The most frequently financial advice that is being told is to work hard, save money, get out of debt, live below your means, and invest in a well-diversified portfolio of mutual funds. Do our school prepare us to be financially literate ? Our schools do well at teaching reading, writing and arithmetic, but they are horrible at preparing people to work with money. Nearly every person who graduates from school is financially illiterate. Basically, Financial literacy is the ability to understand how money works in the world.
Every rich people who are financially free have high level of financial literacy. The good news for you is you don’t need to be super talented to be financially free. To be financially literacy It will take hard work, a lot of study, and trial and error, but the return will be worth it. The key to becoming financially literate is to understand the four foundational principles of financial literacy.
#1 – The Difference Between an Asset and a Liability
Many people misunderstood the definition of an asset. For example, you probably think your house is an asset, but it’s not. The truth is that just as there are two definitions of an asset.
Accountants use definition of asset as economic of resourse that requires lots of financial knowledge to make people and companies feel richer than they really are whether the asset have cash flow value.
The rich use the definition of asset grounded in simplicity and reality. An asset is anything that puts money in your pocket and a liability is anything that takes money out of your pocket.
Your house is not an asset because it takes money out of your pocket each month. Even if you own your house outright, you still have to pay for the taxes, maintenance and more out of your own pocket.
But if you own a rental property, that can be an asset, because it puts money in your pocket each month in the form of cash flow. When your tenant pays rent, they cover your mortgage, maintenance, taxes, and more.
#2 – Using debt and taxes to get richer
Your financial adviser or accountant will tell you that debt is bad and taxes are inevitable. People who are financial literate will understand that both debt and taxes can be used to create immense wealth. There are two kinds debt, bad and good. When your financial adviser tells you to stay out of debt, she means stay out of bad debt. That is good advise but they never tell you what is good debt.
Bad debt comes in the form of borrowing money for liabilities such as using credit cards to buy smart phone or luxury items, which cause your money flowing out of your pocket to pay debt.
What is good debt? Good debt is debt used to purchase assets like rental property. For example, When you use the bank’s money to purchase real estate, you will use less of your own money to pay down payment to secure an asset instead of full price, and your tenant’s rent pays off your debt while you own the asset and pocket the profit for cash flow.
People with high financial literacy understand when it come to taxes that governments give exempted tax codes to encourage specific types of investment. If governments want you to build affordable housing, they give you a tax cut. If they want to encourage oil exploration, they give you a tax cut. If they want to see higher employment, they give you a tax cut. The secret is that most tax benefits are made to help entrepreneurs and investors. With the right financial education, you too can utilise the tax code to not only get richer, but also pay nothing in taxes.
#3 – Cash Flow Versus Capital Gains
Most people invest for capital gains but the rich invest for cash flow. Investing for capital gains is like gambling, you invest your money and hope the price goes up. For instance, many people buy a house hoping they’ll be able to sell it for more money later. In the meantime, they have to pay their mortgage and home expenses. Money goes out of their pocket. It becomes a liability.
The rich invest for cash flow, that it’s money flowing into your pocket on a continual basis whether you’re working or not. It is your money working for you. And generally, cash-flow investing is based on fundamentals that aren’t as susceptible to market swings like capital-gains investments, which means that even in bad times, money still flows into your pockets.
Additionally, cash flow is what is known as passive income, which is the lowest taxed type of income. This is not always the case with capital gains taxes, which vary depending on the type of asset you’ve invested in and how long you’ve owned that asset. In some cases, the taxes can be very high. Different investments produce different results. The question is, what results do you want?
#4 – Making your own financial decisions
If you are not financially literate and confident about your knowledge about money, you let others make your financial decisions for you.
You let your financial advisor to decide how and where your money should be invested. They will advise you based on which investment pay them the higher commission. You let your bank to tell you what interest rate is your money worth and you follow whatever investment trend is popular in the news without financial education.
The rich don’t follow the crowds. They set the trends and are gone by the time the trends become popular in the mainstream. What’s their secret? They think for themselves about money and make their own financial decisions because they have a high financial intelligence.
Having great knowledge to act on and great wisdom to know which course of action is the best is the key in building great wealth. By applying yourself to financial education only you can gain this kind of knowledge and wisdom to a high financial intelligence.
The question for you is, are you ready to increase your confidence about money by increasing your financial education? Are you ready to start making your own financial decisions?