I know history isn’t everyone’s favorite subject, but it’s imperative to learn from the past. It’s our responsibility to constantly improve ourselves and our society based on what we’ve learned from the past. Besides, learning from history can help you with your personal finances too, so it’s nothing but a blessing to have the privilege of learning from past successes and failures. Whatever your current stance on history is, let’s hone in on how great it is by learning financial tricks from the past!
Who Cares About History?
Well, everyone should care about history. I know your teachers may’ve scared you off while you were growing up, but there is a lot more to history than just sheer memorization. We should care about history for a multitude of reasons. It shows us where we’ve been, how we got there, and how we’re progressing since then. If more people cared about history, then we’d repeat fewer of the same mistakes over and over again.
Learning From The Past
Learning from the past is much like learning from your own mistakes, whether they’re financial or otherwise. In order to learn from the past, we first have to understand it. History is less about memorizing random tidbits and more about understanding why certain things happen. In the case of personal finances, we can start with major financial events and trends throughout history.
How Does This Impact Personal Finance?
Well, thanks to historical records, we have tons of information that related to personal finance. We have the history of various investments, trends with interest rates, signs a bull or bear market is coming, as well as how individuals generally reacted to them (including what worked and what didn’t). In fact, we have so much information at our disposal it’s practically irresponsible to not use it to better our lives.
Things To Learn And Make Note Of
Now, I just mentioned them, so let’s dive into some of the obvious financial tricks we can learn from our past.
How different investments perform
First up, we know how well or poorly different investments do because of our records. For example, it’s become widely known that passive investing often beats out day traders over the long run – especially over the course of decades. So, we know that investing in index funds or ETFs that mirror the S&P 500 is a great additional to your portfolio, and we can estimate with relative accuracy how much that will return you on average over the long run.
Beyond that, we have information on other investments like real estate or bonds. With the example of bonds, based on the way current events are progressing, and their historic returns, you may decide to minimize the amount of bonds you have in your portfolio.
Failures That Damaged The Economy And How We Recovered
Another thing we’re able to see is our major shortcomings. We can identify certain decisions that lead to major market crashes or bubbles popping. Consequently, we can learn and not make those same mistakes again. Obviously we will always make mistakes, but if we don’t fall for the same ones, we can slowly improve and potentially see longer periods of prosperity.
Signs Of A Recession
Recessions will never completely cease, which is why it’s important to see the signs that one is coming. To be clear, I’m not saying you should try to time the market or anything of the sort. However, if all the signs of a recession are there, then you can prepare yourself, build up a bigger emergency fund, and prepare for the times ahead of you.
Signs Of An Economic Boom
Which brings me to my next point. There are certain cycles when it comes to finances and the economy. While recessions will never go away, that also means we’ll always have some of these economic booms that make life a little easier. Again, the goal shouldn’t be to time the market during one. Rather, being aware of the signs of a potential boom may let you take more risks in things like your career development.
Historic Interest Rates And Patterns
Interest rates have definitely been interesting lately. While those have gone up and down in the past, the records we have also help us identify the potential ramifications of higher (or lower) interest rates and how long we can expect them to stay.
Debt Reduction
Which brings up another good point – it’s important to minimize the amount of debt you have or the new debt you take on during periods of high interest rates. To avoid taking on new debt, it’s a good idea to have an emergency fund in a high-yield savings account like the one Axos offers. That way if an emergency happens, you’re well prepared and won’t be forced to take on additional debt.
To eliminate existing debt, there are two common methods people like to use. The more common one is arguably the snowball method, and the arguably more efficient one is the debt avalanche method. You can research more about the difference, or read this article I wrote on both of them here. The short story is that debt snowballs tend to produce more successes (which historic patterns have shown us!), because it’s a system that has more immediate rewards which helps people stay consistent.
As we know, a huge hurdle for most people in personal finance is just their mindset – the psychological aspect of the whole situation. The debt avalanche method usually ends up saving you quite a bit more money in the long run, but it can be hard to stay disciplined with it.
Conclusion
Hopefully this made you rethink any negative misconceptions you had about history. Better yet, maybe it has encouraged you to learn about history – which is an endlessly fascinating topic that can reward you in a myriad of ways. If you have any thoughts or extra tricks of your own, be sure to let us know in the comments.
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