Financial Illiteracy

Financial Illiteracy

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Begin with the decision that you are going to do what is necessary. You are used to doing what is necessary, but without a plan. Many people can’t find $2000 in their personal budget, but they have 6 or 7 people they can borrow from. They have resources, they have techniques. They have something to do something with. But, they don’t have a systematic plan for after the immediate crisis is averted. What’s necessary? Take a deep breath. Take a moment and recognize how you find yourself in the situation. Self-assessment is the first step.

Second, you want to critically assess the resources you have available. You may not have the money you need even when borrowing, but there is value beyond money in the relationships that you have. They may have access to other relationships. They may be able to save you time. They may have information that changes your calculus.

Next is Trust. It may be trust in a process or a technique to get you from point A to Point B. Many people want to get the bills paid or get out of debt or get out of the hole they are in, but they continue to do the same things that got them into the rut they are in. They are resistant to the commitment required to get where they want to be. No matter how much money you make, without discipline, it will run through your fingers in much the same way.

Financial Markets

Money has its own system and life cycle. Financial markets work to benefit themselves. In survival mode, you’re only worried about your money and what your money can get for you. That’s consumerism by definition. Another option, closer on the continuum to a producer perspective, is to look at what your money can do to make you more money and what it can do to leverage a lifestyle. This requires learning about money in the context of financial markets not just what you can buy or how you can use money. Many don’t find the opportunity or motivation to stop, breathe, and adopt a producer perspective or a wealth mindset.

For example, if you think about it in terms of levels. The level of understanding financial markets is above paying your bills and paycheck to paycheck. It’s above having your ends meets. It’s above having a retirement account. I’s above having a savings plan for your kids. You need all those instruments to get to that knowledge of financial markets. Another way to say is that those are ways to engage financial markets, but if you’re putting money into your 401K every paycheck but you don’t understand what the opportunity is in the context that 401 K, you are living at a level of ignorance.

Illiteracy Example

In 2015, Hilcorp Energy in Houston gave $100,000 bonuses to each of their 1400 employees. Employees were interviewed to find out how they were going to use the windfall. One lady caught my attention. She said that she would take her $100,000 and pay for college for her kids. With the rest, she planned to pay bills and save.

Some would say that she was wise. They would say that she has purpose for that money. I think that is a demonstration of ignorance. First, if your company made enough money to give $100,000 bonuses, the number one thing you must question is how to invest in the company. If the company isn’t public or the option doesn’t seem long-term sustainable, your focus must be on leveraging the money.  I agree with paying off debt IF she had any high-interest loans laying around. But, investing in an account for college and saving are both losing propositions when compared with other options for the money.

I consider this ignorance or financial illiteracy because most people don’t comprehend the mechanism, market, or information required to invest in a company or explore investment in the broader financial market. What she’s saying by saying that she is going to save that money is she’s going to waste that money. There is no saving instrument that she can choose that will compare to the return she could receive compared to more high-yield situations such as stock market or real estate.