Learn How To Avoid Functional Financial Illiteracy

What if I wanted to build a house. Build it, not just contract the work to others. How many tools would I need?

Answer: Dumb question!

All the tools in the world would not help me build a house. I don’t know how to do it. I am building illiterate.

I can know all about tools and materials and still be lost. It is like Richard Feynman has explained, knowing the name of something is not the same as knowing something.

To know is to be able to use.

Functional financial illiteracy

If your financial literacy is limited to knowing about the tools, you will be lost. Knowing how to apply the tools is where their value lives.

Money tools can be best seen in the context of financial planning. Being highly skilled or knowing everything about power tools is good, but it gets me no closer to being able to build a house.

It’s the same with life insurance investment plans, disability insurance, mortgages, credit cards, car lease, student loans, and employer group insurance or pension plans.

Once you know how to use the tools you can do a better job of selecting them, knowing when they matter, understand the difference between value and price, and knowing when not to use them.

In an ideal state, you could explain them to someone else. A spouse, a child even,

Building a financial plan.

Like building, financial planning involves four parts.

Step #1 – Vision

What do you want the house to be? A small bungalow on a small lot or a vast country home on 50 acres. Knowing what you are trying build will develop information about possibilities and limits. The terrain and geology of the site, the floor plan, the exterior elevations, the time to construct, the services required like hydro, water, and sewage treatment, permits required, the price, resolving conflicting ideas with others who will live there, the decorating and landscaping. Starting with no vision will involve looping back to fix obvious but overlooked things. That adds to cost and the time to complete

Vision is the first step in financial planning. What are you trying to accomplish in your life? When do you need it? What is the price? Who else is involved? What career paths are available to you? What do you value most? What aspects are open to tradeoff and negotiation?

Step #2 – Define strategy

There are many questions you can ask yourself that will make the plan specific.

All of them start with “W”

  1. What do I want? There could be several of those.
  2. Why do I want that particular set of things. Ties to who you are and your vision for your life.
  3. What do I have to get it with? Mostly your career value. The ability to work and the skill to work at things that pay well, or better. What would I defer or give up for more money?
  4. Who is involved? How do they support my goals and how do I support theirs? Could be spouse, children family, parents. Maybe business partners.
  5. When do I need what I want? Some things are fairly near. Maybe paying off personal debt or buying a car. Others are farther. Children’s education, retirement, security.
  6. Where will we be? Is geography a crucial limit. Some people will move for tax advantages. Others must be near children or grandchildren. Some people don’t like cold weather.
  7. What if? How will I handle some of life’s serious problems. Death, disability, divorce, child rearing, unexpected financial success? (Lottery winners have uneven life success after winning.)
  8. Why not? There are more thing in life possible than we can ever partake of. You tend to make better decisions if you don’t waste time and other resources trying things that you could exclude beforehand.

Vision and the “W” questions are strategic

By the time you think about the vision and the strategic questions, you will find four things:

  1. The most important is, it’s your strategy, your plan. Only yours. You are the planner. Everyone else is a helper .
  2. You will have an idea about risk. It is not so much the condition but what it means to you. What will you do if things don’t work out? Some people are good at risk others not. Understand your tolerance for risk. Understand your exposure to it. Understand your capacity to overcome an adverse event or to manage the likelihood of occurence.
  3. You will have an awareness of what parts are fuzzy. There will always be some fuzzy ideas. Retire at 55 or 60 or never? Have two children or four? Live where you grew up or a different place? Many of the fuzzy things can only be clarified by trying them. Some are non-reversible, so risky. Like having children.
  4. You will realize none of what you want or even need will ever happen unless you do something about it. Doing something is not a given. Many people have ideas and dreams, but don’t implement them. Implementing is an entirely different function. It is like the tab on my monitor that says, “Writing and editing are different tasks.” You cannot do both at once.

Tomorrow we will talk about iimplementing and the last two steps

I don’t know how so my best choice is know who.


I help people understand and manage risk and other financial issues. To help them achieve and exceed their goals, I use tax efficiencies and design advantages. The result: more security, more efficient income, larger and more liquid estates.

Please be in touch if I can help you. don@moneyfyi.com 705-927-4770

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