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.
