Earlier this month, I was talking to a friend about financial literacy and they were telling me that they felt ignorant of so much of what was available to them regarding their finances. They\’d set themselves some basic goals – they want enough money to be able to provide a good education for their (as yet unborn) children, they wanted a nicer house with more space, they knew they wanted better holidays and they wanted to make sure they\’d be financially secure in retirement.
As we were on the topic of goals, I decided to ask them whether they\’d set themselves any education goals. If they were concerned about the levels of financial literary, what were they doing to correct that?
Although I applauded my friend for having goals (it\’s rarer than you\’d think!), I was quick to point out that they\’d essentially just listed a set of situations or items they wanted to own. Did they have a set of measurable steps to take to make progress towards achieving those goals?
Being an investor requires more than squirelling money into a savings account and occasionally transferring it into a S&S ISA. It means having a good understand of what you\’re investing in, how you can invest and most importantly an understanding of the pros and cons of different investing options.
Imagine yourself stuck in the middle of a desert with nothing but the clothes on your back. The sun is beating down on you and you know you\’re going to dehydrate or starve in short order unless you get to civilisation. You come across a local tribesman who has an ample supply of food and water, but you have no idea how he has acquired it and so are helpless to acquire your own.
When we can\’t do something for ourselves, we are forced to rely on others. The other person has nothing different to us, other than one thing – knowledge. Because of a lack of education, we are totally helpless to help ourselves and become reliant on other people to understand a situation for us.
To come back to personal finance, these people are your banker, your insurance broker, your pensions advisor – maybe even your IFA if you have one. If you came across your banker in the desert with a supply of water, would you rely on him to share it with you?
We blindly trust these people because they position themselves as an authority. We assume that we can\’t understand the \’complex regulatory nature\’ of pensions, or that we\’d never be able to figure out how a hedge fund works. We convince ourselves that it\’s \’safer\’ to give our pensions to a third party to invest for us.
When I was telling this to my friend, he asked me what he should do. I told him that when I was learning the piano, I used to spend half an hour each day practising. I\’d sit down, mangle some notes, and then finish. After a week, I\’d have mastered a few lines of whatever piece I was trying to learn and could move onto the next. After a few weeks, I could play the whole piece. After a few years, I considered myself a pianist.
Financial education is no different. If generating money through investments is important to us, we can acquire new skills that will open opportunities to us. Just as I took lessons to learn the piano, I invest a little time each day to learn about investing. I follow bloggers, read books, explore financial statements. I listen to podcasts and read articles. I look at my own finances and apply the principles I\’ve learn and explore new opportunities to deploy my capital.
Half an hour a day doesn\’t sound like a lot, but believe me – this time next year, you\’ll thank yourself for the investment.