Basics of Financial Literacy

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Financial Literacy

In this article, I would like to bring to your notice the very basics of finance. All the ideas of this article have been inspired by the book- Rich Dad Poor Dad.

The rich keep getting richer. The middle class stays the same. The gap keeps widening. Every now and then there are debates about taxing the rich.

What’s more astonishing is that the middle class keeps complaining of the rich, they want the rich to be taxed higher rather than themselves striving towards being rich.

Our society and institutions are bereft of financial literacy. That’s why the gap keeps widening. There is enough evidence to support that. That is why many lottery winners end up at the same place, a few years later after winning a lottery.

Rich people buy assets and poor people buy liabilities that they think are assets.

An asset is something that puts money in your pocket.

A liability is something that takes money out of your pocket.

Let me narrate to you a simple story-

A well-educated person gets a job, makes decent money, spends it lavishly. Then he gets married. Now the couple, pool their money to buy a house. For that, they also take loans. As they receive increments, they have kids to raise. Also, they are planning for a car and want to save money for the kid’s education.

Notice one thing- As the income level goes up, so do the expenses. Let’s not forget the tax part. The tax is correlated to your income.

Poor and middle-class people never play the long-term game in terms of finance. They’ll buy all the latest trends but not quality assets. Nor will they build assets.

Rich people on the other hand keep strengthening their asset base. They will buy stocks, bonds, intellectual property, or construct a business. Their asset, in turn, generates more income. The income generated from assets not only cover their expenses but also gets reinvested into their asset column.

Well, it’s not your fault. This is how our society has been working. We are told to get a degree, then a job, invest in Fixed Deposit(FD).

Let’s talk about the fixed deposit. You think that your money is safe, and it keeps compounding. Here is a harsh truth- In fact, your money is losing its value.


The answer is inflation.

Inflation is the increase of prices over time. Ex- A packet of bread a decade ago, was priced Rs20. But today the price is Rs25. This increase in price over time is inflation.

Nowadays, FD offers a rate ranging from 3 to 6%. Whereas the inflation rates are more than the FD rates. You can check out the inflation rates here. Saving is losing its value. Most of the time, the hike in salary is less than the inflation.

On the other hand, SENSEX(Indian stock market index) has given staggering returns over the years.  You can check the comparison here- SENSEX Vs FD.

Rich people put their money to work. Average people work for money.

Though, the above practices have been running in the family for decades. The family takes a loan for the child’s education, which sometimes takes years for them to recover. The middle class is afraid to take risks.

Little risk is necessary if you want to achieve something in life.

Rich people put their money to work. Average people work for money.

Our education system creates focuses on creating employees rather than employers. Our education system robs the kid of their creativity, by focusing on getting good grades and getting a good job. Their main purpose is good grades. We think that a good job brings money. It does but the poor cash flow management ruins our financial freedom.

This is because of a poor financial foundation. And we all know that a building collapses when the foundations are weak.

We need to realize the power of money. Create a budget. Know where your money is flowing. Invest in quality assets.

Also, another thing I would like to bring to your notice is that it’s good to be frugal but make sure to spend on things that make your task efficient and saves time. Don’t even think twice.

That’s it for today.

Critical thinking is not common today. That is why we make horrible decisions which we pay in our lifetime. Most things we consume our noise and don’t add any value. That is where Mental Models comes into the picture. They help you think better and make rational decisions. All the information is useless if you don’t have them in a usable form.

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