Some things are best learned at the basic age of 3 or 4 like math, violin, a new language, or money. We learn at an enormous rate at that time, soaking information like a sponge. We’re wonderfully efficient learners as children because we are literally wired to absorb information.
It takes thousands of hours of practice to become good at some things. Even after putting in that effort, the odds of becoming a virtuoso aren’t great. On the other hand, far less time is needed to master the fundamentals of finance. It isn’t rocket science—far from it—and the payoff is far more assured. If you’re looking for a large reward for relatively little effort, I would argue that few endeavors can rival learning about money.
We all need someone to teach us about money when we’re growing up—and yet often it simply doesn’t happen. Below are four of the most important:
Law No. 1: Compound interest is the most crucial notion in finance. This simple concept has enormous practical implications for both investors and borrowers, including the virtues of starting to save money as early in life as possible and the tremendous cost of carrying credit card debt.
Law No. 2: Nothing else will matter if you don’t learn to save. The overwhelming majority of finance books focus on investing money. These books are alluring, because they promise a quick road to riches. But unfortunately, there are no shortcuts in finance. The most important things we can do to ensure financial success is save money. It isn’t nearly as exciting as investing—but it is indispensable.
Law No. 3: Borrowing, except for a mortgage, is the road to financial slavery. Put bluntly, non-mortgage debt is toxic to your financial well-being. Like so many things in finance, debt is more than just a money issue. It’s a behavioral issue. We’re constantly encouraged—by family, friends, colleagues and advertising—to buy things we can’t truly afford, and yet we don’t even realize it.
Law No. 4: Know your net worth. An increasing net worth is a sign of financial health. If I could only know one thing about a family to assess their financial health, I wouldn’t ask about salaries or the size of their house. Instead, I would want to know their net worth and what’s happened to it over the past five to 10 years. Net worth and its long-term trend speak volumes about the state of a family’s finances.