This Sunday, Aug. 14, is National Financial Awareness Day, a good reminder to take investing and saving seriously in order to build financial stability and prepare for the future.
To learn more about finance, The Daily spoke with Gregory Harmon, assistant professor of banking and finance at Weatherhead School of Management.
Read on to learn Harmon’s thoughts on the importance of investing and why being financially literate matters.
1. Finance is much more than Wall Street and markets.
Finance, or the study of money, plays a role in every company, whether it be a bank, investment firm or the grocery store or manufacturing firm in your town. It also plays a role in your everyday life, like balancing your checking account or managing your credit cards or other obligations. It is important to have a basic understanding of finance to be able to manage the financial aspects of your life for today and through retirement.
One of my favorite podcasts is Animal Spirits with Ben Carlson and Michael Batnick of Ritholtz Wealth Management, where they talk about current financial issues in a clear and easy to understand way.
2. The hardest part about investing is getting started.
Setting an account up to save for the future has gotten a lot easier over the past 10 years, but people are still afraid they do not have enough information to know how to invest. Turns out the most important decision to make about investing is to start putting your money into the stock and bond market, even in index funds, without trying to pick any stocks. The vast majority of your return is not determined by which stocks you pick but by simply being invested.
If you want to start investing, I would recommend The Little Book of Common Sense Investing by John C. Bogle, the father of indexing and founder of Vanguard Investment Management.
3. Compounding is your secret weapon.
Compounding, or earning interest on interest, grows your money without you doing anything. From this perspective the longer you invest, the more you earn from compounding.
For example, putting $1,000 into an account with a 2% interest rate earns $20 the first year. Because of the interest paid on your interest earned, by the 10th year that annual interest credit will be $23.90, or 20% larger! But it also works against you for the money that you owe, like a student or car loan, or a mortgage. So it is important to be aggressive about paying down your debt.
4. Save as much as you can.
The more you add to your savings or investment accounts, the longer it has to grow and compound. Even adding just $5 per week (the same cost of a fancy coffee) will grow to over $10,000 over a typical 40-year career, before the effects of an investment return or compounding.
5. Pay attention to your tax refund.
Many people are excited when they get their tax refund from the IRS and actually plan to use it for a vacation or special purchase each year. But if you are getting a large refund then you have been giving a free loan to the U.S. Government for most of the year. You should be happier to get no refund or to have to pay a small amount, so that you can keep your money to save and invest and then be able to take a better vacation. Or better yet, put that difference into your savings or investments. If you get a large refund, adjust your withholding using a new W4 form with your employer to reduce the amount taken out of every paycheck.