Integrating Financial Education Into The Education System – Part 2
Given the various flaws in the education system, many people become more vulnerable to bad financial advice. As a result, financial problems occur and this causes them to gain financial wisdom the hard way. Since prevention is better than cure, it is definitely better if we wire in sound financial concepts into students before they step into the outside world. The following single lesson below is one I deem extremely important for students to know, adding on to the 3 addressed in Part 1.
One vital lesson the education system ought to have is the difference between capital gains and cash flow. Capital gains allow you to make money from a difference in buying and selling price. Basically, you must liquidate a certain asset in order to gain money. For cash flow, investors basically receive money every month from an investment without working for it. One example would be cash flow.
As capital gains investments are affected by wild market swings, they are more of a gamble despite the fact that they can rake in more money in the short term. In contrast, cash flow investments provide steady and stable passive income over a long period of time and you can easily reinvest the money elsewhere to gain more cash flow.
Given the rapid pace of change today, investors must invest for both cash flow and capital gains, with greater emphasis however placed on cash flow investments. This is because money today is a currency and must move to an asset that increases cash flow to prevent losing value to inflation.
Also, investing for cash flow takes most risk out of investments because even if asset prices fall, the investor still receives his passive income monthly. However, if the price of asset increases, you get a bonus! This is much safer than capital gains investments.
In stocks, the cash flow investments available would be dividend stocks. A rule of thumb to remember is that a dividend yield exceeding 5% would be a good stock while that below 3% would mean that the stock is over-priced, suggesting an eventual dip in prices.
If many people knew this general rule, they would not have fallen prey to traps in the market during October 2007 and March 2009. In October 2007, the stock market hit a high of 14,564 with only 1.8% dividend yield. Using the rule, it would have meant that stocks are too expensive and investors shouldn’t enter. Nonetheless, many did not know this and entered the market during this time, causing heavy losses.
To make things worse, history simply repeated in March 2009 when the stock market hit a low of 6,547 with 1.9% dividend yield. This also meant that prices were too high but nevertheless, many people thought prices were low and entered the market. Here, they lost money once again.
In conclusion, given the repetition of such gaffes, it is definitely vital that schools guide their students well on knowing cash flow and capital gains investing well. This would definitely groom them into more financially literate individuals with more means of contributing back to society.