A little financial knowledge goes a long way
Each of us has expertise in something. It could be related to a profession, a hobby, or an experience we had. Being immersed in our field of expertise can cause us to lose perspective on what others do or don’t know about our specialty and what the “common knowledge” is on the topic. It might be hard for a musician to imagine that some people don’t know the difference between a quarter note and a half note. To a physiotherapist, knowing what to do with an exercise band seems obvious. A writer might expect everyone to know the difference between an allegory and a metaphor. When it comes to finances, what constitutes common knowledge is hard to assess, but is critically important.
While we certainly don’t have to know everything about everything (or even something about everything), some areas of knowledge are more relevant to the everyday lives of average people than others. Nutrition, exercise, money, relationships, and mental health are a few things that most people need and want to learn at least something about. It’s good to build a certain level of common knowledge on these topics. General interest magazines are good at building common knowledge - you might find articles on eating well, how to build a regular exercise routine into your schedule, and how to use mindfulness to manage your stress. This is all good information and if the tips provided are obvious to you, you’ve built up your common knowledge on the subject.
When it comes to personal finance, building common knowledge is important. Even if you’d rather believe the money isn’t important, it is. That’s the reality of our lives. Money determines where we live, what we eat, how we get around, what activities we can enjoy, and the state of our mental and physical health. We make decisions involving money almost every day, even if they are subconscious. A lack of money can make us unhappy, while “enough” can allow us to live our lives without obsessing about it.
The basics make a big difference
Let’s compare money to a less contentious topic: health. Like money, health impacts our lives every day – when we feel good, we don’t really think about our health, but when we are sick, it’s all we can think about. Have you ever had a pain - say a toothache - that caused you to think about it constantly? Then one day you wake up and the pain is gone and almost immediately you forget about it? If your health is good, you probably don’t think about it very much. Similarly, if you are financially sound, money won’t be at the forefront of your thoughts all the time.
Here is my “common knowledge” on the topic of eating well for good health:
1. Eat a variety of foods - “eat the rainbow”.
2. Stay away from “bad fats” and eat the “good fats”.
3. Limit the amount of sugar you consume.
4. Don’t drink too much caffeine and alcohol.
5. Choose complex carbohydrates over simply carbohydrates.
A nutritionist would have a field day with filling in the details on these topics and adding many more tips and strategies for being healthier. But do these five things make a big difference? Definitely. Even if I don’t get into any more details, I’m going to do pretty well following this common knowledge.
Personal finance is no different. Having a base level of understanding on a handful of topics will get you a long way to being better off financially over your lifetime. These tips – like the nutrition tips – are best learned when you’re young to get the maximum benefit but it’s also never too late to start.
Here are five things that I believe should be common knowledge on the topic of personal finance:
1. Understand debt, especially how credit cards work.
2. Know what your personal cash flow looks like.
3. Adopt mindful spending.
4. Manage bills properly and automate bill payments.
5. Save and invest as early as possible, even if it’s a small amount.
With these five areas covered off, we can set ourselves up for a lower-stress, healthier financial life by preventing some of the most toxic financial conditions: high debt levels, a lack of financial cushion, and over-spending.
Don't complicate it
Personal finance can feel overwhelming. There are so many blogs, books, and social media posts on the topic. While some of it is good and useful, it’s hard to sort through it to determine what’s helpful and what’s unnecessary. If you’re a beginner, use the list above to guide you. If you’re already knowledgeable, consider diving deeper by doing things like learning more about investing using exchange-traded funds, building your own cash flow and net worth statements in a spreadsheet, and tracking your spending. Just be careful about branching off into areas that are only going to add confusion, things like financial maneuvers, speculative investments, and stock trading strategies. It’s easy to be paralyzed by complexity – not unlike a “healthy eating” cookbook with complicated recipes you’ll never make.
Money doesn’t have to be complicated. A little common knowledge goes a long way.