Increase Your Financial IQ

Chapter 2

The Five Financial IQs

There are five basic financial IQs. They are:

Financial IQ #1: Making more money.
Financial IQ #2: Protecting your money.
Financial IQ #3: Budgeting your money.
Financial IQ #4: Leveraging your money.
Financial IQ #5: Improving your financial information.

Financial Intelligence vs. Financial IQ

Most of us know that a person with a mental IQ of 130 is supposedly smarter than a person with an IQ of 95. The same parallels can he drawn with financial IQ. You can be the equivalent of a genius when it comes to academic intelligence, but the equivalent of a moron when it comes to financial intelligence

Often I am asked, "What is the difference between financial intelligence and financial IQ?" My reply is, "Financial intelligence is that part of our mental intelligence we use to solve our financial problems. Financial IQ is the measurement of that intelligence. It is how we quantify our financial intelligence. For example, if I earn $100,000 and pay 20 percent in taxes, I have a higher financial IQ than someone who earns $100,000 and pays 50 percent in taxes."

In this example, the person who earns a net $80,000 after taxes has a higher financial IQ than the person who earns a net $50,000 after taxes. Both have financial intelligence. The one who keeps more money has a higher financial IQ.

Measuring Financial Intelligence

Financial IQ # 1: Making more money. Most of us have enough financial intelligence to make money. The more money you make, the higher your financial IQ # 1. In other words, a person who earns $1 million a year has a measurably higher financial IQ #1 than a person who earns $30,000 a year. And if two people each make $1 million a year and one pays less in taxes than the other, that person has a higher financial IQ because he or she is closer to achieving financial integrity by utilizing financial IQ #2: protecting your money.

We all know that a person may have a high academic IQ and be a genius in the classroom but be unable to make much money in the real world. I would say my poor dad, a great teacher and a hardworking man, had a high academic IQ but a low financial IQ. He did very well in the world of academia but did poorly in the world of business.

Financial IQ #2: Protecting your money. A simple truth is that the world is out to take your money. But not all who take your money are crooks or outlaws. One of the biggest financial predators of our money is taxes. Governments take our money legally.

If a person has a low financial IQ # 2, he or she will pay more in taxes. An example of financial IQ #2 is someone who pays 20 percent in taxes versus someone who pays 35 percent in taxes The person who pays less in taxes has a measurably higher financial IQ.

Financial IQ #3: Budgeting your money. Budgeting your money requires a lot of financial intelligence. Many people budget money like a poor person rather than like a rich person. Many people earn a lot of money but fail to keep much money, simply because they budget poorly. For example, a person who earns and spends $70,000 a year has a lower financial IQ #3 than a person who earns $30,000 and is able to live well on $25,000 and invest $5,000. Being able to live well and still invest no matter how much you make requires a high level of financial intelligence. Having a surplus is something you have to actively budget for. Budgeting for a surplus is something we will look at in detail later on.

Financial IQ #4: Leveraging your money. After a person budgets a surplus, the next financial challenge is to leverage their surplus of money. Most people save their financial surplus in a bank. This was a smart idea before 1971 -- before the U.S. dollar became a currency. Also, after 1974, workers needed to save for their own retirement. Millions of workers did not know what to invest in, so they invested their financial surplus in a well-diversified portfolio of mutual funds, hoping this would leverage their money.

While savings and a diversified mutual fund portfolio are a form of leverage, there are better ways to leverage your money. If a person is truthful, he or she has to admit it doesn't require much financial intelligence to save money and invest in mutual funds. You can train a monkey to save money and invest in mutual funds. That is why the returns on those investment vehicles are historically low.

Financial IQ #4 is measured in return on investment. For example, a person who earns 50 percent on his or her money has a higher financial IQ #4 than someone who earns 5 percent. And someone who earns 50 percent tax-free on his or her money has a higher financial IQ than a person who earns 5 percent and pays 35 percent in taxes on that 5 percent return.

One more point. Many people think that higher returns on investment require higher degrees of risk. That is not true. I achieve exceptional returns, and pay very little, if anything, in taxes, all with very low risk. To me, having a well-diversified mutual fund portfolio and savings in the bank is a lot riskier than what I do. It is all a matter of financial intelligence.

Financial IQ #5: Improving your financial information. There is a bit of wisdom that goes, "You need to learn to walk before you can run." This is true with financial intelligence. Before people can learn how to earn exceptionally high returns on their money (financial IQ #4: leveraging your money), they need to learn to walk; that is, to learn the basics and the fundamentals of financial intelligence.

One of the reasons so many people struggle with financial IQ #4: leveraging your money, is because they are taught to turn their money over to financial "experts," such as their banker and their mutual fund manager. The problem with turning your money over to financial experts is that you fail to learn, fail to increase your financial intelligence, and fail to become your own financial expert. If someone else manages your money and solves your financial problems, you can't increase your financial intelligence. Actually, you are rewarding other people for theirs instead -- with your money!

It's easy to increase your financial intelligence if you have a strong foundation of financial information. But if your financial IQ is weak, then new financial information can be confusing and have seemingly little value. Remember my example of math geniuses still needing to start with 2 + 2? One of the benefits of being dedicated to your financial education is that over time you will be better able to grasp more sophisticated financial information just as mathematicians are able to do complex equations after years of practicing math problems. But, again, you need to learn to walk before you can run.

From the book INCREASE YOUR FINANCIAL IQ, Get Smarter with You're Money. Copyright (c) 2008 by Robert Kiyosaki. Reprinted by permission of Grand Central Publishing, New York, NY. All rights reserved.