Increase Your Financial IQ Book Review Part 2
Every Sunday here at Ask Mr. Credit Card we review a personal finance book. This review of Increase Your Financial IQ by Robert Kiyosaki is a continuation. If you missed the first part of the review, you can check it out here.
The Five Financial IQ’s
According to Kiyosaki, the five necessary Financial IQ’s are:
- Making More Money
- Protecting Your Money
- Budgeting Your Money
- Leveraging Your Money
- Improving Your Financial Information
Right off the bat it is interesting to me that frugality is not mentioned here. That’s one of the things that I love most about Kioysaki – his entire viewpoint revolves around how to get what you want – not how to avoid getting what you want, or how to learn to do without it. Sometimes we all have to do without things, but even in Rich Dad Poor Dad Kiyosaki talked about the major difference between wealthy and poor people’s thought processes. Wealthy people figure out how to get what they need (or want) and poor people figure out how to avoid having to get it, or how to do without it. The difference is in the focus.
Since I really do believe that our minds work according to our focus – this is huge. If we tell our mind to figure out how to get by without something (or many things!) it will. If we tell our mind that it needs to figure out how we can have more money, etc. it will do that too. In general, I believe that we are all excellent problem solvers – we just need to be more careful about the type of problems we choose to have our minds solve!
Financial Intelligence Vs. Financial IQ:
Most of us know that a person with a mental IQ of 130 is supposedly smarter than 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.
Well, this is undeniably true – I can draw a hundred examples from my own life that prove this point. I believe that what Kiyosaki is getting at is that our financial successes or failures are not a measure of our intelligence, but rather, our wisdom.
Everyone has the intellectual capacity to understand their finances. Not everyone has the wisdom. Wisdom comes from deciding internally what is right, and taking those steps over and over again. Wisdom is hard to quantify, but it is largely based on experience. If you mess up, you learn from the experience and move on –that is wisdom. You do not start out already “knowing” everything you need to know and being perfect at it. Even if you read a thousand personal finance books, it won’t replace the wisdom you gain by actually having the experience.
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 an measurably higher financial IQ #1 than a person who earns $30,000 a year. And, if two people each make $1 million dollars a year, and one pays less in taxes than the other, that person has a higher financial IQ because he or she is closer to achieving financial integrity by utilizing financial IQ #2 – Protecting your money.
You know, I just want to say that these five financial intelligences that Kiyosaki explains – they just drive home to me the importance of reading personal finance and self-development materials. I’m sure most of us can come to the conclusion that we need to make more money all on our own!
However, sometimes, having all of the answers laid out, spelled out -simply, can make all the difference. It might have taken me years to put all of these steps together, in detail on my own. I have no doubt that I would have, but why trudge through a thought process when someone else, (arguably an expert), has already done it?
Common sense, yes. Always obvious….no. Not for everyone. Myself included.
Financial IQ#2: Protecting Your Money
A simple truth is that the world is out to 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 out 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% taxes vs. someone who pays 35% in taxes. The person who pays less in taxes has a measurably higher Financial IQ.
I’ll admit that as I began to invest in stocks, and to make money, I did not always pay attention to the finer points of tax law. However, the more successful I became, the more I began to realize that yes, I really do want to pay as little in taxes as possible. At that point, I really had the choice of hiring someone else to handle my taxes for me, or learning to do them myself. As a temporary measure, I hired someone else. However, I am still in the process of learning. That is Kiyosaki’s biggest point – don’t let the government take more than you have to, and learn the “hows” and “whys” of the law so that you don’t break it.
This is an especially important point that I would really like to talk to the non-fans of Kiyosaki about (please leave me a comment!) I have heard many of his tactics cited as borderline illegal. Which ones are you referring to? How and why do you disagree? I would love to have your opinion!
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 is a bear. I’d like to use a different word, but this is a business blog! There is no way around it. It is absolutely, 100% necessary. If you do not know where your money goes or when, or how you will never, never, never get off the ground financially. I didn’t get settled into budgeting until I bought YNAB. Once I found what worked for me, I stuck with it.
If you are not already using a regular budget, please pick it up as a New Year’s resolution, and run with it. The difference you will see in your stress level, and your finances, will be well worth the time and monetary investment that ing a budgeting program and learning to use it will take. Use a piece of paper, or a spreadsheet if you need to – budgeting does not have to be expensive. It just has to be done regularly if you want to be successful financially.
Financial IQ #4:Leveraging Your Money
After a person budgets a surplus, the next financial challenge 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 US dollar became 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 of those investment vehicles are historically low.
Financial IQ #4 is measured in return on investment. For example, the person who earns 50% on his or her money has a higher financial IQ #4 than someone who earns 5%. And, someone who earns 50% tax-free on his or her money has a higher financial IQ than a person who earns 5% and pays 35% on taxes on that 5% return.
Kiyosaki promises, later in this book to highlight some of the ways that he leverages his money. I am really looking forward to that since none of his previous books have really shed any light on that subject. If he does dish the dirt on these “Low risk – high reward” tactics – I will definitely share them with you!
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 earn how to earn exceptionally high returns on their 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, you fail to increase your financial intelligence, and fail to become your own financial expert. If someone else 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!
It is especially important, as you move through your own financial journey, to only take advice from people who really do know what they are doing. Personally, I am a fan of Kiyosaki – not everyone is. If his advice doesn’t work for you, definitely find someone who is out there teaching that resonates with you a little better. Just check their qualifications, and take the advice with a grain of salt. As much as I like Kiyosaki, I do not into all of his arguments. I believe his basic premises are sound – especially when it comes to patterns of thought, and attitudes about money. The devil’s in the details though, and Kiyosaki doesn’t always come completely clean in the wash.
I just try to remember that I must make the final judgment about where, and how my money is managed. Not my advisors, not my family, not personal finance authors, not a golf caddy with a hot stock tip. Just me. It’s my money – who else knows better than me what I need to do with it?
One last quote from the book that I really got a kick out of. This book was written in 2007 and published in March of 2008 – just after the financial sector first began hitting the fan:
The reason I write, create financial products, and emphasize the importance of the five financial intelligences is because I believe the US and the world are in for an economic upheaval as we have never seen. There have been too many financial problems that have gone unsolved. Instead of using financial intelligence to solve them, we have thrown funny money at them. We have used old ideas to solve modern problems. Using old ideas to solve new problems only creates bigger and newer problems. This is why I believe the five financial intelligences are important. If you develop these 5 financial intelligences, you will have a better chance of doing well in a rapidly changing world. You will be better able to solve your own problems and increase your financial intelligence.
I wonder what Kiyosaki thinks about the way our government is handing the financial crisis? What do YOU think?
That’s it for this week’s review. Please check back next Sunday for the next section of the review. If you don’t want to miss it, you can grab our free RSS feed and get it delivered straight to you. Thanks for reading!
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