Students Should Learn About Investment to Be Financially Independent

Introduction

Becoming financially independent entails hard work, commitment and financial literacy. According to the Commission for Financial Literacy and Retirement Income (par. 1) financial literacy is the ability to make strategic decisions regarding the investment and management of money. It entails having financial skills and knowledge, as well as, understanding, motivation and confidence to make financial decisions.

Further, financial literacy induces business ideas that can be transformed into viable opportunities; protects people from investment risks, fraud and scam, thereby making people self-sufficient. For students to be financially dependent, they should learn about investment, which is concept presented by financial literacy. Features of healthy portfolios include goal oriented, risk management, capital appreciation and liquidity. Liquidity refers to how fast or easy an asset can be converted to cash. Shares and mutual funds are extremely liquid. On the other hand real estate investments are illiquid. Every investment or portfolio must have an aspect of risk management or insurance. Good portfolios have a purpose or vision. That is to say, good investments must have feasible goals. This paper discusses the why students should learn about investment to be financially independent. This is accomplished through the analysis the link between financial education on investment and financial independence under various contexts. In other words, the sections that follow substantiate the relationship between informed investments and financial independence.

Financial Literacy and Investment

Benjamin Franklin once said that “If a man empties his purse into his head, no man can take it away from him. An investment in knowledge always pays the best interest”. An investor may make losses or lose intellectual property rights (IPR) to theft, but nobody can deprive them their financial education. The sooner a person seeks education on investments, the sooner they begin to reap the profits that compounds in their portfolio. Like annuity, financial education is one time investment that offers dividends for the rest as long as the investor lives. Life is filled with critical choices. Those who are well informed have the power to improve their lives and in turn influence the world around them positively. Financial literacy is meant to help individual apply valuable skills in saving, investing, career planning, money management and retirement planning.

Investing allows people to turn the wave of working for money by making money work for them. For example, for individuals with fixed deposit accounts and through the concept of compound interest, the accumulated interest receives additional income without working for it.

As of consequence, the initial deposit (investment) can expand with time. By exploring business strategies to create and protect wealth, students must recognize the importance of information to manage their resources and lives. As noted by Ryan (2), choices affect income, and income influences savings. Savings are funds set aside to meet future demands. Typically, savings is the differences between income and expenses. Therefore, through financial education and networking, students must explore various methods of earning more money so as to channel the difference in viable investments. Financial independence begins with goal setting, career planning, and an understanding of income source and taxes. Saving and investment principles enable students to buy and sell strategies effectively. In the same context, saving and investment principles enable students to understand regulatory agencies, financial markets and laws that affect their businesses.

Some investment options are very flexible than others in terms of liquidity. While an investment can be purchased for a small amount of cash, others can only be acquired using large investment amounts. Students can choose among saving and investing options that are feasible.

Investment option has low, medium and high risks. As noted by Wright and Pugh (106), the best approach to investment for starters is to buy low and maximize profit. As income is earned or generated and wealth is accumulated through investment, risks must be assessed to protect the assets. Through financial education, students learn how to use or allocate credit wisely. In addition, financial education equips students with the knowledge and skill of minimizing costs, and how to resolve credit problems.

Investment and Financial Independence in various contexts

To invest, one must have a basic understanding of money and financial markets. The common financial literacy principles that serve as pillars of investment include budgeting, financial goals, contracts and employment models. The level of financial literacy influences the saving and investment culture significantly. In fact, financial literacy enables people to understand the prerequisites of achieving a lifestyle that is financially sustainable, ethical, balanced and responsible. Financial education benefits people of all ages and different income levels.

For students, it can provide the fundamental tools for budgeting, saving and investing so that debt and expense are minimized. Financial literacy helps families to create a financially disciplined environment and save for their children’s education. Older workers can be enlightened about retirement plans to ensure that they lead a comfortable life after retirement.

School or College Environment

Investment is a critical macroeconomic variable that can trigger economic growth at an individual or national level. The rationale for learning about investments is strong because when students are well-informed about saving and investing, they generate or expand their income sources and create wealth while they are still young. As people tend to become older, they tend to invest in less risky ventures because their financial independence day (retirement) is at the corner. This makes it logical to start saving and investing early in life, probably while still schooling. Lincoln Investment (par. 1) notes that “Saving is easy and you can save more throughout your career if you start early.” Savings contributes to financial independence because wealth, which is an equivalent of financial security, is a function of savings and investment. Increasing saving corresponds to limiting expenses and increasing income. To achieve this, focus is placed on increasing the difference between income and expenses. Financially independence requires that debts are paid off. High interest loans constrict budgets hence should be prioritized. It is almost impossible to generate wealth without investing subject to the fact that savings are liquid. Typically, savings are more liquid than investments. That is to say, savings can be converted to cash easily as compared to investments. An investment is termed as illiquid if it is not convertible to cash promptly.

Financial independence is characterized by illiquid investments because they usually pay higher returns than liquid investments. To attain financial independence, people seek to balance their long-term (illiquid) investments and short-term (liquid) investments to give them the flexibility of converting their investments to cash when need arises. In line with Wright and Pugh (109), personal saving and budgeting plays a critical in the effort to achieve independence. Budgets would enable students to balance their assets and liabilities within a given period.

The key to financial independence is to manage personal finances, asset and liabilities much like a business focusing on the value and efficiency of the income utilization. The analogous business should be agile, flexible or adaptable. Given that every person’s situation is different in terms of location, age and goals the principles of investment induced by financial literacy should serve as the backbone and bridge to financial independence. In the view of the fact that no investment is likely to meet all the needs of an individual, it is imperative to consider liquidity, risk and the rate of return (ROR) in the process of choosing an investment for various purposes.

Family or Societal Context

The achievement of financial independence is a critical indicator of the contemporary transition from childhood to adulthood. In other words, financial independence is a marker of maturity in the present day society. Lee and Mortimer (45) contend that financial independence is a result of effective communication about the importance of work within the family context during adolescence. That is to say, financial independence is a function of financial literacy and social motivational factors such as good shelter, clothing and health food. Based on extensive data spanning from adolescence to young adulthood, the two authors determined whether communication and socialization practices regarding finances and works influence the perception about financial independence and confidence in the economic environment.

The results from the study indicate that financial independence is fostered by completion of formal schooling. Further, the family or societal environment that emphasizes on self-efficacy through commitment to work and economic investment induces confidence in young adults within the economic realm thus fostering financial independence. Wealth creating and financial independence are areas that require financial literacy and services. Families require a range of saving and investment products as ingredients of wealth creation. In the same context, households need financial or management skills such as planning and controlling for the purpose of containing family activities within their means or budget. The outcomes depend on their risk perception, as well as their level of financial literacy.

By learning investment, people would understand that some investments have the capability of satisfying more than one financial role. For example, if a family acquires a home through mortgage, the home may appreciate rapidly and yield a good profit if the owners resale it. In the same context, equity is built with the remittance of regular mortgage payments. Further, the owners can borrow against their accumulated equity to address immediate or long term financial needs. From this end, it is apparent that investments contribute to financial stability in the sense that people do not have to rely on their primary occupations exclusively. Therefore financial education within the realm of investment is not only bridge to self-sufficiency, but also pillar of economic growth and financial well-being.

Work Environment

In reference to work environments, financial education enables employees to save and invest for their retirement. As much as financial education for employees concentrates on retirement, the results of investment education impacts positively on financial independence.

Currently, smart companies broaden their employees’ perspective about investments through structured financial education sessions. Based on the exquisiteness of financial independence, employers, educators and governments continue to move beyond retirement education and offer comprehensive investment education which emphasizes on strategic management, saving, personal budgeting and minimization debts and risk. The whole idea of financial education regarding investments at any work setting is to create financial security, which is largely dependent on the perceptions and attitudes of workers towards investments. Wright and Pugh (106) contend that instead of perceiving investment as gambling, people should consider them as gifts and tools of self-efficacy from God. This is a sensible are of transforming thinking because as facts change, the mindset should also adapt.

Investment prepares people for their retirement and beyond. People need to plan for the time when they will stop working and enjoy the benefits of their investments. According to Ryan (318), retirement is a period when a person is not working but in a position to meet their expenses through other income sources. The state of financial independence is almost equivalent to retirement in the sense that under financial independence, an individual is able to meet his or her expenses from other sources besides their primary occupation. This can only be achieved through investments, which generates income that can be translated to wealth. Wright (113) highlights that, “To maximize savings and investment opportunities, take full advantage of employer-based matching retirement funds.” Financially independent individuals do not necessarily work for money, rather their invested money works for them. Some of the sources of retirement income include social security employer-provided retirement plans, savings and investments. Economically speaking, financial education on investment options around the work environment is an investment in itself in the sense that knowledgeable human capital has a direct impact on their employer (company output) and the society as whole.

Through financial education, workers learn to prioritize investments for financial independence. According to Wright and Pugh (109), the key pillars of investments are savings, budgeting, as well as, clear goals and effective strategies. People have different investment goals at different stages during their lives. Therefore, financial success and independence is determined by the choices made. Making good choices and strategic decisions involves an understanding of financial goals, the risk involved and how each choice or decision made will react or respond to market and economic dynamics. It is only then that an individual can begin to make strategic investments. Before investing, a feasibility study and other research work is conducted. The data collected can be analyzed with assistance from financial planners. Financial planners are individuals or entities that offer advice regarding investment decisions. Characteristically, financial planners work for brokerage or investment firms, as well as at financial institutions

Community and National Context

With respect to national or global investments, the basic economic principles learnt are strategic decision making, pricing strategies, monetary and fiscal policy, inflation and business cycle. Numerous studies have indicated the correlation between investment and GDP at national levels. In other words, there is a positive relation between gross domestic products and investments. Progressive investment at state or national level leads to economic growth which is proportional to the GDP. Ultimately, venture capitalist and local investors benefit from financial stability or independence. As people continue to earn, they tend to invest and generate more wealth. To this end, the dependency ratio improves because more and more jobs are created. Furthermore, financial education is an investment in itself because it increases income or earning potential; secures retirement; increases return on investment (ROI), protects portfolios from unnecessary risk, losses or debts; and improves the quality of the investor’s life. Typically, the unique skill set that makes or breaks financial success are not taught in school. People graduate with either their four year or five years degree programs, yet they have no knowledge about personal finance, savings and investments. Financial literacy is a necessity and a skill set that must be developed to facilitate wealth creation and the enjoyment of financial independence. Financial independence or wealth is a function of savings and investments. As Vanguard Asset Management (4), “Quite simply, you invest to create and preserve wealth.” Inferring from these facts, it is apparent that financial education is the starting point of generating income, saving, making strategic investment and eventually creating sustainable wealth. It is also important to note that regardless of the income or savings, financial independence or financial security can only be achieved through wealth creation and strategic investments. This translates to the assertion that self-sufficiency can only be experienced if an individual learns to create and manage financial sources other than the primary occupation.

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