-15% is enough? If you want to save for retirement or big purchases the math is easy. Look at this:

Imagine you earn approximately 4.500 USD a month (which is the median US wage as of 2022) and you save 10% of it (450 USD, which amounts to 5.400 USD a year (450 x 12 = 5400). An average person graduates from college at 22 and retires at 67, meaning 45 working years. This means a total of savings of 243.000 USD (45 x 5.400 USD). You think this amount is enough for just living of your retirement? This is excluding any big purchases like a house or a car. You will have to save at least somewhere between 30-40%.

In addition to this, saving is not an option, you have to invest. Looking at data over the last 20 years, putting your money into a savings account would only have given you slightly less than 3%. This will add close to nothing to your savings of the last 20 or so years. Investing in the stock market on the other hand would have given you an average of 9%, which is triple!

Practical tip: Starting early with this is key, as you will see in the next topic, the law of compounding. So starting in college or even earlier would be great!

3. The Power of Compounding

We talked about the difference in returns when talking about investing and saving. Now let’s see this example.

Joe Doe puts 100.000 USD in his bank account in the year 2000 and earns 5% on a yearly basis, meaning 5.000 USD per year. At the end of each year he takes it out and goes on holiday to enjoy himself.

Jane Doe also puts 100.000 USD in her bank account in 2000 and earns the same 5%. But instead of going on a holiday, she puts the interest back into her bank account. For this reason, she gets 5% interest on the interest again, which is called compounding.

You want to know the results?

By the end of 2023, Joe Doe has still the 100.000 USD in his bank account (while having had some nice holidays of course).

However, Jane Doe has now 322.510 USD! She tripled her money.

That’s the power of compounding. The younger you start the better!

Practical Tip: Now add the higher investment return compared to savings to the compounding effect and you can see investing is much better than saving!

4. Budgeting

The fact is that without a plan you most likely spend way more money than you should. In order to reach your financial goals, you need to master the act of budgeting. But what does budgeting actually mean? It means make a plan for your income and expenses. For this you need to know where your money is coming from and where it is going to. Secondly, set your goals, where is it that you want to be in 10, 20 or maybe 50 years? After that you can make your plan and decide on how much you need to set aside each period to reach your goal. A final step in the budgeting process is to monitor your progress continuously.

Practical tip: Make separate buckets for categories of spending, in this way it’s easier to track and psychologically easier to maintain.

5. Your credit score

Credit scores are mostly used for taking out a loan or credit card, but they are also used by other institutions to see whether they can trust you, for example future employers, insurance companies, government agencies and even landlords.

How can I improve my score? Well there are certain things your credit score is affected by the most, these are payment history, age of your credit, percentage of credit limit used, total balance, recent credit behavior and available credit. Improving these will help your credit score immediately.

Practical Tip: See my next video on how to improve your credit score with practical examples!

6. Taxes: Filing Taxes and how to minimize them

You are right out of college and started working, when do you need to file taxes? If not, when do you have to start paying taxes? How is your earnings taxed if you are doing some freelance work? These are few important things which nobody teaches us.

There are ways to deduct money from your taxes with for example private student loans or ways to claim missing money. Of course every country has different tax laws, but the general rule is the same, before entering the workforce you somehow have to know some basics of taxation. Also, did you know you might have to file state taxes next to your normal taxes?

Practical Tip: You don’t need to file physical papers as tax, you can also file taxes online. Taxes are due normally around the 15th of April of each year, but you have to file them beforehand.

7. Alternative Income Streams

School teaches you that after graduation you should get a 9-5 job, work hard and get promoted and then have kids and grow old. Well, reality isn’t really like that. There are other income streams besides the normal 9-5 jobs. When you are out of college or just started working you acquire skills. You can leverage these skills and earn either money on the side or have your own business. Having your own business and doing well often gives you more freedom.

Some examples of alternative income streams are freelancing, investing wisely, a youtube channel, Amazon FBA or drop-shipping business.

Practical Tip: If you have a few hours to spare each week, think about what an extra monthly 200-500 USD would do to your life. Maybe that’s the extra freedom you like or it’s just a tryout for a better life after working 9-5?

8. Psychology of money

Finally, nobody teaches you anything about the psychology of money. Often when dealing with money, emotions take over and we can make the wrong decisions. There is a branch called behavioral finance and it is all about psychology and finance. They basically show the mental effects when we deal with money. It is best explained by an example.

Imagine you have 1.000 USD and have to choose either to gamble where you have a 50% chance of winning 1.000 USD or a definite win of 500 USD.

Mathematically they are the same but according to research, people prefer to take the certain win.

We can ask the same question differently. Imagine you have 1.000 USD and have to choose either a gamble where you have a 50% chance of losing 1.000 USD or a definite loss of 500 USD.

What would you choose?

Again, mathematically, it’s identical, but this time people prefer to take the gamble.

This experiment was done by Kahneman and Tversky, who are famous for their book “Thinking fast and slow”. This effect is called loss aversion. People feel the pain of losses much more than the pleasure of winning. For this reason they will take any chance to get out of a loss.

These concepts and many more are included in the study of behavioral finance, it’s basically the study of how your brains plays games on you when it’s about money. Did you have this at school?

Practical Tip: Check yourself, are you doing this in real life? The stock market is a great example.

So there you have it! These were the big 8 personal finance topics they don’t teach you in schools. Learning these topics is extremely valuable and will help you in your journey to financial independence. The sooner you master them the better and easier your life will be. In the end it’s all about you, make sure you prepare yourself and believe in yourself!