There are five basic financial IQs. They are:
Financial IQ 1. Making more Money.
Financial IQ 2. Protecting your Money.
Financial IQ 3. Budgeting your Money.
Financial IQ 4. Leveraging your Money.
Financial IQ 5. Improving your Financial Information.
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Financial Intelligence vs. Financial IQ
Most of us know that a person with a mental IQ of 130 is supposedly smarter that a person with an IQ of 95. The same parallels can be drawn with financial IQ. You can be the equivalent of a genius when it comes to academic intelligence, but the equivalent of a moron when it comes to financial intelligence.
Often I am asked, “what is the difference between financial intelligence and financial IQ?” My reply is, “Financial intelligence is that part of our mental intelligence we use to solve our financial problems. Financial IQ is the measurement of that intelligence. It is how we quantify our financial intelligence.
Measuring Financial Intelligence
Financial IQ 1: Making more money. Most of us have enough financial intelligence to make money. The more money you make, the higher your financial IQ 1. In other words, a person who earns $1 million a year has a measurably higher financial IQ 1 than a person who earns $30,000 a year. And if two people has a higher financial IQ because he or she is closer to achieving financial integrity by utilizing financial IQ 2: protecting your money.
We all know that a person may have a high academic IQ and be a genius in the classroom but be unable to make much money in the real world. I would say my poor dad, a great teacher and a hardworking man, had a high academic IQ but a low financial IQ. He did very well in the world of academia but did poorly in the world of business.
Financial IQ 2: Protecting your money. A simple truth is that the world is out t take your money. But not all who take your money are crooks or outlaws. One of the biggest financial predators of our money is taxes. Governments take our money legally.
If a person has a low financial IQ 2. He or she will pay more in taxes. An example of financial IQ 2. Is someone who pays 20 percent in taxes versus someone who pays 35 percent in taxes. The person who pays less in taxes has a measurably higher financial IQ.
Financial IQ 3: Budgeting your money. Budgeting your money requires a lot of financial intelligence. Many people budget money like a poor person rather than like a rich person. Many people earn a lot of money but fail to keep much money, simply because they budget poorly. For example, a person who earns and spends $70,000 a year has a lower financial IQ 3. Than a person who earns 30,000 and is able to live well on $25,000 and invest $5,000. Being able to live well and still invest no matter how much you make requires a high level of financial intelligence. Having a surplus is something you have to actively budget for. Budgeting for a surplus we will look at in detail later on.
Financial IQ 4: Leveraging your money. After a person budgets a surplus, the next financial challenges is to leverage their surplus of money. Most people save their financial surplus in a bank. This was a smart idea before 1971—before the U.S. dollar become a currency. Also, after 1974, workers needed to save for their own retirement. Millions of workers did not know what to invest in, so they invested their financial surplus in a well-diversified portfolio of mutual funds, hoping this would leverage their money.
While savings and a diversified mutual fund portfolio are a form of leverage, there are better ways to leverage your money. If a person is truthful, he or she has to admit it doesn’t require much financial intelligence to save money and invest in mutual funds. You can train a monkey to save money and invest in mutual funds. That is why the returns on those investment vehicles are historically low.
Financial IQ 5: Improving your financial Information. There is a bit of wisdom that goes, “You need to learn to walk before you can run.” This is true with financial intelligence. Before people can learn how to earn exceptionally high returns on their money (financial IQ 4: leveraging your money), they need to learn to walk; that is, to learn the basics and the fundamentals of financial intelligence.
One of the reasons so many people struggle with financial IQ 4: leveraging your money, is because they are taught to turn their money over to financial “experts,” such as their banker and their mutual fund manager. The problem with turning your money over to financial experts is that you fail to learn, fail to increase your financial intelligence, and fail to become your own financial expert. If someone else manages your manages your money and solves your financial problems, you can’t increase your financial intelligence. Actually, you are rewarding other people for theirs instead—with your money!
This Article is taken from Rich Dad Increase your Financial IQ
Written by Arshad. A