Here are 5 basics of personal finance and investing every person should know.
- Spend less than you earn – The simplest way to do this is to practice Make, Save, Live (in that order). That is, Save before you Spend. No matter how much money you make, if you do not spend less than you earn, you will never become wealthy;
- Time is your most valuable asset – You must understand the power of compounding as young as possible. Become familiar with the rule of “72”. Learn how starting early can yield huge gains. Use your savings to buy things that generate passive income;
- Minimize investment fees – Use low-cost index funds to build and maintain a diversified portfolio. Understand that most mutual fund managers cannot and do not add enough value to compensate for the damaging effects of the annual fees they charge;
- Know the difference between “Investing” and “Trading” – Don’t try to “win” by beating others in the market. Instead, develop a suitable allocation of assets and participate in the long-term value creation of our economy;
- Conviction is the #1 trait of successful investors – Have the Conviction to stay the course in spite of the inevitable market ups and downs, and changes in investor/media sentiment over your investment lifetime. Study the long-term behaviour of our market to understand that volatility does not always imply risk.