Got Financial Intelligence?

For years, I have heard people say, “money is the root of all evil.” Then I learned that the actual biblical quote made more sense – “for the love of money is the root of all evil.” And it is that same love of money that is now part of the root of our current “evil economic crisis.”

Though most of the blame for our current economic condition has been placed on greedy Wall Street investment banks for the housing market collapse, and on Congress and President Bush for the overwhelming increase in food and gas prices, what we must understand is that a lack of financial intelligence on behalf of American citizens is also partly responsible for the country’s current financial and economic crises.

According to a recent U.S. Department of Housing and Urban Development survey, nearly 12% of sub-prime borrowers stated they were not familiar with basic financial terms such as interest rates, principal, and down payment, and roughly 33% were not aware of the different types of mortgages available. How well do you know these things? Ask yourself, are you financially educated, financially literate, or financially intelligent? It’s not a trick question. Please allow me to school you on the differences between the three.

Financially Educated: A person who has learned and knows basic business ideas and financial facts. Financial education is simply obtaining business and financial knowledge. A person can read and memorize the words in a personal finance textbook and declare that they are financially educated. If you can define and explain how a credit card, mortgage, and bank works, then you can say you are financially educated.

Financially Literate: A person who is financially educated, but also knows how to read, write, and speak about basic business ideas and financial documents. If you can read and understand loan agreements, bank and credit card statements, and can successfully explain and calculate compound interest, congratulations, you are financially literate.

Financially Intelligent: A person who is financially educated and literate, but also understands how to use financial knowledge to make money, save money, and create wealth. If you know and understand how to borrow money from a credit card at 5% interest and re-loan that same money to someone charging 12% interest, you are financially intelligent.

If you know and understand how to transfer debt that is being charged at 12% interest to a 0% interest credit card and repeat the process until you have paid zero interest on your debt, then it is my honor again to award you the financially intelligent distinction.

How do you become financially intelligent? You must read business articles, study economic and financial concepts, ask yourself questions about how you can profit from that information, and most importantly practice your financial lessons. You can spend an entire day reading a recipe on preparing a particular meal, but until you actually go into the kitchen and start working, you will not learn how to mix and measure ingredients, properly use cooking utensils, and ultimately prepare a delicious meal.

This same advice is true for business and money. Until you start creating financial spreadsheets, calculating compound interest and return on investment (ROI), and actually start a side business, you will continue to be what I call an “academic entrepreneur.”

It’s no secret, the majority of Americans live paycheck to paycheck, carry approximately $9,000 in credit card debt and do not know the current interest rate on their credit cards or other debt such as that for student loans. If you are “financially fooled” once, then shame on the person or financial institution responsible for the fooling. If you are “financially fooled” twice, then shame on you for not being, or attempting to become, financially intelligent!