Financial Education in 17 Definitive Lessons
What is financial education? That’s a good question, and one that has many different answers depending on who you talk to. For some, financial education means teaching kids how to save money, balance a checkbook, and use a credit card responsibly. For others, it means teaching how to invest in the stock market and manage a 401(k). Whatever your definition of financial education, it’s clear that there’s one thing we can all agree on—financial education is nearly non-existent in our schools.
A recent survey by Ipsos shows that only 13% of Americans were taught about investing in school. The same people surveyed believe overwhelmingly that financial literacy should be taught in school (87%), and that it should start as early as Middle School (72%).
This begs the question, what would it look like to teach financial education in our schools?
If I ran the school system, I'd create a financial education program that included the 15 following lessons. Even if you're not in school anymore, these would be valuable things for you to study and learn on your own as part of your journey towards financial literacy.
Lesson 1: The history of money
It's important to understand how money works, and part of doing that is by studying how it's worked in the past. Money has progressed over the centuries from something pretty simple, like bartering, to something pretty complicated, like derivatives. It's gone from being an object to an idea, so it's not tangible and intuitive. It's important to study money to grow rich. Some dates that are important:
1903 - Rockefeller's General Education Board takes over the U.S. education system
1913 - The Federal Reserve is formed
1929 - The Great Depression
1944 - The Bretton Woods agreement
1971 - Nixon takes the dollar off the gold standard
1974 - Congress passes the Employee Retirement Income Security Act
Lesson 2: Understanding your personal financial statement
I often said, "Your banker never asks to see your report card. A banker wants to see your financial statement—your report card when you leave school."
One of the foundational elements of financial literacy is understanding how to read and understand a personal financial statement.
Lesson 3: Know the difference between an asset and a liability
One reason many people are in financial trouble is because they confuse liabilities with assets. For instance, many people think their house is an asset when it's really a liability. A simple definition of an asset is anything that puts money in your pocket. A simple definition of a liability is anything that takes money out of your pocket.
Lesson 4: Seek cash flow... then capital gains
Many people invest for capital gains, meaning they're betting on the price of something to go up. Unfortunately, today, many people aren't winning on those bets. Investing for capital gains is akin to gambling, only not as much fun. Instead of investing for capital gains, the wealthy invest for cash flow and capital gains are icing on the cake, if they do happen.
Lesson 5: Three types of income
Not everyone earns money through a paycheck. In fact, my rich dad taught me that there are three types of income: earned, portfolio, and passive.
If you have a job and receive a paycheck, you make money through earned income. If you make money through the sale of capital gains, you make money through portfolio income. The third type of income, passive, is when you make money regardless of whether you work or not.
Lesson 6: The CASHFLOW Quadrant
According to Robert Kiyosaky, there are two types of people, those who view the world through the two different sides of Rich Dad's CASHFLOW Quadrant.
To summarize, on the left side of the quadrant are Es and Ss. They pay the most in taxes and trade their time for money. And each has a different mindset.
On the right side, however, are the Bs and is. They pay far less in taxes but create (or invest) in assets that make money for them even when they're sleeping.
Lesson 7: Savers are losers
In 1971, President Nixon changed the rules of money. That year, he closed the gold window instantly turning our dollar (which was backed by gold) into a currency. This was one of the most important monetary shifts to happen in modern history, yet few people understand why.
The reason savers are losers is because of this change. The value of the dollar continues to lose its value because of inflation. Basically, what your money can buy in the future is less than it can purchase now.
Lesson 8: Your wealth number
True wealth isn't determined by your net worth or how big your bank account reads. True wealth is determined by your wealth number.
As we discussed above, if you are making money through passive income and it's more than you spend every month, you have an infinite wealth number.
Lesson 9: The difference between fundamental and technical investing
Fundamental investing is the process of analyzing a company's financial performance, and that begins with understanding a financial statement. Technical investing is measuring the emotions or moods of the markets by using technical indicators. You can invest successfully doing both types of investing, but both take commitment and continued financial education..
Lesson 10: Know how to measure an assets strength
There are four asset classes: Business, real estate, paper assets, and commodities. To grow rich, you must study these classes, choose what is best for you, and work towards becoming an expert.
There is no shortage of opportunities in the world of investing. The question then becomes, which investments are worth pursuing? A key component of a full financial education is understanding how to measure whether an asset is strong or not. One of the best ways to do this is to refer to the B-I Triangle, which looks at an asset's full properties: Team, leadership, mission, cash flow, communication, systems, legal, and product.
Lesson 11: Know how to choose good people
Partners are crucial to business success. I used to say, "The best way to know a good partner is to have had a bad partner." You need to learn from every interaction. A good deal can blow up if you have a bad partner. So choosing partners and team members well is crucial.
Lesson 12: Know when to focus and when to diversify
Ideally, you'll want to be diversified in all four asset classes, but you'll want to focus on becoming an expert in one at a time. An old adage is that if you try to please everyone, you'll please no one. The same could be said for investing.
Lesson 13: Minimize your investment risk
In investing and business, there is always an element of risk. A smart investor knows how to minimize risk by hedging. There are a number ways you can do that within each asset class. Study up on ways to minimize risk in your chosen asset class.
Lesson 14: Make more money with taxes
I often say "It's not about how much you make, it's about how much you keep." Taxes are your biggest expense. That's why it's important to your financial education to understand how you can best limit that expense.
A financially intelligent person understands how to use the tax code to his or her advantage.
Lesson 15: The good, the bad, and the truth about debt
As many of you know, there is good debt and there is bad debt. The key to using debt is knowing how to borrow wisely and how to pay back the money. Without a solid plan to pay back debt, you'll soon have no credibility. A solid financial education will include understanding debt and how to pay that debt back.
Lesson 16: Know how your wealth is stolen
There are four things that steal your wealth: Taxes, debt, inflation, and retirement. A proper financial education will stress understanding how to use these wealth-stealing forces to make money rather than lose money.
Lesson 17: Know how to make mistakes
It's impossible to learn without making mistakes along the way. The key is to learn the lessons of those mistakes, and not let them take you out of the game. Look at failure as a learning opportunity.