From chemical bonds to the Second World War, our 12-year education system appears to cover just about all there is to learn. That is, excluding the single most important concept in setting students up for future success: financial literacy.
I can almost guarantee that throughout your years at school, as you sat behind your desk in rapt attention, your teacher never devoted a single course to your financial future. This is a significant shortcoming, especially when we consider that finance is at the root of systemic inequalities in our country.
Teenagers, allow me to pose a few questions: Do you pay your own utility bills? How about taxes? Groceries? As dependents of parents and guardians, teenagers rarely need to rely on their own finances. Instead of throwing this away, we must be taught from a very young age to use it to our advantage.
The key to financial success is stunningly simple: Invest early and regularly. But, investing requires capital, and capital has to steadily come from somewhere: income.
Quite simply, there are two types of income: active and passive. Are you proficient in an instrument or subject? Teach lessons. Otherwise, you could be a barista at your local Starbucks, scan items at the grocery store, and plenty more. This is active income: trading time for money. Setting up an online business, affiliate marketing, and dropshipping items is trickier, but allows for relatively consistent income. This income is passive: you are acquiring a source of money.
Once we have income, we must invest it effectively. The simplest, most highly recommended strategy is investing your money into a market-tracking index fund.
Essentially, rather than paying fees to well-paid and well-dressed men and women on Wall Street to actively "manage" our money, an index fund simply tracks the broader market; as goes the economy, so goes your money, and this, over the long term, is a winning strategy.
At a young age, we can afford to take market risk head on, as it averages out over time during which we don’t need immediate access to this money. Conversely, a 60-year old will need more immediate liquidity, and is more affected by the shorter-term ups and downs of the market. They cannot simply ‘wait it out’.
Though this seems over-simplistic, there is one piece of magic that will drive my point home – compound interest: the key to making your money effortlessly work for you over time. Assuming the broad market doesn’t change its centurial course, and you start off with a mere $500 in an index fund adding just $200 a month to it, you will have a cool one million dollars in your account in 38 years. Change that monthly contribution to $400 and you'll get there almost a decade faster.
Make your money smarter for you by investing in yourself early. I hope this fact solidifies the rationale behind investing as early as we can. Do so and you will praise your teenage self.