FNCE 101

One of the most frequent complaints about the school system is that students don’t learn practical skills. Forced to sit in class and hear about algebra instead of learning how to earn, save and invest money, students aren’t prepared to be independent adults.

If you choose to head off to college, the education on personal finance doesn’t get much better than it was in high school. In college, you can dig into lots of abstract topics that touch on the money. Courses in economics, corporate finance and future and options trading all involve learning about money, but you still don’t learn the necessary financial management skills that are so essential to a happy life.

If you do learn personal finance before you are 21, it is from your parents.

Many kids go through high school never working a job. They go into university and are surrounded by people spending their parent’s money or digging themselves into a massive holes of debt. The reality of making payments on that debt four or five years in the future is so far from mind that it is hard to think about. To the seventeen or eighteen year old starting college, the future burden of interest payments on their student debt is hard to understand. When you don’t even understand how compounding interest works, it is hard to imagine the impact the debt will have on your life. Making payments on that debt five years down the road is something too far in the future to worry about in your first few years at college.

If you want to take the alternate route, and go traveling instead of starting college, you have to learn about personal finance immediately.

There is no doubt that some people go out traveling using their parents money, or that you can also get yourself into debt with a 6-month backpacking trip, but for the most part, the people who go off traveling have earned it. They’ve worked, saved, and been self-reliant in starting their adventure.

Going to college is the conventional route. It won’t raise eyebrows. People will be eager to support you. Going traveling instead is not conventional. Your parents probably won’t be supportive of the idea. You can’t count on financial support from your parents, or a loan from a bank.

If you want to go on an adventure instead of starting college, you will have to earn it.

In this way, you start learning about money as soon as you decide that you want to travel. You have to compare costs of living to make a destination decision. You need to figure out how much money will you need every day. You have to think about how long you will go for and realistically budget for that amount of time.

Looking around the world at your options you are introduced to the concept of radically different costs of living; how you can spend $50 a day to live in Europe, but $15 a day in South America. You will be facing the real world trade off’s that are missing from the lives of most college students.

Once you’ve decided where you are going and how much money you’ll need to save, and you will need to learn how to actually save money. Living within your means is a skill, and it is one of the most critical skills for success in life.

To save successfully before your trip is massively educational. But even while you travel the personal finance lessons keep coming.

While you travel, you learn that spending money in the present means not having something in the future. In studies of small children, kids who can defer enjoyment go on to earn more money and have more positive life outcomes decades later. Deferring enjoyment isn’t a character trait, it is a learned skill. Seeing the consequences of your inability to defer enjoyment and digging into the reasons will teach you how to do it better in the future.

Traveling is an exercise in deferring enjoyment. Each day, you face the choice of spending your today to do something fun or saying no today so that you can have more days traveling at the end of your trip. This is where your budget comes in. For probably the first time in your life you will be budgeting with a significant downside to not budgeting correctly. When you’re out of money, you’ll have to stop traveling. And that sucks because you won’t want to go home and find a new job.

There is a long list of other economic and financial concepts that you will get to experience while you are traveling.

You are forced to gain a deeper understanding of money. Everyone knows about different currency. But when you travel around between a bunch of countries you become a currency trader. When you arrive, you need to change into the local currency. You learn about exchange rates and bartering at the currency exchanges. With a little curiosity, you will find out that inflation is the reason a US dollar is equal to 25,000 Vietnamese Dong.

The concept of real vs. nominal prices will become solid in your mind when you become a millionaire upon your first trip to the ATM in Vietnam. Money is just an abstraction to represent the value you produce for others and the value you can collect from others. The numbers don’t actually mean anything at all, only in relation to the total amount. But it is easy to forget that if you use US Dollar’s every day of your life. The concept becomes clear when you change currencies every other week.

As you continue to travel, you will learn that you can leverage your time flexibility into getting more value for your money. When you eat out at lunch during a period with less demand, you can get a deal and receive more food than you would for the same amount if you had gone out for dinner. You can eat a huge lunch and nap afterward, followed by a small dinner and that results in another week of traveling at the end of your trip.

The biggest financial lesson you learn from skipping your first year of college to travel may come from an experience that you are missing out on. Four or five years down the road when all your friends are learning first hand about the effects of debt as they are faced with tens or hundreds of  thousands in debt for their college degrees.

Confronted with the prospect of paying 4% interest on $200,000 in debt you are missing $8000 every single year. $8000 is a healthy budget for a 5 month trip to a low-cost destination. When you are given debt with no interest for 4, 5, or 6 years, it is easy to ignore how costly that interest will be when you have to start paying it.

On top of that, our economy has been stalled for the better part of a decade so university graduates face the prospect of working jobs after college that they could have just gotten before they went to university. Taking on a massive amount of debt to go to college is a big decision to make, as is deciding to invest four years of your time. You may feel like you have to do it. You might feel like there is no chance to make good money without it, but the strange thing is that at the same time as having a university degree becomes less of a guarantee of a good job and a good salary, more and more options are opening for people without the stamp of approval.