Financial Literacy Is More Than Tools

I have paid a little attention to what passes for financial literacy. If I take out how credit cards work and how much they cost, take out mortgages and car loans, take out the long term cost of money managers, take out a smattering of stock and bond information, take out the tax deductibility of retirement plans, I would have little remaining.

Financial literacy, as we know it today, is about tools and tactics.

Literacy is about competence. Competence demands the ability to use tools, not just know about them.

Tools matter, but less than you think

I could go to Home Depot and buy every tool in the place and every piece of material in the place and yet I could not build a house. Probably not a dog house. Expensive tools and good materials are important, but absent the craftsmanship, they come to nothing.

Tradespeople know things I do not. You lose a little material with each saw cut. Tradespeople measure a little differently than I. Lumber has a crown and you must put it up when building a deck. It is easier to trim a room when it’s square. When renovating, put the drywall up square and accumulate the error to someplace, like a closet, where you can hide it. Expensive tools work more reliably and more precisely than cheap tools.

Applying the tools is what makes the project come out as expected.

Strategic financial literacy matters.

Strategic financial literacy would help you design projects, select tools and material, and apply those to the purpose.

Strategic financial literacy focuses on the end point and uses more resources than tools and materials. It uses people and time as essential elements. Few projects are there for the purpose of the project. Most are there to enhance the life of the people they affect. Most cover long time frames. Most recognize the scarcity of resources. That leads to priority definition.

Tools address none of those first. Applying specific tools to match resources and purposes is the outcome of strategic thinking.

Each of us can be a better financial tradesperson

We can be better tool users. There are strategic ideas in financial planning that people miss:

  1. Compound growth is not intuitive. The last double is more than the sum of all those prior. Accumulation is vastly different when you recognize the result is a function of capital, yield and time. The order of importance is time, yield, capital. You don’t need a lot of money to gather up a huge portfolio. You need time. Start early.
  2. The yield you keep is the only yield that matters. Consider taxes and costs when assessing your return. For a high rate taxpayer, 10% interest is 5% in pocket. 10% in an investment fund is 8% after fees and 6% after a capital gain tax is applied.
  3. Taxes deferred are taxes avoided. If you invest $100,000 at 10% for 20 years and pay 50% tax at the end you will have $386,000. If you pay as you go, you will have $265,000.
  4. Nothing in life is guaranteed. Most guarantees tell you the most you will get back. Not even government guarantees are 100%.
  5. Continuing life and ability to work, are probable but not certain. You need time to convert your skill and effort resource. Consider insurance.
  6. Risk is always there because the future is unknown. Learn to insure some risks, avoid others, and accept the rest. Accepting risk is a cost benefit thing. If you can afford the loss, minimize it by prevention, then carry on. Deductibles are an example.
  7. Don’t confuse price and cost. Price is an element of cost, but only a part. Often the least significant part. Keep the idea, “Cheap is expensive” in mind. Factory second parachutes are a poor tool.
  8. Debt is a charge against your future earnings. Be certain your future self is prepared to participate in the adventure.
  9. Life is uneven, so have a financial cushion.
  10. Have a long plan. Written is better because we forget and rationalize. Have a short plan, a budget, to control the day to day and learn about lifestyle management.
  11. Use the 3Rs. Record, review, and revise. Good results evolve, they are seldom the same as the first plan. People can build a house with a plan, because people have built millions of houses before. Your life is one off. No one has lived it the same as you will. A fixed plan is inappropriate.

Think strategic first.

Tools first is always a mistake. There is no reliable way to select without the strategic layer in place. With a strategic view tool selection is effortless. It fits or it does not, given the priorities.

You might need some help in the beginning because there is so little emphasis on the strategic. Do you know why? Providers make money only on tools, so why would they tell you about anything else?

You will find that most of financial literacy relates to behaviour. Your behaviour. Be involved. No one else is motivated the same way as you will be. You are a “mark” until you learn to govern your future strategically.

I help business owners, and professionals understand and manage risk and other financial issues. To help them achieve their goals, I use tax efficiencies and design advantages to acquire more efficient income and larger, more liquid estates.

Please be in touch if I can help you. 705-927-4770

One Comment on “Financial Literacy Is More Than Tools

  1. Do- it – yourself financial purveyors are at variance with long term individual financial success. The difficulty lies in finding your trusted advisor, educator , coach. The journey is long. Time invested is the most important element . See above . People who ignore these facts will fall short of their goals . The data is there to prove it. Thanks Don for reminding us. It never gets stale.

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