Financial Literacy Essay Example For Students

Financial Literacy Essay FINANCIAL LITERACY â€Å"Financial literacy is one of the most important investor basics, especially if you want to be a safe investor, an inside investor, and a rich investor. Anyone who is not financially literate cannot see into an investment. Just as a doctor uses X-rays to look at your skeletal system, a financial statement allows you to look into an investment and see the truth, the facts, the fiction, the opportunities, and the risk. Reading a financial statement of a business or individual is like reading a biography or an autobiography. † A business has a financial statement, a stock certificate is a reflection of a financial statement, each piece of real estate has a financial statement, and each of us as an individual human being has a financial statement attached to us†¦Everything – regardless of if it is a business, real estate, or human being – that transacts money has an income statement and balance sheet, whether or not they know it. People w ho are not aware of the POWER OF A FINANCIAL STATEMENT often have the LEAST MONEY and the BIGGEST FINANCIAL PROBLEMS. † â€Å"While you were in school, you got a report card once a quarter. A financial statement is your report card once you leave school. The problem is that since most people have not been trained to read financial statements or how to keep a personal financial statement, they have no idea how they are doing once they leave school. Many people have failing marks on their personal financial statements but think they are doing well because they have a high-paying job and a nice home. Unfortunately, if I were handing out the grades, anyone who was not financially independent by age 45 would receive a failing grade. It’s not that I want to be cruel. I just want people to wake up and maybe do a few things differently†¦before they run out of their most important asset: TIME! † â€Å"A person needs to get his or her own personal financial statement under control before investing. † â€Å"This process I have been talking to you about is the process of taking control of yourself, which also means your financial statement. So many people want to invest because they are deep in debt. Investing in the hopes of making more money so you can pay your bills or a buy a bigger house or a new car is a fool’s investment plan. You invest for one reason: to acquire an asset that converts earned income into passive income or portfolio income. That conversion of one form of income into another form of income is the primary objective of a TRUE INVESTOR. And to do that requires a higher degree of financial literacy than simply balancing a checkbook. † â€Å"So you’re not concerned about the price of a stock or piece of real estate. You’re more concerned with the operating fundamentals, the fundamentals that you can see with a financial statement? † Where you find the best investment opportunities is from understanding accounting, the tax code, business law, and corporate law. And it in these invisible realms where the real investors shop for the biggest investment bargains. † â€Å"People leave school not even knowing how to balance a checkbook much less how to prepare a financial statement. They never learned how to control their finances. And the only way you can tell if peop le are in control of themselves is by looking at their financial statements. † â€Å"Just because people have high-paying jobs, big houses, and nice cars does not necessarily mean they are in control financially. If people knew how a financial statement worked, they would be more financially literate and more in control of their money. By understanding financial statements, people can better see how their cash is flowing. † Literacy Lesson #1: It is the direction of cash flowing that determines if something is an asset or a liability, at that moment. In other words, just because your real estate broker calls your house an asset does not mean it is an asset. Literacy Lesson #2: It takes at least two financial statements to see the entire picture. Sophisticated Investors must see at least two financial statements simultaneously if they want a true picture. † â€Å"†¦the professional investor must think beyond the price of an investment going up or going down. A sophisticated investor reads the numbers to get the true story and begins to see things that the average investor does not see. A sophisticated investor must see the impact of government regulations, tax codes, corporat e law, business law, and accounting law. One reason it is hard to find accurate investment information is that to gain a full picture requires financial literacy, an accountant, and an attorney. In other words, you need two different professionals to get the real picture. The good news is that if you take your time and invest the time to learn the ins and outs of what goes on behind the scenes, you will find investment opportunities and great wealth, wealth that very few people ever find. You will find out the truth about why the rich get richer, and the poor and middle class work harder, pay more in taxes, and get deeper in debt. Once you know the truths, you can then decide which side of the quadrant you want to operate from. IT’S NOT HARD; IT JUST TAKES SOME TIME†¦TIME THAT PEOPLE WHO JUST WANT A HOT INVESTMENT TIP DO NOT WANT TO INVEST. † â€Å"When you come to the boundaries of what you know, it’s time to make some mistakes. † â€Å"The streets are a very tough teacher. In school, you’re given the lesson first. On the street, you’re given the mistake first and then it’s up to you to find the lesson, if you ever find it†¦in school, you are considered smart if you don’t make mistakes. On the street, you’re smart only if you make mistakes and learn from them. † – On School Smarts and Street Smarts. I am so rich because I’ve made more financial mistakes than most people. Each time I made a mistake, I learned something new. In the business world, that something new is often called ‘EXPERIENCE. ’ But experience is not enough. Many people say they have a lot of experience because they keep making the same mistake over and over again. If a person truly learns from a mistake, his or her life changes forever, and what that person gains instead of experience is ‘WISDOM. ’ â€Å"People often avoid making financial mistakes, and that is a mistake. They keep saying to themselves, ‘Play it safe. Don’t take risks. People may be struggling financially because they have already made mistakes and have not learned from the mistakes. So they get up every day, go to work, and repeat the mistake and avoid new mistakes, but they never find the lesson. These people often say to themselves, ‘I’m doing everything right, but for some reason, I’m not getting ahead financially. ’ â€Å"There are people who buy tickets to the game, and there are people who sell tickets to the game. You want to be on the side that is selling the tickets. † â€Å"Great spirits have often encountered violent opposition from mediocre minds. – Einstein â€Å" We all possess both a great spirit and a mediocre mind. The challenge in turning our ideas into a million dollar or even a billion dollar asset is often the battle between our own great spirits and our own, often mediocre, minds. † – Rich Dad â€Å"There are many people with great ideas but very few people with great amounts of money. The reason the 90/10 rule holds true is because it does not take a great idea to become rich but it does take a great person behind the idea to become rich. You must be of strong spirit and strong in your convictions to turn you ideas into fortunes. Even if you understand the process via which your ideas can become millions even billions of dollars, always remember that great ideas only become great fortunes if the person behind the idea is also willing to be great! It is often difficult to keep going when everyone around you is saying, â€Å"You can’t do it. † You must have a very strong spirit to withstand the doubt of those around you. But your spirit must be even stronger when you are the person saying to yourself â€Å"You can’t do that. †Ã¢â‚¬ ¦No one can tell you what you can or cannot do in your life. Only you can determine that. Your own greatness is often found at the end of the road, and when it comes to turning your ideas into money, there are many times when you come to the end of the road. The end of the road is when you are out of ideas, out of money, and filled with doubt. If you can find in yourself the spirit to go on, you will find out what it really takes to turn your ideas into great assets. Turning an idea into a great fortune is more a matter of human spirit rather than the power of the human mind. At the end of every road, the entrepreneur finds his or her spirit. Finding your entrepreneurial spirit and making it strong is more important than the idea or business you are developing. Once you find your entrepreneurial spirit, you will forever be able to take very ordinary ideas and turn them into extraordinary fortunes. Always remember the world is filled with people with great ideas and very few people with great fortunes. † – Rich Dad Once you understand the fundamentals of investing, you can better understand rich dad’s categories of investors and the ten investor controls he said were important to all investors: The Ten Investor Controls . The control over yourself 2. The control over income/expense asset/liability ratios 3. The control over the management of the investment 4. The control over taxes 5. The control over when you buy and when you sell 6. The control over brokerage transactions 7. The control over the ETC (entity, timing, and characteristics) 8. The control over the terms and conditions of the agreements 9. The control over access to information 10. The control over giving it back, philanthropy, redistribution of wealth â€Å"Investing is not risky; not being in control is risky. – Rich dad Many people find investing risky because they are not in control of one or more of these ten investor controls. The Inside Investor To build a successful business is the goal of the inside investor. The business may be a single piece of rental real estate or a multi-billion –dollar retail company†¦A successful B knows how to create and build assets. Rich dad would say, â€Å"The rich invent money. After you learn to make your first million, the next ten will be easy. † A successful B will also learn the skills needed to analyze companies for investment from the outside. Therefore, a successful inside investor can learn to become a successful sophisticated investor. The Ultimate Investor To become the selling shareholder is the goal of the ultimate investor. The ultimate investor owns a successful business in which he or she sells ownership interest to the public; hence, he or she is a selling shareholder. If you want to invest in the same investments the rich invest in, you need: 1. Education 2. Experience 3. Excessive cash The price of being financially free requires time and dedication to gain the education, experience, and excessive cash to invest at those levels. You know you are financially smarter or increasing in sophistication when you can tell the differences between: 1. Good debt and bad debt 2. Good losses and bad losses 3. Good expenses and bad expenses 4. Tax payments versus tax incentives 5. Corporations you work for versus corporations you own 6. How to build a business, how to fix a business, and how to take a business public 7. The advantages and disadvantages of stocks, bonds, mutual funds, businesses, real estate, and insurance products as well as the different legal structures and when to use which product Most average investors know only of: . Bad debt, which is why they try and pay it off 2. Bad losses, which is why they think losing money is bad 3. Bad expenses, which is why they hate paying bills 4. Taxes they pay, which is why they say taxes are unfair 5. Job security and climbing the corporate ladder instead of owning the ladder 6. Investing from the outside, and buying shares of a company rather than selling shares of a company they own 7. Investing only in mutual funds, or picking only blue chip stocks The Definition of Rich Forbes magazine defines rich as $1 million in income and $10 million in net worth. Rich dad had a tougher definition: a consistent $1 million in passive income, which is income that comes in regardless of if you work or not, and $5, 000, 000 in assets, not net worth. Net worth can be an elusive and much-manipulated figure. He also felt that if you could not maintain a 20% return from capital invested, you were not really an investor. The price to reach rich dad’s goal, starting from nothing, is actually measured in rich dad’s three E’s: education, experience, and excessive cash. â€Å"†¦Rich dad knew that the purpose of a business was to buy assets†¦essentially, the business buys assets with pre-tax dollars. â€Å"Rule Number One in becoming an Entrepreneur is to never take a job for money. Take a job only for the long-term skills you will learn. † â€Å"†¦If you cannot sell, you cannot be an entrepreneur. † â€Å"The biggest mistake people make is that they work too hard for their money†¦Most people do not g et ahead financially because when they need more money, they take a part-time job. If they really want to get ahead, they need to keep their day job and start a part-time business. † â€Å"The world is filled with great ideas for new products. The world is also filled with great products. But the world is short of great businesspeople. The primary reason in starting a business part-time is not so much to make a product great. The real reason to start a part-time business is to make you a great businessperson. Great products are a dime a dozen. But great businesspeople are rare and rich. † â€Å"The message is, therefore, do not bother trying to make a great product. FOCUS MORE ON STARTING A BUSINESS SO YOU CAN LEARN TO BECOME A GREAT BUSINESS OWNER. † â€Å"Many people dream of starting their own business but never do because they’re afraid of failing. Many other people dream of becoming rich but don’t become so because they lack the skills and experience. The business skill and experience is where money really comes from. † â€Å"The education you receive in school is important, but the education you receive on the street is even better. † The Entrepreneurial Spirit â€Å"†¦You build a business because of the challenge. You build a business because it is exciting, it’s challenging, and it will require all of you to make it successful. † â€Å"There is no such thing as a successful poor entrepreneur or business owner. You can be a successful and poor doctor, or a successful and poor accountant. But you cannot be a successful and poor business owner. There is only one kind of successful business owner, and that is a rich one. † One of rich dad’s strongest criticisms of the educational system was: â€Å"In school, they train students to take tests on their own. If a child attempts to cooperate at test time, it is called ‘cheating. ’† Rich dad would also say, â€Å"In the real world of business, business owners cooperate at test time, and in the real world of business, every day is test time. † If people want to become sophisticated investors and above, they must invest as a team. † On rich dad’s team were his accountants, his attorneys, his brokers, his financial advisors, his insurance agents, and his bankers. I use the plurals here because he always had more than one advisor. When he made a decision, it was with input of the team. Today, I do th e same. † â€Å"Most small-business people dream of someday owning a boat or a plane. That is why they will never own that boat or plane. When I was first starting out, I dreamed of having my own team of accountants and attorneys, not a boat. † †¦most people work hard and dream of getting away on their own boat. I first dreamed of having a team of full-time accountants and attorneys. That is why I can now have the big boat and the free time. It is a matter of priorities. † â€Å"When people say, â€Å"Building a business is risky,† they often speak from a point of view of doing alone, a habit they learned from school. In my opinion, not building a business is risky. By not building a business, you are failing to gain a priceless real-world experience, and you are failing to get the best education in the world, the education that comes from your team of advisors. The Piano Lesson1 EssayThe reasoning behind concept is that profit for the period should represent fairly the earnings of the time covered and, in view of the dynamic nature of any business; it is unlikely that all invoices will have been paid. However, they should be accounted for to give a true picture. A distinction is made between the receipt of cash and the right to receive cash, and between the payment of cash and the legal obligation to pay cash. The accruals concept requires the accountant to include as expenses or income those sums which are due and payable. PRUDENCE Prudence is proper caution in measuring profit and income. Where sales are made for cash, profit and income can be accounted for in full. Where sales are made on a credit basis, however, the question of the certainty of profits or incomes arises. If there is not a good chance of receiving money in full, no sales are made on credit anyway; but if, in the interval between the sale and the receipt of cash, it becomes doubtful that the cash will be received, prudence dictates that a full provision for the sum outstanding should be made. A provision being an amount which is set aside via the profit and loss ccount. The two main aspects of this concept are that: †¢ Income should not be anticipated and all possible losses should be provided for. †¢ The method of valuation of an asset which gives the lesser value should always be chosen. Prudence is often exercised subjectively on grounds of experience and is likely, in general, to lead to an understatement of profit. The subjectiv ity involved can lead to variation between accountants in the amount of provision for bad debts, etc. and is bound to create differences between results obtained by the same general method of measurement. In long-term credit arrangements, e. g. hire-purchase agreements, difficulties arise in the actual realization of income and profit. GOING CONCERN BALANCE SHEETS AND INCOME STATEMENTS â€Å"People who are not aware of the power of a financial statement often have the least money and the biggest financial problems. † There are many different types of statements reflecting the state of your finances. The two most important are the balance sheet and the income statement. Understanding these two documents and their relationship to each other is the master key to financial freedom. THE BALANCE SHEET This balances the value of your assets against the value of your liabilities. One half of the balance sheet lists assets, the other half liabilities and your net worth: DIPLOMA IN BUSINESS ADMINISTRATION – PART 1 Accounting Syllabus Aims: 1. To demonstrate an understanding of the theoretical framework of accounting and the principles underlying accounting statements. 2. To demonstrate an understanding of the application of accounting systems using information technology. 3. To be able to prepare and present limited company financial statements. . To evaluate the performance and financial position of organizations from their financial statements. THE B (BUSINESS OWNER) Unlike the perfectionist S, the B type loves to delegate work. The motto of a true B is, â€Å"Why do it myself when I can hire someone better to do it for me? † The true B can leave his or her business for over a year and return to find it more profitable than before. That’s not u sually the case with someone in the S quadrant. When an S leaves his or her business for over a year, chances are there is no business to return to. Being a successful B requires technical business skills. B’s motto is O-P-M (Other People’s Money) and O-P-T (Other People’s Time). B’s understand the concept of leverage. To succeed, B’s need to know more than just how to build superior products or services – they need to know how to build the solid network of business systems without which their offering won’t sell. And they have to be skilled in the art of leadership. Successful B’s bring out the best in their people so that their people will carefully tend the network of business systems. â€Å"Many people have great ideas but very few have fortunes. To be a successful B, you have to do more than just have a great idea – you have to understand business systems. † â€Å"If you want to be rich, you need to be financially literate. † â€Å"The poor and the middle class turn cash into trash, or liabilities. Meanwhile, the upper class buys things like stocks, real estate, and businesses, turning cash into assets. † CORPORATION A corporation is really nothing more than a way of doing business. It is a legal entity regarded as separate from the owner, one that offers distinct tax advantages as well as liability protection from creditors and others who might sue. The owner controls the corporation and is a shareholder, possibly the only shareholder. As owner and shareholder, the owner is the boss. The owner controls what happens in the corporation, but because the corporation is a separate entity, the owner doesn’t own any of the corporation’s assets and therefore doesn’t have to assume any of the corporation’s debts. The corporation owns its own assets and pays its own debts. This is one of the secrets of the rich: Own nothing, but control everything. After the C corporation deducts business expenses from its income, tax is paid on the corporation’s profits. The owner/shareholder in turn pays tax on any money received from the corporation, usually in the form of a salary or bonus, and the corporation can deduct these payments as expenses on its tax return. However, when a C corporation pays a dividend to its shareholders, the dividends are taxable to the shareholders but not deductible by the corporation. When the C corporation deducts legitimate business expenses and pays out profits in the form of compensation to its shareholders, there may be no taxable income left. In that case, the corporation doesn’t have enough income left to pay dividends. THE SECRET OF THE RICH This secret has been around ever since the days of sailing ships, when the rich created the corporation as a vehicle to limit their risk. The rich would put their money into a corporation to finance a voyage. If the ship was lost the crew lost their lives, but the loss to the rich would be limited to the money they invested for that particular voyage. Corporations can protect assets and serve as vehicles for the creation of new assets. If you understand that basic secret, then you’re ready to master the art of building the B-I triangle. There are many people with great ideas but few people with great fortunes. The B-I triangle has the power to turn ordinary ideas into great fortunes. † THE BUSINESS-INVESTOR TRIANGLE Anyone can start a company, yet how many can start a company that survives and thrives? Anyone can purchase real estate, yet how many know how to analyze a property or how to structure the purchase to take advantage of the tax savings a vailable for real estate? The key to business success in either business development or real estate lies in the so-called business-investor triangle, or B-I triangle. 88. The Law of Clarity: The clearer you are about your goals and objectives, the more efficient and effective you will be in achieving them. Do You Really Need an MBA? For many years, people have gone back to school to get an MBA (Masters of Business Administration) because it’s the â€Å"thing to do. † Companies want to see the degree on your resume, making the degree the fastest track to corporate executive positions and bigger paychecks. This has been the case for some time, and truth be told, this is still the case. Consider the statistics garnered from research with recruiters worldwide: ? Demand for MBAs is rising at about 20 percent per year. Demand for MBA/consultants is up about 35 percent. ? Salaries are on the rise, with the average new MBA graduate starting at $84,500; in some areas, the salary is well over $100,000. But money is just one reason why you may want to seek an MBA. Here are some equally (if not more) important reasons: ? To develop skills in busines s functions: economics, finance, marketing, management, operations, and accounting. ? To acquire valuable soft skills: leadership, teamwork, ethics, and communication. ? To develop an entrepreneurial mindset: you want to become innovative and opportunistic to tackle the challenges of a dynamic, global world. Exploring the New World of Business Due to the nature of competition – where only the fittest companies are destined to survive – businesses are always pushing the envelope of creativity, innovation, and technology. They’re constantly testing new approaches, new procedures, new processes, and new ways of doing business – looking for a little (or large) advantage over their competitors. These are exciting times in business, as evidenced by the following: ? The Internet has leveled the playing field for small companies. They can now look and act as multinational corporations and reach millions of customers without the burden of physical assets such as plants and equipment. ? New business models, communication technologies, and distribution methods enable businesses to take their products and services anywhere they want. ? Successful entrepreneurs such as Bill Gates and Warren Buffet continue to demonstrate to the rest of the business world what it means to be philanthropic. ? A new generation of workers – the New Millenials – are changing management styles and corporate culture as they force baby-boomer bosses to consider a new definition of work ethic. The business world can watch in amazement as China grows at light speed. It will become the biggest economic power in the world in the not-too-distant future. ? Everyone with a computer and an Internet connection has access to the same information (â€Å"Just Google it! † has become a popular search engine phrase). Because of You Tube, for instance, everyone can have their 15 minutes of fame on the Internet. Rich Dad’s Guide To Investing Investments of the Rich â€Å"†¦I was most intrigued by the idea that there were investments only for the rich, and then there were investments for everyone else. I remembered that when I was a kid working for rich dad, all he talked about was building his businesses. But now that he was rich, all he talked about was his investments†¦investments for the rich. † â€Å"The only reason I built businesses was so I could invest in the investments of the rich. The only reason you build a business is so that your business can buy your assets. Without my businesses, I could not afford to invest in the investments of the rich. † Rich dad went on to stress the difference between an employee buying an investment and a business buying an investment. He said, â€Å"Most investments are too expensive when you purchase them as an employee. But they are much more affordable if my business buys them for me. † â€Å"Learn to build businesses and invest through your businesses. † â€Å"When I spent time with my rich dad, I began to realize that he saw a completely different world. He could see a world of too much money. That view was reflected when he said, â€Å"Don’t worry about money. If we do the right things, there will always be plenty of money,† or â€Å"Don’t let not having money be an excuse for not getting what you want. † â€Å"The trouble with being young is that you don’t know what it feels like to be old. If you knew what being old felt like, you would plan your financial life differently. † â€Å"It is important to plan as early in life as possible. † â€Å"Words form thoughts, thoughts form realities, and realities become life. The primary difference between a rich persons and a poor person is the words he or she uses. If you want to change a person’s external reality, you need to first change that person’s internal reality. That is done through changing, improving, or updating the words he or she uses. If you want to change people’s lives, first change their words. And the good news is, words are free. Investing is a plan, often a dull, boring, and almost mechanical process of getting rich†¦it is simply a plan, made up of formulas and strategies, a system for getting rich†¦almost guaranteed (almost because there is always risk involved). â€Å"I now realize why it is so hard for most people to follow a simple plan†¦Because followin g a simple plan to become rich is boring†¦Human beings are quickly bored and want to find something more exciting and amusing. That is why only three out of a hundred people become rich. They start following a plan, and soon they are bored. So they stop following the plan and then they look for a magic way to get rich quick. They repeat the process of boredom, amusement, and boredom again for the rest of their lives. That is why they do not get rich. They cannot stand the boredom following a simple, uncomplicated plan to get rich. People think there is some magic to getting rich through investing. Or they think that if it is not complicated, it cannot be a good plan. Trust me; when it comes to investing, simple is better than complex. † BASIC RULE NUMBER ONE Investment basic rule number one is to always know what kind of income you are working for. There are 3 different kinds of income: 1. Earned Income: income generally derived from a job or some form of labor. In its common form, it is income from a paycheck. It is also the highest-taxed income, so it is the hardest income with which to build wealth. When you say to a child, â€Å"Get a good job,† you are advising the child to work for earned income. 2. Portfolio Income: income generally derived from paper assets such as stocks, bonds, mutual funds etc. Portfolio income is by far the most popular form of investment income, simply because paper assets are so much easier to manage and maintain than any others. . Passive Income: income generally derived from real estate. It can also be income derived from royalties from patents or license agreements. Yet approximately 80% of the time, passive income is from real estate. There are many tax advantages available to real estate. BASIC RULE NUMBER TWO Investment basic rule number two is to convert earned income into PORTFOLIO INCOME or PASSIVE INCOME as efficiently as possible. BASIC RULE NUMBER THREE Investment basic rule number three is to keep your earned income secure by purchasing a security you hope converts your earned income into passive income or portfolio income. SECURITY – A security is something you hope will keep your money secure. And generally, these securities are bound up tight by government regulations. BASIC RULE NUMBER FOUR It is the investor that is really the asset or the liability. BASIC RULE NUMBER SIX If you are prepared, which means you have EDUCATION and EXPERIENCE, and you find a good deal, the money will find you or you will find the money. Good deals seem to bring out the greed in people. And I don’t mean to use the word greed in a negative way. I speak of greed as a general human emotion, an emotion we all have. So when a person finds a good deal, the deal attracts the cash. If the deal is bad, then it is really hard to raise the cash. WHAT IS TO â€Å"REFINANCE†? To finance something means to take a loan to buy something. The loan amount is almost always less than the total value of that thing. To refinance means to take a different loan on that same thing. The refinance process always makes sure that the original lender is paid first, and the borrower gets or pays the difference. Example: 1) I borrow $80 to buy a $100 home from Lender X. Five years later: ) The house value increases to $125 (and I still owe $75 to lender X from step one) 3) I refinance by borrowing $100 because my home value has increase, but I dont get all $100. $75 goes to Lender X, and I get $25 (and now I owe more money) This is also called pulling out equity Ive pulled out $25 of equity from my home, but this is problematic if home values have peaked, and shortly after experience a drop in value. If six moths l ater, my home value drops to $95, then Im under water because my house is then worth less than what I owe on it: $100. Thats what a lot of people are facing now.