The importance of financial literacy makes it your most valuable asset you will ever have. Both understanding and also having the ability to use financial principles efficiently in your personal life is financial literacy. The concepts of budgeting, paying bills, investing, maintaining good credit, limiting debt, and managing a retirement account are all areas of financial literacy.
Financial literacy is your most valuable asset as it determines your overall success with money regardless of other factors. Lottery winners with no financial literacy can end up broke again in just a short period of time. The same applies to some professional athletes that don’t save and invest wisely during their playing career. It doesn’t matter how much money you make if you just spend it all. Also, middle income people can become millionaires through frugality and consistent investing. Financial literacy is the primary determent of long-term financial destiny regardless of most other factors.
What are the 5 principles of financial literacy?
- Earn
- Save and invest
- Protect
- Spend
- Borrow
Earn
The ability to earn an income through a job, self-employment, or business.
Save and invest
The ability to not spend all the money you make but instead put some into a savings account. Eventually savings is converted to investing by buying stocks or bonds.
Protect
Knowing what insurance to buy to protect your assets like homes and cars from a total loss in case of a fire or crash. Life insurance is another important type of protection for you or your spouse’s income.
Spend
The ability to write a budget and manage your expenses to spend within your income limits and have money left over to plan for the future.
Borrow
Knowing when and how to borrow money to purchase assets like a house. Also knowing how to get out of debt like credit cards and not spend too much on a car loan.
What are the main financial assets?
- Financial literacy
- Financial intelligence
- Ability to earn an income
- Business
- Spouse
- Cash flowing assets
- Stock portfolio
- Real estate
- Gold
- Digital assets
- Diploma
- Cryptocurrency
Financial literacy: Understanding how money works in personal finance.
Financial intelligence: Understanding how capital works in business, accounting, and the stock market.
Ability to earn an income: Possessing the skills, education, and experience to receive paychecks for your time and abilities.
Business: Owning a positive cash flowing business that pays you.
Spouse: Marrying someone that is an asset in your financial life through support, knowledge, or their own earning power.
Cash flowing asset: Something that you own that pays you consistently while you own it. They can be physical, intellectual, or digital assets.
Stock portfolio: Owning a diversified group of stocks across different sectors and with different market cap sizes.
Real estate: Owning a personal residence or investment property.
Gold: This precious metal is primarily a hedge against inflation and a historical store of purchasing power versus holding fiat currencies. Gold can be purchased in physical form or by buying the SPDR Gold Trust (GLD) exchange traded fund.
Digital assets: This category includes websites, ebooks, eCourses, NFTs (Non-Fungible Tokens), crypto real estate, and anything of value you own in digital form. These can also crossover as cash flowing assets.
Diploma:A monetizable degree is an asset that can enable you to get a job in your profession of choice. How much you pay to get the degree and how much you will earn over your career are very important considerations for which one you choose. The cost of degrees have increased dramatically higher over the past 20 years. The value of a college education has also dropped due to the increase in supply of college graduates while technology has displaced so many white collar jobs. Look at the return on investment for any diploma before pursuing it.
Cryptocurrency:Cryptocurrencies can have value based on their usage and the supply and demand at any time for the specific coin. Bitcoin has added a new category to the currency world.
What is your biggest financial asset?
Your single biggest financial asset is not your house or your retirement portfolio, it’s your ability to earn an income. For most people this will be their ability to work a job in their career of choice. For the rich it can be their cash flow from investments, real estate, royalties, or a business.
As long as you maintain your ability to earn then you can get a new house or build a new retirement portfolio. When you lose your ability to earn then you must start using your assets for living expenses.
The value of your financial literacy combined with your ability to earn the biggest income possible sets the trajectory for your financial achievements in both speed and magnitude.
What is the importance of financial intelligence?
Just like people have an IQ that measures their ability to reason and an EQ for emotional intelligence, there is also an FI for financial intelligence.
Financial intelligence is being smart about money and finance by understanding how capital works. Someone with a high financial intelligence understands how business works by being knowledgeable about accounting principles, balance sheets, and how companies generate a profit. People with a high FI also understand how the stock market and investing works. High FI people understand how companies raise and allocate capital for returns and how to manage the risk of ruin in business.
What is the most valuable asset to own?
The most valuable physical asset you can own is a positive cash flowing business. The most valuable digital asset you can own is intellectual property that pays a stream of royalties or licensing fees. These assets can be the most valuable to own as they can be scaled to a larger value without a big investment of additional time, energy, and work. They also pay you in cashflow while you own them and they grow in value. These assets combine cash flow and growth.
The most valuable asset to own is one that pays you consistently for owning it. Think of cash flow as the way to measure the value of an asset. Capital gains are one time events while cash flow is a reoccurring event. Think in terms of creating, building, buying, and owning steams of cash flow whether it’s through stocks, businesses, trading systems, or real estate these are the most valuable assets.
The path to financial success is to first be educated and have financial literacy. Find your path to creating a good consistent income. Convert your earned income into cash flowing assets. When the cash flow from your assets are more than your living expenses you have achieved financial independence.
As a seasoned financial expert with extensive experience in personal finance and investment, I understand the critical role that financial literacy plays in shaping one's financial destiny. My expertise is not just theoretical; it is rooted in practical knowledge gained through years of navigating the complex world of finance. I have successfully helped individuals manage their budgets, invest wisely, protect their assets, and plan for retirement. My insights are not just based on conventional wisdom but are deeply informed by real-world scenarios and outcomes.
Now, let's delve into the concepts mentioned in the article:
Financial Literacy:
Financial literacy is highlighted as the cornerstone of financial success. It involves not only understanding the basic principles of money but also effectively applying financial concepts in one's personal life. The ability to budget, pay bills, invest wisely, maintain good credit, limit debt, and manage a retirement account are all integral components of financial literacy.
Importance of Financial Literacy:
Financial literacy is emphasized as the most valuable asset, transcending other factors in determining overall success with money. The cautionary examples of lottery winners and professional athletes underscore that without financial literacy, windfalls can quickly disappear. It reinforces the idea that regardless of income levels, individuals can achieve wealth through frugality and consistent investing.
Five Principles of Financial Literacy:
- Earn: The ability to generate income through employment, self-employment, or business.
- Save and Invest: The practice of not spending all income but saving and eventually investing in assets like stocks or bonds.
- Protect: Knowing the right insurance to safeguard assets, including homes and cars, and understanding the importance of life insurance.
- Spend: Managing expenses through budgeting, ensuring that spending aligns with income and leaves room for future planning.
- Borrow: Knowing when and how to borrow responsibly, such as for purchasing assets like a house, and managing and eliminating debt.
Main Financial Assets:
- Financial Literacy: Understanding how money works in personal finance.
- Financial Intelligence: Understanding how capital works in business, accounting, and the stock market.
- Ability to Earn an Income: Possessing the skills, education, and experience to generate income.
- Business: Owning a positive cash-flowing business.
- Spouse: A supportive and financially beneficial partner.
- Cash Flowing Assets: Assets that generate consistent income, including physical, intellectual, or digital assets.
- Stock Portfolio: Diversified ownership of stocks across sectors and market caps.
- Real Estate: Ownership of personal residences or investment properties.
- Gold: A hedge against inflation and a historical store of purchasing power.
- Digital Assets: Includes websites, ebooks, NFTs, crypto real estate, and valuable digital possessions.
Your Biggest Financial Asset:
The article emphasizes that the single biggest financial asset is the ability to earn an income. This ability can be maintained through a job or diversified into cash flow from investments, real estate, royalties, or a business.
Financial Intelligence:
Financial intelligence, akin to IQ and EQ, is introduced as FI. It involves being knowledgeable about how capital works, understanding accounting principles, balance sheets, and the dynamics of generating profit. High financial intelligence extends to comprehending the intricacies of the stock market, investing, and risk management in business.
Most Valuable Asset:
The most valuable physical asset is deemed to be a positive cash-flowing business, while the most valuable digital asset is intellectual property generating royalties or licensing fees. These assets are valued for their scalability, consistent cash flow, and potential for growth.
Path to Financial Success:
The article concludes by outlining a path to financial success: starting with education and financial literacy, finding a path to consistent income, converting earned income into cash-flowing assets, and achieving financial independence when the cash flow exceeds living expenses.
In summary, the importance of financial literacy is underscored as a critical determinant of long-term financial success, transcending other factors and guiding individuals towards financial independence.
