Updated: Jun 3, 2021
By Santiago Bohorquez | Canada
The average North American – let’s name him Joe – has bad habits with money. Whether it is accumulating exorbitant amounts of debt in a credit card, buying expensive designer clothes, or drinking a coffee every day of the week, Joe does not realize how these costs add up over time. He doesn’t realize either the opportunity cost of his spending. In short, he doesn’t know about personal finance. To understand how harmful this habit becomes, let’s illustrate with an example:
Joe buys a Venti Salted Caramel Mocha Frapuccino with a price of $5.25, every day for a month: the total is $160.
The S&P500, a stock market index of the 500 largest companies in the United States, has averaged an approximate yearly return of 10% over the last 40 years. If Joe, Instead of buying the Frappucino, had invested the money every month with a 10% yearly return he would have $1,020,943 in 40 years. Does the Frappuccino still look as delicious as before? On the other hand, lets assume a Lacoste or Hugo Boss polo costs $500. $500 invested one time in an index fund that tracks the S&P500 and returns 10% for 10 years will equal $1296.87, and $3363.75 after 20 years.
This is just from a one-time lump sum.
Of course, these are extreme examples. However, they show that a person with zero knowledge on personal finance will unknowingly waste money on useless items, rather than save and invest it for the future.
If the readers wish to improve their financial education, as well as their future, I recommend they learn about the following terms:
Furthermore, the following books are recommended to anyone wishing to further inquire about personal finance:
Rich Dad, Poor Dad by Robert Kiyosaki
The Little Book of Common Sense Investing by Jack Bogle
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