An intellect that is honed financially helps one see opportunities that they otherwise would have not. These opportunities are seen with the mind. An unknowing fool will throw a gem away thinking it is another stone; a wealth creator will see an opportunity to make money which an untrained mind cannot see.
Financial Intelligence is the third eye which opens doors to opportunities where none exist. It creates new opportunities. That is why they say ‘rich invent money.’ An untrained mind, on the other hand, can create extreme poverty that lasts generations by teaching it to their families.
Financial intelligence not only creates wealth, it sustains it. There are innumerable stories of professional sportsmen who made millions during their playing years only to become bankrupt within a decade. Mike Tyson, a heavyweight champion, is one such example. He earned millions during his lifetime but is now bankrupt.
You must have also heard about lottery winners who are back to where they started within five years of winning the lottery ticket.
I was recently reading an article on the descendants of Hyder Ali and Tipu Sultan who are today penniless. They are members of families who ruled over half of India few generations ago. Why is it that these families lost their wealth? There are other families who not only sustain but grow their fortunes over generations.
The world changes, markets go up and down, technologies change, economies boom and crash. The families who survive are those that make the efforts it takes to develop their financial intelligence, which allows them to adjust to the changes and also helps find new opportunities to succeed in this changing world. They also take the trouble to teach and transmit this intelligence to their younger generations and hence, are able to sustain their wealth for generations to come.
What is Financial IQ?
There are many facets of financial intelligence. It is about understanding assets and liabilities, capital growth and cash flows, passive income as against earned income, good debt and bad debt and making money work for you instead of you working for money. It is also about tax savings and protecting your assets including intellectual property rights.
Let us examine some of these aspects in greater detail.
Assets and Liabilities
An asset, as explained by Robert Kiyosaki in his book ‘Rich Dad Poor Dad’, is something which puts money into your pocket and liability is something that takes money out of your pocket. By this definition your house, car, boat, golf set and other luxury items that you buy (thinking they are assets) are in actual fact liabilities. All these so-called assets take money out of your pocket. Most of these depreciate in value (except may be your house,) and are high maintenance items that cost money out of your pocket.
Most of us think that we are buying assets, but in actuality, we buy liabilities that keep us poor. This does not imply that one should not buy these things that make us feel nice and good about life: one must buy them only once sustainable wealth has been created by first purchasing income-producing assets.
The real assets are businesses, investment properties, shares, bonds, etc., that put money into your pockets and also appreciate in value. To create wealth is to buy income producing assets such as real estate, businesses and paper assets.
Capital Gain and Cash flow
Wealth is created through a combination of capital growth and cash flow. Capital growth creates long-term wealth whereas cash flow sustains it in the short term and a balance between the two is needed to sustain and fuel the growth.
Short-sighted people only go for cash flow to fund their current needs. On the other hand, there are long-term investors (especially those who invest in properties) who get into serious trouble by not understanding the importance of cash flow. A sensible combination of the two is needed to grow financially.
Good Debt and Bad Debt
People are scared of taking debt for business expansion and investments as it causes a lot of stress. At the same time, they are not afraid of taking loans to buy cars or to go on a holiday.
Financially intelligent people know that creating debts for buying income-producing assets is a prerequisite for growing rich. A good debt is when money is borrowed to create money. Just like the bank: banks take money deposits from us at a lower interest rate and loan it back to businesses or for purchasing properties at a much higher interest rate. They make money on the difference, as can anyone.
The simple trick is to borrow cheap and create an asset that pays more. Bad debts are the ones that you borrow at high interest rate and use for buying assets that depreciate or produce less, or no income.
Make Money Work for You
The best definition that defines being rich is: “In case you stop working today because of ill health/ accident or voluntary retirement then for how long will your savings sustain your current life style.” In some cases, it may be just a few days or at best a couple of months- this means you are poor.
In other cases, it may be a couple of years. A tad better situation but is certainly not a healthy one! You will be rich if you can sustain your lifestyle adjusted for inflation, indefinitely.
The super-rich can not only sustain their present lifestyle but they make it better, and also have surplus income to reinvest so that their net wealth increases with each passing year.
This can only happen when you have a large component of your money coming from passive income in the form of rents from commercial/ residential real estate, dividends from shares, intellectual property rights or interest earned from deposits. In other words, it is money working for you even when you sleep or are on holiday. In case of a job, the money will stop flowing the moment you stop working.
Saving on Taxman’s Dollars
You may or may not realize this, but the most outflow of money from your pocket, during your lifetime, is the money paid in taxes. In many countries, taxes can be more than 50% of the income earned. These include the GST, Income Tax, Custom Duties, Excise Duties, Service Tax, Sales Tax, Capital Gains Tax, Stamp Duties and Estate Duties etc.
You may not even be aware of some of the taxes you pay because they are cut at the very source—before you get paid or they get added to the price of goods that you buy on a daily basis. If you add them all up, taxes can take away anything ranging from 40-75% of all that you earn.
Financially intelligent people use investment vehicles and tax saving strategies to save on these taxes. Money saved from taxes through proper planning and invested sensibly can make even a modest earner into a millionaire many times over.
Most financially uneducated people will try and hide their income to save on taxes, and eventually, get in trouble with the law. They will try and save dollars by not consulting an astute accountant and setting up proper structures to save legitimately on taxes.
To grow financially, one has to provide their income details and their turnover: when you do that, you become liable to pay tax. Proper tax planning – not tax avoidance – is the route financially intelligent people take.
Structures for Asset Protection and Tax Planning
This is a very important component of financial intelligence. You should protect your wealth even as you earn. Things, sometimes, can go wrong even with the right knowledge and intentions because no one can have full control over their environment or future events. There is an unknown element in each financial decision we take.
Rich people set up proper structures for asset protection and tax planning before they start. Yes, there is a cost involved in setting up these structures at the beginning, especially at a time when the business or the entity is not generating any income. Normally the cost involved is very small and will pay itself hundred times over if set up correctly. It will also make you sleep better at night.
Risk and Risk Management
Most people refrain from starting a business or investing somewhere because they feel that there is a huge risk involved. What appears like a risk to an untrained mind is like a cake walk for the financially intelligent. This is because they understand those risks and take adequate steps to insure that risk.
I sailed around the world in a 40 ft. yacht. My friends and family thought I had put myself at great risk in such a small boat but I had trained hard and was a knowledgeable sailor. I understood and respected the sea in all its moods. To me, sailing that boat was safe and an enjoyable experience that enriched me as a person.
Life itself is a risk! The fact that we are born and continue to live is a risky business. We travel by cars and airplanes that can meet with accidents. The human body is fragile. It can give in to cancer, heart failure or a stroke at any stage.
Then there are natural disasters that can strike us at any moment: earthquakes, tsunamis, volcanoes, fires or even a strike from an asteroid can take our lives away in an instance.
Added to this, man has created enough disasters for himself in the form of wars, nuclear power, global warming and terrorism. We cover our risks in daily life by taking prudent decisions and by insuring our health, life and property.
The same can be done in our financial lives. In today’s world, every financial risk can be insured. There is a premium involved but this can be an expense that can be taken into account into the cost of running a business or investment. Financially intelligent people not only take out insurances, but also have an exit policy in place for every decision they take. They have business structures in place so that their personal wealth is not touched even if businesses or investments fail.
Robert Kiyosaki rightly put it: “It is never the business or an investment that is risky. It is always the businessman or the investor who is the risk.” It is our lack of financial knowledge that causes the risk. We get carried away by our emotions of fear and greed, which cause the risk. Risk can be controlled and even eliminated through proper knowledge and insurance.
The biggest risk in life is to remain poor and to have no assets. An even bigger risk in life is to think that someone else will come to our rescue in the hour of need: be it the government, family or friends.
The best thing in life is to rely on our own strength and take steps to become not only financially secure but rich. We have a responsibility towards our family and loved ones to cater for their well being, growth and emergencies in life. The real risk is in not taking timely action to make them financially secure. Avoiding risks to improve one’s financial future is just an excuse.
Key Skills of Financially Intelligent People
Financially intelligent people have certain key skills that make them rich. Unfortunately, these key skills are not the focus of what is taught in our schools and colleges.
We live in an information age. Most of the times, our minds are overloaded with information; be it the television, the internet, mobile phones or many books and magazines. There is so much information available and very little time to process and digest it. Creative thinking suffers as a result.
A problem solving and creative mind knows where to look for information, and process the data towards a predetermined useful end. An undisciplined mind will waste hundreds of hours in non-productive conversation over the phone or surfing the net lacking focus.
Discipline and focus release the mind from information overload. Only a restive, inward looking and a meditative mind can think creatively and solve problems.
In life, to get what we want, we have to negotiate. We have to get the other party to agree to our terms and conditions. We have to have the skills to change their initial responses: from a “No” to a “Yes.” We have to learn the art of compromising for the betterment of both parties.
There can be no successful business transaction without proper communication skills. Forget about business development, even marriages and friendships rescind when there is a communication breakdown. You will not achieve your desired results, so long as you are not able to communicate your point of view.
Selling and Marketing
For most people, selling a product or an idea has horrible connotations. It involves rejection, which most people find hard to swallow. The basic truth is that there can be no wealth creation without selling a product or an idea. Profits are generated and encashed once they’re sold.
You cannot be successful in any walk of life without being skilled in selling. When you walk into a job interview, you are selling your skills, talents and personality. Even successful dating involves selling your charm, beauty, inner qualities and character.
It is not selling that is difficult: it is the fear of rejection that one has to conquer. Ask any successful entrepreneur and he will tell you that marketing and selling together constitute the oxygen of any business.
Investment and business is about numbers. Basic knowledge of mathematics and accounting is essential to develop a financial mindset. There is no calculus or higher mathematics involved, but basic knowledge is essential.
Financial intelligence is combination of several things. By reading, reflecting, associating with right kind of people, attending seminars and taking action you can gradually improve your financial IQ.