Increasing your financial IQ – How and why?
The general consensus is that 40% of the world’s population is financially illiterate. If that isn’t a strong enough incentive to increase your financial IQ, things get even worse when you evaluate each country individually.
We don’t want to scare anyone, but in developing countries, this percentage skyrockets to almost 80%.
And make no mistake, there is a price to pay for ignorance: A report from the National Financial Educators Council shows that the lack of financial literacy cost 15% of adults at least $10,000 in 2022.
Don’t worry if you don’t feel like reading, you can enjoy the video below or watch it on YouTube:
1
Understand ”The Finance Matrix”
Now, this is the foundation of all the arguments we are going to expand on in this article.
So before you start, make sure you have a good idea of how the banking system and money work.
We approached the subject in a previous post, so if you don’t understand how money moves through the market, you should go through those first and then come back to this one.
In any case, if you want to improve your financial IQ, you need to understand how money and the banking system work.
By understanding key ideas like interest rates, inflation, and credit, you can save, trade, and manage risk in a smart way. This will help you get the most money and stay away from possible dangers.
Getting to know the basics of loans and borrowing gives you the tools you need to use debt wisely. It will also make you smarter when it comes to choosing the best credit products and negotiating with lenders to get good terms.
If you know a lot about the banking system and how money works, it will not only help you handle your own money better. It will also help you understand how the economy works as a whole.
We’re talking about macroeconomics here, of course.
If you understand how banks and monetary policies affect the economy as a whole, you’ll be able to change your financial strategy as the economy changes.
This is important if you want to make sure that your investments stay diverse and that you can still reach your financial goals.
Remember that times of economic trouble are when riches are made. People who know about money see these times as opportunities. They know that the business has its own life cycle.
This is the best time to build wealth that will last for generations, and it only happens every few decades.
Take the time to learn about money because it will skyrocket your financial IQ. This foundational information gives you the tools you need to make good decisions, handle risks well, and grow your wealth.
2
Master the “Rule of 72”
The “Rule of 72” is a clever but simple way to estimate how many years it will take to double the value of an investment or money placed at a constant rate of interest per year.
This handy tool makes it easier to understand the huge power of compounding. And it also lets you quickly compare how different investments might grow in the future.
To use the Rule of 72, all you have to do is divide 72 by the annual interest rate, which is given as a percentage. The number that you get gives you an idea of how long it will take for your investment to double in value.
For example, if the interest rate on an investment is 6% per year, you can expect the value to double in about 12 years.
Keep in mind that the Rule of 72 is only a rough guide and may not always be accurate. Especially for higher interest rates or when fees, taxes, and other factors that could affect an investment’s yields are taken into account.
Still, it is a great mental tool that helps you quickly understand how an investment can grow and increase your financial IQ.
So, if you know how to use the Rule of 72, you can:
- Learn more about how interest rates affect your savings so you can make better decisions.
- Compare the potential growth of different investments quickly to make better investment choices.
- Develop a clear understanding of how important growth and the time value of money are.
Use the rule to set reasonable standards for your investment goals and time frames.
Foster a deep understanding of how important it is to start saving and investing plans early if you want to get the most out of compound interest.
3
Decode behavioral finances
Behavioral finance is an interesting area of study that combines psychology and finance. It figures out how feelings and cognitive biases affect how people make financial decisions.
Its main goal is to explain why people often make irrational decisions even when they have all the relevant knowledge.
Important ideas in the field of behavioral finance include:
Overconfidence is the tendency to overestimate one’s skills or the accuracy of one’s views. This can lead to taking too many risks or making bad investment decisions.
Confirmation bias is the tendency to look for and put more weight on information that backs up views you already have while ignoring or downplaying evidence that goes against your beliefs. This can lead to narrow-mindedness and bad financial decisions.
Loss aversion is the tendency for people to feel the pain of losses more strongly than the pleasure of equal gains. This makes them hold on to failing investments for too long or sell profitable ones too soon.
Anchoring is a cognitive bias in which a person makes decisions based too much on the first piece of knowledge (the “anchor”). In finance, this can mean that an investor values an object based on its past prices instead of its true value.
Herd mentality is the desire to act or think like everyone else. Even if it goes against what you believe or what you know. This can lead to irrational market trends and bubbles.
Mental accounting is the tendency to treat money differently based on where it came from or what it will be used for. This leads to inconsistent and illogical money management.
Recency bias is the tendency to give more weight to recent events or information when making choices. This can cause people to overreact to short-term changes in the market and ignore long-term trends.
Consider the following ways to decipher and get around these behavioral biases:
Increase your self-awareness by taking time to think about how you make decisions.
We know a neat way to help you out here. “The 72-Hour Rule” is the name for it. “The One-Page Financial Plan,” a great book about personal finance by Carl Richards, taught us this easy rule:
Before you buy something that isn’t necessary, you should wait 72 hours.
When your FOMO (fear of missing out) starts to kick in, you should do the same thing with your finances. You’ll know if it was a good idea to buy that thing after some time has passed.
Look for different points of view: To avoid confirmation bias and make well-informed choices, look at a variety of sources of information.
Use disciplined methods for investing: Use methods like dollar-cost averaging, stop-loss orders, and sticking to a predetermined asset allocation.
Focus on the long term: Give your long-term financial goals high importance and don’t be swayed by short-term market changes.
Keep an eye on your progress: Check your investment account and financial plan often to make sure they are in line with your goals. By understanding behavioral finance and how it affects your financial choices, you can increase your financial IQ.
And trust us when we say that these are the only kinds of decisions you should make with your money.
4
Implement zero-based budgeting
Zero-based budgeting (ZBB) is a new way to manage your money that involves allocating every dollar of your income to specific bills, savings, or investments. This makes sure that no money is left over.
Traditional budgeting methods focus on making changes to previous budgets, but ZBB starts from scratch every time. This means you have to justify every expense and put your financial goals in order of importance.
This way helps you spend more carefully, be more aware of your finances, and feel more in charge of your money.
To use zero-based budgeting, start by making a list of all the ways you make money each month, including your pay, side jobs, and any passive income streams.
Then, list all of your bills and put them into two groups: fixed costs (like rent and utilities) and variable costs (like groceries and entertainment).
Lastly, put the rest of your money toward savings, investments, or paying off debt. Make sure that every dollar you earn is set aside for a specific reason.
Using a zero-based budget helps you figure out where you might be spending too much, thus increasing your financial IQ.
Reviewing and tweaking your budget on a regular basis makes you more accountable and makes sure you keep making progress toward financial safety and success.
Over time, this method can help you develop better habits for managing your money and a more responsible way of thinking about your funds.
5
Study case studies of financial successes and failures
When you look at case studies of both financial successes and failures, you can learn a lot about the strategies.
Examining real-life situations will teach you how to spot patterns, learn from the mistakes of others, and apply the lessons to your own financial journey.
By breaking down what made some people successful, you can learn about effective ways to spend. Or how important it is to think about the long term, and how innovation can change the way money is made.
On the other hand, looking into financial failures like the dramatic fall of Enron, the 2008 financial crisis, or even the recent fall of Silicon Valley Bank can teach important lessons about the consequences of unethical behavior, taking too many risks, and following the crowd.
Understand the mistakes and bad decisions that led to these financial disasters. If you manage to see what happened behind the curtain, you’re well on your way to increasing your financial IQ.
6
Learn to read financial news critically
It’s important to learn how to read financial news critically if you want to filter out unnecessary noise.
In the fast-changing media world of today, it is more important than ever to separate useful information from sensationalized news.
If you work on your critical thinking skills, you’ll be better able to figure out if financial knowledge is reliable, useful, and correct.
Start by looking at the news source closely and thinking about how reliable it is. Financial news can be affected by many things, such as the interests of the publisher, advertising pressures, or government ties.
Keep an eye out for possible conflicts of interest and think about comparing information from different sources. This observation skill will increase your financial IQ heavily.
By using a variety of sources, you can learn about different points of view and get a more complete picture of the topic at hand.
Also, pay close attention to the quality and depth of the research in the news. Instead of relying on anecdotes or opinions, look for well-researched and data-driven articles.
Be careful when you see shocking headlines that are meant to get your attention but may not contain any useful information.
By getting better at analyzing financial news, you can find useful information and avoid making hasty choices based on unreliable information.
Remember, if you’re not sure what to do, just follow the money and you’ll find out.
7
Challenge yourself with financial experiments
Using financial experiments as a way to test your financial knowledge, skills, and ability to change turns out to be a good idea.
These experiments could include setting short-term goals or trying out new financial strategies. Maybe even looking into business opportunities that haven’t been tried before.
When you step out of your comfort zone, you can gain useful knowledge. Moreover, you learn from your mistakes and improve your business skills.
Financial experiments can take many forms, like sticking to a strict budget for a month to see how frugal you are or investing in a new asset class to see what the risks and possible rewards are.
You could also start a side business to make extra money or try out different ways to save to find the best one for you.
Through these tasks, you’ll learn more about your financial habits and tendencies, which will help you make better choices in the future.
During these experiments, it’s important to have a learning attitude, think about your successes and failures, and stay open to change. These experiments have the potential to greatly increase your financial IQ.
Keep track of your progress and write down your experiences to look for trends and lessons that can help you make better financial decisions in the future.
8
Analyze your favorite brands’ financials
Examining the financials of your favorite brands can be a fascinating activity. It lets you learn more about money and evaluate the performance of companies that excite you.
By looking at their financial statements, yearly reports, and earnings calls, you can learn more about their business structures. This hands-on method gives you the skills you need to make smart investment decisions and increases your financial IQ at the same time.
Look at the company’s income statement, balance sheet, and cash flow statement to start your research.
These important financial papers give an idea of the company’s financial health. Keep an eye on things like the rise of revenue, the profit margin, the amount of debt, and the liquidity ratio.
By comparing these numbers to industry benchmarks or peer data, you can learn about the company’s relative strengths and weaknesses.
Lastly, listen to earnings calls and read annual reports to learn more about the company’s long-term goals. This information gives you a more complete picture of the company’s future.
Analyzing the financials of your favorite brands not only helps you increase your financial IQ. But it also helps you make better decisions as a customer and an investor.
9
Follow influential financial podcasts
Watching financial podcasts is a great way to increase your financial IQ. They give you expert advice and tips on different parts of personal finance, trading, and managing your wealth.
Here’s why:
Podcasts are a quick and easy way to get information. You can listen to it on your way to your job, while working out, or in your free time.
They help you stay up-to-date on market trends, investment strategies, and personal finance tips. They also give you inspiration and motivation to improve your money habits.
The best financial podcasts often feature interviews with successful entrepreneurs, investors, and financial gurus. This gives listeners a wide range of viewpoints and useful advice.
By listening to these talks, you can learn important lessons from their experiences, mistakes, and strategies.
Also, these podcasts do a great job of breaking down complicated financial ideas into easier-to-understand and more interesting formats. This makes it easier for viewers to understand the information and use it in their daily lives.
To get the most out of financial podcasts, it’s important to choose ones that match your hobbies and goals. Podcasts are an amazing way of increasing your financial IQ.
Find podcasts that cover a wide range of topics, such as personal finance, investing, entrepreneurship, or financial freedom. Sign up for more than one to make sure you get a balanced and wide range of ideas.
And if you want to get started, Naval Ravikant’s talks are a great place to start. He has the best and most sensible ideas about how to build and keep wealth.
10
Read influential personal finance books
Reading popular books on personal finance can help you learn a lot about money.
Most of the time, these books cover a wide range of themes, like budgeting, saving, investing, dealing with debt, and building wealth.
By learning from the experiences and knowledge of successful financial authors, you can build a strong base in personal finance and use their advice on your own financial journey.
Personal finance books that have a lot of influence often include stories, case studies, and real-life examples. These examples make complicated financial ideas easier to understand and more interesting.
Finance books can help you find and solve common money problems, create a growth mindset, and form habits.
Reading these books can also give you the inspiration and drive you need to take charge of your finances. Or set big goals for your money, and work towards financial independence.
To get the most out of personal finance books, you might want to write down or summarize the most important things you learn and then apply those lessons to your own finances.
Use the methods and techniques you learn in a way that works best for you and your financial goals.
Always look for new books and tools to learn more, and keep up with the constantly changing financial world. And if you want to know what books to read, just take a look around our channel.
We have a lot of pieces where we talk about great books about money, so give them a read if you want to increase your financial IQ.
11
Utilize gamified learning apps
By adding game-like features and rewards to the learning process, gamified learning apps are a fun and interactive way to learn about money.
These apps give users a fun and encouraging place to learn about money. By using apps that turn learning into a game, you can make the process fun and interesting.
Some of the most famous gamified learning apps, like Wealthbase and Investopedia’s Stock Simulator, are about investing in the stock market.
They let users build virtual portfolios, simulate real-time trading, and compete with friends or other users in a risk-free environment. You can have fun and earn rewards while learning about different ways to spend, analyzing the financial health of companies, and understanding how the market works.
Aside from stock market simulators, there are other apps that use games to teach planning, saving, and managing personal finances. Games are a fun and interactive way of increasing your financial IQ.
These apps often use fun graphics, tests, and tracking of progress to help users learn good money habits and reach their goals. And if we’re talking about apps, ours is high up in the ranks.
We designed the Alux app specifically to get you rich. Our unique approach to learning (only 10 minutes/day) will see you making progress in leaps, not steps. If you want to reach your goals fast, download the Alux app right now!
12
Set up a financial vision board and utilize goal-based investing
A financial vision board is a clear picture of your financial goals and dreams. Carefully put it together to motivate and inspire you to keep going on your financial journey.
To make a vision board, you need to find pictures, words, or symbols. Represent your ideal financial future and arrange them on a physical or digital board.
The vision board will always remind you of your financial goals. It helps you make choices that will lead to the results you want and increase your financial IQ.
Goal-based investing is a technique that is based on matching up with your investment plan.
Instead of focusing only on maximizing returns, goal-based investing focuses on reaching specific financial goals. Say like saving for a house, paying for a child’s schooling, or getting ready for retirement.
When you identify and rank these goals, you can tailor your investment plan to fit each goal’s different time frame, risk tolerance, and amount of money needed.
This way lets you keep better track of your progress and make changes to your plan as needed.
When you use a financial vision board and spend based on your goals, you can create a powerful plan to reach your financial goals.
The vision board gives you ideas and motivation, and goal-based investing gives you a clear, organized plan for how to meet your goals.
13
Experiment with dollar-cost averaging
Dollar-cost averaging (DCA) is a disciplined way to invest in which a set amount of money is invested at regular times.
This method makes it unnecessary to try to time the market and reduces the impact of market volatility. It also reduces the risk of making bad investment choices based on short-term changes.
Investors gain from both upswings and downswings when they invest consistently over time. This is because they buy more shares when prices are low and fewer shares when prices are high.
One of the best things about DCA is that it helps buyers get past the mental blocks that get in the way of good investing.
By automating the investment process and focusing on the long term, investors are less likely to let feelings like fear or greed drive them to make hasty decisions.
This approach also helps people get into good financial habits by encouraging them to save and invest regularly. This helps people develop a disciplined and patient way of thinking about money.
To use a dollar-cost-averaging strategy, investors should first decide how often they want to invest. Then, they should choose a way to spend, like an index fund or an exchange-traded fund, that matches their risk tolerance and long-term financial goals.
Who says you need to bet on everything? Always remember that the best way to spend is to spread your money out over time.
14
Automate your finances
Set up systems and tools to handle and streamline your finances.
By automating your finances, you’ll spend less time and energy managing your money.
Start automating your funds by setting up regular transfers from your checking account to your savings or investment accounts. This “pay yourself first” method makes sure you always save and spend first.
Also, think about automating your bill payments by setting up regular payments with your bank or with service providers directly.
This will save you time, help you avoid late fees, and keep your credit score high.
15
Study the financial independence, retire early (FIRE) principles
The Financial Independence, Retire Early (FIRE) movement. It’s a way of life and personal finance that encourages people to save and spend aggressively.
The main goal is to build up enough assets to make a steady income that covers your living costs. This will allow you to retire early and follow your interests without having to work a traditional job.
Usually, this is done by saving a lot of money, usually at least half of one’s income, and investing in low-cost, diverse portfolios to get the best returns.
The FIRE principles center on saving money, living on purpose, and planning for the future. Great principles when it comes to improving your financial IQ.
Followers often cut costs they don’t have to pay and find the best tax strategies. They put most of their money into investments that bring in money on their own.
Not investing enough time and energy in your financial education is a mistake that can haunt you for the rest of your life. Put these tips to good practice and take action based on them. There’s no better way to increase your financial IQ than doing.
