Depending on the financial environment you grew up in, your financial literacy levels oscillate between excellent and clueless. Sadly, most people fall in the latter category, and I too was the same for many years. Luckily, I was able to acquire certain knowledge that really moved along my financial progression so I want to share what helped me finally breakthrough in my own financial endeavors!
According to a global financial literacy test, 57% of adults in the U.S are financially literate. This means that almost half of America’s population have zero to poor understanding of basic financial concepts, including debt management, compound interest, index funds, and asset diversification. Worse still, these negative statistics aren’t far-flung with the rest of the world. Roughly 3.5 billion of the world’s population mimic a similar trend and this begs the question, what’s the root cause of the low financial literacy levels among adults? Why do grown adults fumble when it comes to handling money?
How did we get here?
There’s no doubt that these negative statistics are powered by an education system that completely alienates financial education. While schools will shell-out knowledge on science, languages, history, and mathematics, financial matters are brushed aside. Unfortunately, many kids grow up with only the financial education bestowed upon them from their parents which in many cases is very minimal at best. Without any financial direction, the reason why so many people are financially illiterate becomes much clearer.
This lack of guidance is why we see so many young adults taking on hundreds of thousands of dollars worth of debt to go to school without even blinking an eye and when they do finally enter the workforce, they are clueless as to how to handle their salaries. As you guessed, this lack of education leads to financial situations that are nothing short of disastrous. Within a few years of graduating college, most adults end up house poor, strapped in credit card debt, and stuck in a job whose fruits they can hardly work out. Now, as I have already briefly mentioned, financial education of our younger generations often falls on parents. However, although seeking financial advice from an older generation may seem harmless, it could drag your finances downhill.
For one, your future goals may not coincide with your parents’ desires. While they may want you to buy a house with a yard, the nature of your career might point you towards renting as a more feasible option. On top of that, economic disparities may render some of their advice rather obsolete. For instance, there’s a vast gap between the economy’s nature in 2000 and 2020. We’ve experienced severe recessions in between, and the job market has also undergone sweeping changes. More variables affect the economy now, which can be difficult for past generations to grasp. What I’m trying to say is simple; take your parents’ advice with a grain of salt.
This is all to say that the safest route is to amp up your financial IQ so that you can decide on financial matters independently and with your future goals in mind. It’s not a secret that individuals who can crack economic systems end up with the highest financial rewards. This also applies to those with a golden skill set. Out rightly, boosting your financial IQ will help you grasp financial principles that underpin how money circulates in the economy and enable you to make informed financial decisions.
So, what does financial IQ entail? In simple terms, financial literacy is a cocktail of debt, credit, and personal finance management, all of which are crucial for navigating the economic landscape. Financial literacy covers things like managing credit cards, investing in cash-generating assets, calculating investment risks, and checking accounts. As it turns out, people with high financial IQs are bound to build a fortune faster than those who are financially inept. Therefore, if you’re still debating on whether you should take that personal finance course, I’ll give you three reasons that should serve as a green light.
The first reason why financial education is essential is that it keeps you up-to-date. Here’s the thing; like any other market, financial markets are evolving fast. Not only do we have more saving and investment options to choose from, but their sophistication is hitting the roofs as well. This makes it harder and harder for the financially illiterate to maneuver investment platforms. Actually, most of them give up even without trying. With fewer people in the game, financially savvy individuals who understand interest rates, plus other helpful investment concepts, can fully exploit different financial instruments and maximize their profits. So, if you want to be part of this group, you already know what to do.
The second reason why you need financial literacy is that it opens your eyes to valuable cash-generating opportunities. While the financially illiterate are debating whether to make the jump or not, the financially literate ones will leverage their knowledge in analyzing potential risks then act accordingly. Let me use an example of real estate. Ever heard of the term house-flipping? It’s a real estate investment technique where you purchase a wrinkled property, iron it out, then resell it at a significantly higher price. So while a financially illiterate person sees an old house with constricted market value, a financially intelligent one will spot a viable investment opportunity. For example, maybe the property has a prime location and with a few renovations the property could be a hit on the market. However, it’s impossible to pick out these kinds of opportunities when you lack the insights that raising your financial IQ can provide!
Thirdly, financial literacy is beneficial because it helps you elude common pitfalls that could hinder your financial progression. If left unchecked, simple things like credit card debt and poor budgeting can dig big, permanent holes in your wallet. Yet, most of these obstacles are fueled by the absence of financial IQ. The chances of a financially literate person racking up credit card debt or buying an expensive car instead of investing are slim to none. Why is this the case? It’s simple. Financial literacy teaches you discipline, and exposes you to the right tools for earning, spending, and investing your money. Besides that, there are multiple other ways that you can leverage financial IQ to snowball your finances, mitigate your debts, or take advantage of fast-moving investment opportunities. It doesn’t matter whether you’re short of capital; all these are possible if you’re knowledgeable and this is what I’ll get into more now.
Financial IQ: The Why
The first way you can leverage financial intelligence is through the use of effective debt management techniques. The truth is, taking on debt isn’t always a bad thing. Debt only becomes a menace when you spend it on ventures that don’t generate income. Regardless, we can’t discount the fact that repaying massive debts can be a tough climb. Such obligations, whether from mortgages, hospital bills, or credit card balances, have steep interest rates that make it even harder to get them out of the way. With steep interest rates, tight deadlines, and a credit score to preserve, it takes acute financial intelligence to repay massive debts fast. That’s not all. High-interest debts also accrue interest rapidly. This means that any minimum monthly payment you make goes towards paying off the interest, yet the principal amount stays the same. Before you know it, you’ll be going around in circles with zero progress on downsizing your loan.
However, with an impressive financial IQ, it’s not as hard as it looks. One of the best approaches to top off high-interest debt is the proverbial Rob Peter to pay Paul. Just that in this case, you’re borrowing a low-interest rate from Peter so that you can off-set the mountainous, high-interest loan you owe Paul. For example, let’s assume you have an overwhelming balance of $10,000 with an APR of 15% on a high-interest credit card. Assuming you make a monthly payment of $250, you will need roughly 56 months to eliminate the debt overload. Over this period, you will have accrued an extra $4,000 worth of interest. Isn’t this a lot of money?
Instead, try to leverage lower-interest debts like lines of credit to offset these costlier debts so you can cut down your timeline to becoming debt-free and avoid handing over your hard earned money to interest collectors.
Now, another way you can leverage your newly acquired financial IQ is through better time management. You’re probably familiar with the phrase time is money, right? It turns out, this isn’t mere slang that you use to ridicule lateness; it’s an actual fact. There’s a strong correlation between how you spend your time and how much money you make every day. Wealthy people acknowledge the incredible financial value that’s hidden in the 24 hours they get in a day; hence they aim to maximize it exponentially. How do they do this?
The thing is, high net worth individuals embrace the idea of buying other people’s time through outsourcing. By paying people to perform mundane tasks that hardly generate any income, rich people can free-up their schedules to accommodate big, million-dollar jobs. The gist is, it’s pointless spending time on tasks that bring in zero or negligible income when you can outsource them at a small fee and ensure these tasks still get done while focusing on the big ticket items that will lead you to greater levels of wealth!
Now, what if you’re interested in real estate, how does your financial IQ come into play? Well, if you’ve spotted a sizzling real estate property, but you have no money to buy it, don’t despair. See, one thing you have to learn about becoming wealthy is that you have to give up making excuses. Unless you start seeing opportunities where others see dead-ends, you will remain broke forever. In this case, for instance, a financially literate person will seek low-mortgage rates to buy the high-value property. If you have past experience in selling houses for profitable returns, you’re even better placed. This is because there are lenders that lower interest rates to match your level of experience in flipping houses. The more experienced you are, the lower the interest rates that you can gain access to.
You can also approach private lenders willing to shell-out their saved money for profits. This is a better option since private lenders tend to be more open to negotiations. As long as you have your numbers straight and have confidence in yourself to negotiate some good financing rates, this easily becomes a situation where your financial IQ will come in handy.
Financial IQ: The How
So at this point, I’ve definitely sold you on why it’s imperative that you continuously raise your financial IQ. Having a high financial IQ is like having a cheat code to making and managing money. But unfortunately, not everyone has the financial IQ right now to strike it rich so how can you raise it from where you stand now?
If you ask me, there are three primary ways to increase your financial IQ with the first being through self-education. Luckily, these days we have access to all the information we could ever need to gain the financial education that will take us from our current financial state to one of abundance. Platforms like YouTube, blogs and podcasts can be a great starting point for anyone’s quest for more financial IQ.
Second, there’s mentorship. They say that having one good mentor is like reading 1000 books so if you can, find a mentor that has walked the path you walk to go down to ensure your journey to financial success is as linear as possible!
Finally, there is always learning through trial and error and sometimes you need to learn from your mistakes. This could mean investing and learning from your losses or starting a business and seeing success beyond what you would have ever imagined. You’ll never know until you try!
Therefore, if you want to change your financial position for the better, look no further than upping your financial IQ. If it can work for me, it can work for you!