Have you ever wondered why so many people fail to truly understand basic financial skills and concepts which ultimately leads them to make really bad financial decisions.
It is because they didn’t obtain one of the most important things in life… financial knowledge. This is one of the most important skills for anyone to master in order to maximize their money and make the most it.
Recently I blogged about training your kids to be financially smart with the Greenlight Debit Card and App. I figured it would be a good idea to blog about parents being financially literate and what that means.
Looking back I wish I had spent a lot more time studying financial knowledge and becoming literate in business finances before I began my entrepreneurial journey over a decade ago,. This could have saved me a lot of headaches and money simply by understanding how to effectively manage my money.
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Now let’s get into this topic of Investing In Your Financial Knowledge…
What Is Financial Knowledge?
Financial knowledge or literacy is the ability that someone understands the finances of business. Financial knowledge also refers to one’s ability to make informed financial decisions using problem-solving and critical thinking.
According to the U.S. Government website Consumer Financial Protection Bureau it is important to have financial knowledge and decision-making skills.
The website states the following: “Strong financial knowledge and decision-making skills help people weigh options and make informed choices for their financial situations, such as deciding how and when to save and spend, comparing costs before a big purchase, and planning for retirement or other long-term savings.”
By early adulthood you should:
- Understands risks and benefits of investing, uses credit wisely, manages debt.
- Spends with values and goals for today and the future in mind, pays day-to-day and month-to-month expenses, saves for retirement, has financial flexibility to splurge once in a while.
- Seeks credible information (e.g., “Consumer Reports,” product labels, store ads), compares features and costs before making big purchases, consults trusted advisers, knows the difference between a bargain and a scam.
There are a number of areas of financial knowledge that you should understood which are as follows:
- Assets versus Liabilities
- The Tax Code
- Principal and Interest
- Assets versus Liabilities
- Good vs. Bad Debt
- Saving and Spending
Learning activities that foster financial knowledge and decision making should support young people’s acquisition of factual knowledge, research and analysis skills, and deliberate financial decision-making
Unfortunately, many schools don’t teach personal finance or financial literacy as part of their curriculum. So, there is a large population that doesn’t have the financial skills needed to be successful and chase their dreams and also to prevent financial crisis.
Financial Knowledge Resources
The good news there are many free and paid resources for increasing your financial literacy.
- Rich Dad, Poor Dad by Robert Kiyosaki
- The Intelligent Investor by Benjamin Graham
- The Millionaire Next Door by Thomas Stanley
- Think and Grow Rich by Napoleon Hill
- WhiteBoard Finance
- Graham Stephan
- Andrei Jikh
- Financial Education
- The Financial Diet
- How to Money
- The Financial Confessions
- Beginner to Buyer
- Finance for Everyone: Smart Tools for Decision-Making
- How to Save Money: Making Smart Financial Decisions
- Purdue University’s Planning for a Secure Retirement
- Fundamentals of Entrepreneurial Finance: What Every Entrepreneur Should Know
Benefits of Financial Knowledge
There are six essential benefits that are elements that need to be part of your financial knowledge library.
#1 – Learn How to Generate More Money
Understanding money teaches you how to generate more of it… sounds straight forward but is very essential. For example, learning to invest, purchasing assets with debt, and developing smart spending habits will help grow your wealth over time.
#2 – Understand Assets vs. Liabilities
Assets are items that put money in your pocket and grow over time, such as investments and real estate. Liabilities are items that take money out of your pocket and decrease in value or stay the same, such as credit card loans and rent.
#3 – Understand How Money Works
Financial literacy teaches you how money is generated, how cash flow works, the value of money, the role the government plays in money, and what digital currency is.
#4 – Grow Your Investments
Learning investing strategies such as investing in index funds can help you build passive tax-free wealth over time with minimal risk.
#5 – Spend and Save Smarter
The more knowledgeable you are about money, the more cautious you become. For example, if you’ve been living lavishly for a while and struggling to make ends meet, you might start spending less and saving more.
#6 – Calculate Financial Risk
Financial knowledge teaches you the important skill of how to calculate financial risks so you can reap the most return without throwing your money away. For example, you might calculate the financial risk of purchasing a rental property for your real estate portfolio.
Why Entrepreneurs Benefit From Financial Knowledge
Anyone that stars a business should have financial knowledge. Being knowledgeable about finances is essential for entrepreneurs because it allows them to calculate financial decisions and manage their money effectively.
There are four major benefits for Entrepreneurs when it comes to financial literacy:
#1 – Understanding How Much Capital You Need for Your Business
Before you start your business, you need funding to get it going. Instead of using your own money, unless you have tons of it, you can raise capital, or funds, from others.
For example, you can use the following types of funding:
- Angel Investors
- Venture capital
- SBA 7(a) loan
- Line of credit from a financial institution
- Peer-to-peer lending, etc.
By gaining financial knowledge, you will be able to make an informed decision on which funding method is right for your business.
#2 – Reducing Your Company’s Taxes
Every one that I know wants to reduce the amount of taxes they pay.
When you own a company it will face hefty taxes unless you have the financial knowledge to reduce them.
For example, you can write off your employees’ salaries, depreciation, office supplies, business insurance, and work-related meals and travel expenses.
#3 – Reading Financial Statements
As an entrepreneur, you must understand financial documents, such as an Income Statement, Balance Sheet, and Cash Flow Statement.
Understanding these financial documents tells you where the money is going and if you need to pivot and optimize your business structure.
#4 – Taking Calculated Financial Risks
Entrepreneurs need to be able to make calculated financial risks for their business.
For example, you can calculate the Return on Investment (ROI) of purchasing new software for your business to see if it’s worth the risk.
Investing in Your Future
Investing in your financial knowledge is the most important investment you can make because it is an investment in yourself.
Understanding basic financial concepts can help you avoid common money mistakes and improve your financial current situation and position.
Investing in your financial literacy is especially vital for your future as an entrepreneur.
Running a successful business requires learning how to budget, invest, reduce your taxes, understand financial documents, use debt as leverage, etc. So, the sooner you become financially literate, the better.
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