Important Financial lessons
“Financial training.” That was my condensed response to a question in my latest interview with Publishers Weekly. “What could have changed the lives of so many people in the Covid 19 crisis?” If more citizens had deeper financial understanding, the masses would possibly have planned and saved for this unexpected emergency more. But what are some of the most valuable lessons somebody (especially a businessman) can learn from finance science?
Following is a small selection of 10 of the most important financial lessons adapted from the 2014 book The Most Important Learning in Economics and Finance. Please note that these financial lessons are not of special significance and may be more or less relevant to you at various points in your life.
Maximize capital to survive and thrive
“Every company’s primary objective should be to maximize the wealth of its owners.”
It seems like this lesson has never been good for many of my former students in finance. It provides a triste dose of truth – your company will ultimately die without wealth.
In The Survival of the richest, this definition was further expanded by listing the three main wealth management options:
- Minimize wealth below the minimum survival requirements needed to survive
- Live on the edge of survival, where an individual only has enough wealth to survive or increase wealth beyond the minimum required for its survival.
- Maximizing wealth is the only choice out of all these three that protects you and your company best in the short and long term.
There are other business ethics lessons that can ultimately eliminate the immoral. Some more quickly than others. That is why it is best to “ethically” optimize your wealth so that you keep your reputation in check.
Diversification will optimise returns and minimise investment risk
“Everything can be diversified.”
The overwhelming proof that diversification is useful is one of the hallmarks of finance. This topic is based in Harry Markowitz’s portfolio selection book on the beginning of modern finance.
Collective funds are a perfect example of this principle. Why have just one or two stocks if you can have a mutual fund for around the same amount of money with hundreds of different types of stocks? Diversification should be extended not only to stocks and bonds, but ultimately to all investment forms (including real estate and collectibles). Diversification can also be used in other aspects of life, such as diversifying our friends and hobbies.
Each job can be worthwhile
“Every worker should improve the living and loving environment.”
The Great Pandemic Depression has taught us to respect hard work even though it does not seem attractive. Most people want to make their kids lawyers and physicians as they grow up. However, let’s face it—these jobs aren’t for everybody. Simple jobs such as work at a supermarket or food shop have recently gained respect for many. If it were not for these workers, who would help us serve the food that we needed in quarantine for our homes?
The Great Pandemic Depression would alter any survivor’s financial thinking process
“Generally, major economic disasters have a lasting effect on the potential financial affairs of their survivors.”
Like all other big events before this (The Great Recession, The Bubble of the Internet, and the Great Depression, of course), we know that financial education is of true importance.
With so many companies which have failed or decreased their workforce, unemployment is widespread. These habits are more likely to persist for many people who learn to survive on less even though circumstances change. The living spirit is checked every day. There is no question that there will be a number of financial wounds to remind us of these darker moments forever.
Finance helps you to manage your assets
“Mastering finance science will help you manage your own money.”
The first step to learn how to handle your money is to learn from experience, from what you or both teach finance. When you learn about science, you learn from many people who have made mistakes and come up with a solution. You can save valuable money and time by researching financially successful people and finding the right ways to handle your resources. We call it “standing on the shoulders of giants” in science. Why not reinvent the wheel?
Those who control money are the source of the worst and most good
“The source of all good and evil is not money.”
Have you ever heard the phrase “the root of all good and evil is money?” How can that be true? Money is just a commodity we use for such activities as the purchase of products or services. Money has no consciousness — its strength resides in our minds. Thus, people can control the money and they can decide to use their money to protect or to kill our world. It is people who can use their money.
Experiences of poverty have meaning
“A lifetime of useful lessons can be given by experiencing poverty.”
Somehow, being poor is a gift — you can learn things about money that people can never really understand without it. This lesson is not a “staying” bad commercial, but to emphasise the importance of “being.” Many who are poor before are usually better able to cope with future unforeseen large wealth losses.
Rich people who aid others in understanding the true aim of excess wealth
“If you die, you cannot take your fortune with you.”
You know someone rich with gullible money or her, you know the kind Ebenezer Scrooge? This financial lesson was particularly designed for rich people who never use their money to support others. As hard as it is to believe, people are tens of millions, even trillions of dollars, who never give to charity or use their money to support others — even their own families.
If you have more assets than your “prosperity tip” (a term developed in The survival of the wealthy book), which illustrates the exact amount that additional wealth adds no value to an individual, all of the over-wealth would better be used if it were reserved for people or causes in your lifetime or immediately. At least you can manage who gets your riches with this strategy when you die. What does it mean if you can never use this money to have a positive impact on the world? The simple truth is that if a rich person dies as a misery with a cold heart, that perception becomes his or her true legacy.
Families are costly to build
“The overall cost of living for one person is increased for one family.”
This lesson is most advantageous for those who want to marry and/or have children. Life is costly for every individual. For basic necessities such as food, water and utilities, you need money.
If you add only one person to your family, you will have to add all her bills to your family now. When children contribute to this calculation, several other particular bills have to be taken into consideration. Before you take this life course, it’s best to set up the pieces as much as possible to cope with the financial problems.
Wisely save your money
“Any money you save will give you a later choice.”
The old phrase “a buck saved is a buck” taken will literally destroy your financial life. Because investing is a part of saving, you can lose anything if you invest in the wrong financial items. Many years of savings could lead to zero incomes during your retirement. Let’s imagine that for years you saved all your money and stored it under your bed. If tomorrow your house burned down, all that money will be gone.
The aim of this lesson is to save money for your future—but not just to save money. You must also ensure that your investment and risk management approach are well matched with your objectives. The stronger your investment is, the greater your chances of working for you when you need it.
Financial literacy is important
If the masses were far more financially informed, we could never know the exact outcome of the Covid-19 pandemic. Could many companies be saved? How many? How many? It is however certain that in these uncomfortable times, more financial education may have made life a little more comfortable for many people. The core of finance is future planning, especially emergencies.
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