Money
5 biggest money secrets I've learned in my 25 years as a financial educator
In this refreshingly simple guide, Citro’s trusted financial educator, Nicole Pedersen-McKinnon, shares 5 money principles that could change your financial life.
By Nicole Pedersen-McKinnon
I can tell you one thing for sure after a now-25-year career as a financial educator: when it comes to money, the secret is not ‘aptitude’ but ‘attitude’.
(A lot of experts make it seem like the former – vested interest maybe?)
But your ‘money mode’ matters far more than your knowledge of complex financial products or fine print.
In fact, I have identified just five simple principles that power most financial success.
Here are the easy but highly effective elements it takes…
Principle 1: Get compounding working for you
No, managing money is not rocket science but do borrow from physics – specifically from renowned physicist Albert Einstein.
Famous for his theory of relativity, the premise that’s far more relevant to money mastery is what I call his theory of relative worth.
Firstly, you need to know that Einstein allegedly called compounding – which is when you earn interest on interest so that your savings snowball – the “eighth wonder of the world”.
But he went on to give this vital insight: He [or she] who understands compound interest, earns it… and he [or she] who doesn’t, pays it.
You – of course – ‘earn it’ when you save or invest. All you need to do is leave your money there… so it swells faster and faster as you make earnings on your interest (or money you didn’t even save).
For example, just $6 a day saved for 45 years – untouched – at an 8% investment return becomes $1million… and you’ve only had to contribute about $100,000 from your own pocket.
Yep, $900,000 is free.
In other words, compounding has multiplied your money by 10.
By contrast…
Principle 2: Ditch debt fast
The flipside of Einstein’s theory of relative worth – “He [or she] who doesn’t understand compound interest, pays it” – applies when you take on debt.
And some debt is initially good – particularly to get a house, which you otherwise probably couldn’t afford by saving alone and that will hopefully rise in value.
But the key to maximising wealth is to get in then get out quick.
Putting some numbers on that to drive it home: a pretty typical $600,000 mortgage at roughly the best interest rate today, which is around 5%, would cost you $452,263 in interest over 25 years.
But accelerate repayments such that you clear it in 15 years and you part with some $100,000 less: $349,002. (That saving is from paying $460 a month extra.)
More from Nicole on this: Floor the accelerator and pay off your mortgage in the next 7 years.
And the below helps you with this a lot….
Principle 3: Loyalty is for (financial) losers. And respect fees
Now, in your quest to get ahead, paying too much is keeping you behind.
We’re talking fees on your investments, which drag down your returns…. fees on your loans, which if you add them to the loan, compound to cost multiple times the original amounts… and just fees in your day-to-day life when you’re transacting with money – everything from ATM fees and credit card surcharges (until they’re banned) to late-payment slugs.
When it comes to money, disorganisation is the enemy of optimisation.
And this is a related concept to what I call the “lax tax”. Every year the ‘relative’ price of your every financial deal or arrangement will effectively become more expensive. This is because over time, more competitive deals will be available elsewhere.
So, you need to keep on top of what you’re paying – and (possibly, probably) keep switching.
I have another term for it if you don’t: Being a “bill D.I.L”… which stands for Digitally Induced Laziness.
Try this: Do this one thing at least once a year to save big money
Don’t let direct debits and annual automatic rollovers cause more and more money to leach unnecessarily from your pocket.
Principal 4: Invest in yourself
We’ve been talking all about the ‘money out’ side of your financial equation. But you need to have a razor-sharp focus on the ‘money in’ side, too.
And this particularly applies if you’re doing a hard slog, drudging job that you don’t like or no longer like.
Investing in yourself, maybe via more training or even an occupation change, could be the best money you ever spend.
If you could be earning more for your 40 hours a week and having more fun, why wouldn’t you?
And remember if you undertake training in your existing field, it could be tax deductible.
Principal 5: Target goals so sweet you can almost taste them
There is none among us – I believe – who wouldn’t simply spend everything we earn when they earn it… unless we have a good reason.
Sure, mostly that reason is bills and life’s costs.
But the above four principles can – hopefully – also generate some excess to put towards the good stuff. The holidays, the house upgrades, the experiences with your loved ones that makes life wonderful.
However, you’ll likely never get any of this – at least not for the lowest possible cost (in other words, without going into debt) – unless you target it.
Make goals that are short term, medium term and long term. But more than that, you should “cost” and “calendar” them.
That’s as simple as:
- ‘Cost’ equals the straight-up price without paying interest (which you are avoiding in this process); and
- ‘Calendar’ is that cost divided by how many pays there are until you want that beautiful item or experience.
And sticking that on your fun horizon is the surest way of making sure you will actually achieve it.
Trust me – I’ve seen the above five money-mastery principles change people’s lives for the better. Over and over again.
Feature image: courtesy of Nicole Pedersen-McKinnon
This article reflects the views and experience of the author and not necessarily the views of Citro. It contains general information only and is not intended to influence readers’ decisions about any financial products or investments. Readers’ personal circumstances have not been taken into account and they should always seek their own professional financial and taxation advice that takes into account their personal circumstances before making any financial decisions.
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