compound interest, understanding it tells you the future value of a dollar saved as well as the eventual cost of a dollar borrowed. It can work for you, or against you. Saving vs borrowing decisions can have long term consequences, yet it often is a simple binary decision.
Martin McCue
3 days ago
There are lots of great comments here. I’d add two I didn’t see.
The first and to me, the most important is understanding the TIME VALUE OF MONEY – understanding why a dollar tomorrow is never the same as a dollar today – and being able to calculate what the difference is with some simple formulas. This is the basis for understanding things like inflation, interest, depreciation, installment purchases and compounding, among others.
The second is to understand the concept of OPTIONS – not just the investing kind, but the recognition that most significant decisions in life involve options, and that there are pretty good tools for assessing them. The value of the options you choose can depend on factors like the level of uncertainty you face, the volatility of the situation, and the length of time you want to preserve your choices. The rules governing options apply to things like job offers, moves, significant purchases, educational choices, medical procedures, marriage choices and so much more!
Bruce Keller
1 month ago
Patience is THE virtue.
Seigo Tsujimoto
1 month ago
Compound interest
Kevin Thompson
10 months ago
It seems many of us agree on the impact of savings so I will not mention that. I would venture to add the ability to effectively leverage one’s assets. Savings will get you to square one, and to create wealth you need to effectively use leverage and rates to add in exponential growth on that asset.
Banks borrow for less than they lend, so I would say act like the bank. Yes I am aware you would need deposits (savings) first, and that has been palavered on this thread, but if we are talking about a financial concept, the effective use of rates and leverage has to be up there as well.
That is interesting. So are you saying if Buffett, Thiel, Tudor Jones, Lynch, etc.. would have just indexed they would be as wealthy? It just seems to me what was once good for the goose is no longer good for the gander while all the money was made on buying into corporations and owning good companies through fundamental investing. Yet, they say the average investor should index.
Look at Buffets holdings, yet they tell you to index.
Buffet actually agrees with both of you gentlemen. He’s often said that savers with no particular expertise in valuing businesses will be well-served by indexing. He’s also said that, if you do know how to identify 3 or 4 excellent businesses, that’s all you need to create appreciable wealth (and he and Charlie Munger have certainly proved that with Berkshire).
Jeff
1 year ago
Pay yourself first, live below your means, educate yourself about all things finance.
Jerry Pinkard
1 year ago
Live within your means. Regardless of your income this is most important and is essential to apply other financial concepts as well.
Don Southworth
1 year ago
Give away at least 10%, save at least 10% and live on what’s left.
Totally agree with this. I don’t normally comment on these questions, but came here to say, and Don beat me to it. Along the same line, as Christians, my spouse and I believe God owns it all and we are just the stewards of what He has given us.
Mike Drak
1 year ago
I’m a big believer in the F.I.R.E. concept other than the R.E. part.
Philip Stein
2 years ago
If we confine our discussion to personal finance, I would claim saving is the most important concept.
If we’re unable to live below our means and save money, we will have no money to invest and a bleak financial future. From my perspective, everything else pales in comparison.
Curiously, the inability to save isn’t restricted to people with low incomes. The book “The Millionaire Next Door” provides examples of people with high incomes who, due to lavish living, have little net worth. You don’t have to be a humble wage earner to fall into this trap.
+1. In my experience, the propensity to save has little to do with your salary in the sense that a lot of wealthier people have no money sense, they simply make enough that their mistakes have fewer consequences… and the only thing that stops a lot of poor people from saving is the need to spend the income they do have on necessities. Money is an artificial concept, and because of that I believe the truth is that a large number of people of all incomes and ages and backgrounds make very poor money choices.
I’m inclined to agree. It all starts with good savings habits — and, without them, all is lost (at least from a personal finance perspective).
Bob Wilmes
2 years ago
Luca Pacioli was the Venetian monk who invented double entry accounting (and also taught math to Leonardo de Vinci). This is the most critical financial concept to understand.
Until you understand simple accounting you will never understand how assets equal liabilities plus equity, that is needed to understand what is the value of an investment is.
OUTinMinnesota
2 years ago
What you don’t measure, you don’t control.
What successful business operates without a budget… and absolute confidence that they’ll never run out of money?
Bonfante Gardens in Gilroy California is a good example that. The guy who founded it was visionary who had made a lot of money in the grocery business… but he tried to run it without standard financial controls and ended up having to sell it. It’s now called Gilroy Gardens and it’s owned by the city. It’s a wonderful place to bring young children, and i think it’s the only amusement park I routinely left more relaxed than when I entered.
Roboticus Aquarius
2 years ago
The most important concept imho is automation.
Automation allows everything to happen without you having to manage it, which means you are free to do more valuable things with your time. Retirement savings, insurance, debt reduction (or avoidance) can all be put on autopilot, making you free to chase your interests and/or earning power. Automation also allows you to decide which goals are important to you and to prioritize those goals. This means that you are making progress towards your goals while you simply focus on the details of life.
Richard Gore
2 years ago
I’m going to agree with Albert Einstein and say ‘Compound interest.’
This is one reason why the legacy of slavery, followed by Jim Crow, and the theft of Native Americans’ land should be addressed.
I’m just going to concur with most important financial concept being Compound Interest. I saw a chart once that showed how investing the max in your IRA over the first six years (then stopping) would result in just about the same total after 30 years (I think) as starting to invest the max beginning in the seventh year and continuing for the next 23. This was years ago when the max contribution was only $2K, but it really got my attention. Imagine putting in only $12K over six years early on vs. putting in $48K over 24 years later, then ending up with almost the same total at the end (within a few $K). I was floored — and absolutely convinced. MAGIC! BTW, I held onto that article with the chart and shared it with many youngsters for several years before I lost it, and I think it made impressions on many.
Mike Zaccardi
2 years ago
As Carl Richards says, “The entire purpose of financial planning is to align your use of capital with what‘s important to you.”
Of course, compounding interest and returns is important – being on the right side of it makes the world of difference.
Not being afraid to upgrade your life a little bit when your financial situation improves is OK! Lifestyle creep gets a bad rap, but isn’t that the point? You want to better your life and have more fun when you can. You just have to be sure to keep up your saving at all times.
Yes, lifestyle creep can boost happiness and, indeed, we should aim for a gradually rising standard of living. If we stayed at Motel 6 in our 20s and 30s, Hyatts in our 40s and 50s can seem like a great luxury. By contrast, if it was the Ritz Carlton in our 20s but bad money management compel us to stay at Motel 6 in our 50s, we should brace ourselves for unhappiness.
Catherine
2 years ago
Know what you care about, and save for the inevitable rainy day, so that unexpected circumstances will interfere less with living according to your values.
R Quinn
2 years ago
Save as much as you can as early as possible and save regularly no matter what.
Andrew Forsythe
2 years ago
Spend less than you earn, invest the rest, and start early in life!
compound interest, understanding it tells you the future value of a dollar saved as well as the eventual cost of a dollar borrowed. It can work for you, or against you. Saving vs borrowing decisions can have long term consequences, yet it often is a simple binary decision.
There are lots of great comments here. I’d add two I didn’t see.
The first and to me, the most important is understanding the TIME VALUE OF MONEY – understanding why a dollar tomorrow is never the same as a dollar today – and being able to calculate what the difference is with some simple formulas. This is the basis for understanding things like inflation, interest, depreciation, installment purchases and compounding, among others.
The second is to understand the concept of OPTIONS – not just the investing kind, but the recognition that most significant decisions in life involve options, and that there are pretty good tools for assessing them. The value of the options you choose can depend on factors like the level of uncertainty you face, the volatility of the situation, and the length of time you want to preserve your choices. The rules governing options apply to things like job offers, moves, significant purchases, educational choices, medical procedures, marriage choices and so much more!
Patience is THE virtue.
Compound interest
It seems many of us agree on the impact of savings so I will not mention that. I would venture to add the ability to effectively leverage one’s assets. Savings will get you to square one, and to create wealth you need to effectively use leverage and rates to add in exponential growth on that asset.
Banks borrow for less than they lend, so I would say act like the bank. Yes I am aware you would need deposits (savings) first, and that has been palavered on this thread, but if we are talking about a financial concept, the effective use of rates and leverage has to be up there as well.
Index Investing-irrefutable by anyone
That is interesting. So are you saying if Buffett, Thiel, Tudor Jones, Lynch, etc.. would have just indexed they would be as wealthy? It just seems to me what was once good for the goose is no longer good for the gander while all the money was made on buying into corporations and owning good companies through fundamental investing. Yet, they say the average investor should index.
Look at Buffets holdings, yet they tell you to index.
Buffet actually agrees with both of you gentlemen. He’s often said that savers with no particular expertise in valuing businesses will be well-served by indexing. He’s also said that, if you do know how to identify 3 or 4 excellent businesses, that’s all you need to create appreciable wealth (and he and Charlie Munger have certainly proved that with Berkshire).
Pay yourself first, live below your means, educate yourself about all things finance.
Live within your means. Regardless of your income this is most important and is essential to apply other financial concepts as well.
Give away at least 10%, save at least 10% and live on what’s left.
Totally agree with this. I don’t normally comment on these questions, but came here to say, and Don beat me to it. Along the same line, as Christians, my spouse and I believe God owns it all and we are just the stewards of what He has given us.
I’m a big believer in the F.I.R.E. concept other than the R.E. part.
If we confine our discussion to personal finance, I would claim saving is the most important concept.
If we’re unable to live below our means and save money, we will have no money to invest and a bleak financial future. From my perspective, everything else pales in comparison.
Curiously, the inability to save isn’t restricted to people with low incomes. The book “The Millionaire Next Door” provides examples of people with high incomes who, due to lavish living, have little net worth. You don’t have to be a humble wage earner to fall into this trap.
+1. In my experience, the propensity to save has little to do with your salary in the sense that a lot of wealthier people have no money sense, they simply make enough that their mistakes have fewer consequences… and the only thing that stops a lot of poor people from saving is the need to spend the income they do have on necessities. Money is an artificial concept, and because of that I believe the truth is that a large number of people of all incomes and ages and backgrounds make very poor money choices.
I’m inclined to agree. It all starts with good savings habits — and, without them, all is lost (at least from a personal finance perspective).
Luca Pacioli was the Venetian monk who invented double entry accounting (and also taught math to Leonardo de Vinci). This is the most critical financial concept to understand.
Until you understand simple accounting you will never understand how assets equal liabilities plus equity, that is needed to understand what is the value of an investment is.
What you don’t measure, you don’t control.
What successful business operates without a budget… and absolute confidence that they’ll never run out of money?
Bonfante Gardens in Gilroy California is a good example that. The guy who founded it was visionary who had made a lot of money in the grocery business… but he tried to run it without standard financial controls and ended up having to sell it. It’s now called Gilroy Gardens and it’s owned by the city. It’s a wonderful place to bring young children, and i think it’s the only amusement park I routinely left more relaxed than when I entered.
The most important concept imho is automation.
Automation allows everything to happen without you having to manage it, which means you are free to do more valuable things with your time. Retirement savings, insurance, debt reduction (or avoidance) can all be put on autopilot, making you free to chase your interests and/or earning power. Automation also allows you to decide which goals are important to you and to prioritize those goals. This means that you are making progress towards your goals while you simply focus on the details of life.
I’m going to agree with Albert Einstein and say ‘Compound interest.’
This is one reason why the legacy of slavery, followed by Jim Crow, and the theft of Native Americans’ land should be addressed.
I’m just going to concur with most important financial concept being Compound Interest. I saw a chart once that showed how investing the max in your IRA over the first six years (then stopping) would result in just about the same total after 30 years (I think) as starting to invest the max beginning in the seventh year and continuing for the next 23. This was years ago when the max contribution was only $2K, but it really got my attention. Imagine putting in only $12K over six years early on vs. putting in $48K over 24 years later, then ending up with almost the same total at the end (within a few $K). I was floored — and absolutely convinced. MAGIC! BTW, I held onto that article with the chart and shared it with many youngsters for several years before I lost it, and I think it made impressions on many.
As Carl Richards says, “The entire purpose of financial planning is to align your use of capital with what‘s important to you.”
Of course, compounding interest and returns is important – being on the right side of it makes the world of difference.
Not being afraid to upgrade your life a little bit when your financial situation improves is OK! Lifestyle creep gets a bad rap, but isn’t that the point? You want to better your life and have more fun when you can. You just have to be sure to keep up your saving at all times.
Yes, lifestyle creep can boost happiness and, indeed, we should aim for a gradually rising standard of living. If we stayed at Motel 6 in our 20s and 30s, Hyatts in our 40s and 50s can seem like a great luxury. By contrast, if it was the Ritz Carlton in our 20s but bad money management compel us to stay at Motel 6 in our 50s, we should brace ourselves for unhappiness.
Know what you care about, and save for the inevitable rainy day, so that unexpected circumstances will interfere less with living according to your values.
Save as much as you can as early as possible and save regularly no matter what.
Spend less than you earn, invest the rest, and start early in life!