Financial Literacy
Today I want to challenge you to think a little differently about financial literacy.
I am going to share our thoughts on financial literacy and the five fundamentals that can help you make informed decisions and take charge of your family’s wealth. These include Compound Interest, Financial Independence, Human Capital, Cash Flow and Spending Habits.
First, compound interest. The longer you allow your money to build, the more it can work for you. Seems simple and obvious but It’s a common investing mistake to solely focus on the interest rate or rate of return. In reality, time is the most powerful component in the equation.
Next, let’s look at financial independence. Some people assume that financial independence means you have a job and can pay your bills. But true financial independence means the ability to live off the income and growth of your investments - making work optional.
Third, let’s look at human capital and how it’s different from financial capital. Financial capital is the money you possess, while human capital describes a person’s earning potential. Human capital should be thought of as an investable asset. Any effort made to increase your future wages, such as furthering your education or going into debt, could be considered investing in your human capital.
Next let’s look at cash flow. It is important to start by distinguishing between Profit and Cash Flow. Profit describes how much money you have made on an investment and may or may not be accessible. “Cash flow” describes the income or liquidity generated from your assets on a periodic basis. If your assets are producing a steady stream of accessible income, you have the freedom to spend or invest it however you want.
Finally, spending habits. Most of us are subject to a constant barrage of advertising that makes us want to hurry and buy! Then buy again! But it’s having a long-term vision of financial goals that will ultimately make you and your kids more successful when they spend money.
If you spend your money mainly on the experiences of “today”—on the house, the cars, the activities, and so on— and don’t save for the future, your estate will not last for future generations. Your children will have no idea how to operate with long-term goals or future generations in mind, and the money will evaporate. For people with more modest means, failure to consider the future could even make you a burden to your children.
If you can develop a thorough knowledge of these five fundamentals, you’ll be better equipped to thrive in not just your finances but in many areas of life. The more financial smarts you have, the more capable you will be in forming a strategy for building and maintaining your wealth.
For more ideas on wealth planning for the future, please reach out to our team.