122: Don't Make This Mistake with Your Financial Literacy

Are you entrusting your financial future to someone else without understanding the basics? Learn why this approach can be a critical error and how you can avoid it. In this episode of "Boosting Your Financial IQ," I explore the necessity of financial literacy in business and personal finance. Reflecting on past financial disasters like the 2008 housing crisis, I highlight the dangers of blind trust in financial experts. Just as you wouldn't let a doctor make uninformed decisions about your health, you shouldn't let others manage your finances without grasping the fundamentals.

Join me as I debunk the myth that investing in index funds absolves you from understanding finance. I'll discuss the importance of knowing the mechanics behind your investments and how this knowledge can lead to better decision-making. This episode is packed with insights aimed at empowering you to take control of your financial journey. Tune in to discover how enhancing your financial IQ can make you more self-reliant and successful in today's intricate financial landscape. Don't forget to subscribe and become part of the movement towards financial empowerment!

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• Step 1:  Test your financial IQ for FREE
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• Step 3:  Take the Fundamentals of Finance course

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Transcript

Speaker 1: 0:15

You can't just have a strategy for your business but it doesn't tie into the fundamentals of value creation. This podcast, boosting your Financial IQ, is about business, financial literacy, strategies for profitability and the principles taught at byfiqcom. My hope is that you will apply the lessons learned and that we can work together soon in my mastery program. Enjoy the show and don't forget to subscribe. The other day, I put a video out there where I was talking about the importance of increasing your financial IQ and I got a really interesting comment on that post and I'll paraphrase here. But essentially, the person is saying look, you don't need to learn all this stuff about finance. Instead, you can just take your money and invest it in index funds because they do all the research for you. So, instead of trying to understand the mechanics behind the assets in which you're investing in, just trust them because they're doing all the research. You don't need to try to time the market and you don't need to understand all this gobbledegoo. In other words, take your money and entrust it in the hands of others. And I thought, wow, if this is the perception out there in the marketplace, we are heading in the wrong direction. Now, I wasn't even talking about personal finance. Instead, I was talking about the importance of increasing your financial IQ in the world of business, because I'm super bullish about business and I believe there's massive upside for those who can understand the story behind the numbers but more on that later.

Speaker 1: 1:42

But let's go back to this idea of entrusting your financial life in the hands of other people. I mean go back to 2008 and 2009 with the housing bubble and that giant crisis that unfolded in that time period and during that period, there were rating agencies who were trusted fiduciaries, who were supposed to be making ratings or providing ratings on financial assets out there in the market, and they were wrong and there was a ton of fraud in the system and a lot of people got burnt. If you don't know what I'm talking about, just watch the movie the big short and you'll know exactly what I'm referring to. So it's like going to a doctor and saying, hey, doctor, like you could do whatever you want with my body. If you want to cut off my arm because I told you there's pain in it, yeah. If you think that's the best decision, yeah, go for it. Go ahead and cut off my arm or perform the surgery or put me on these medications, whatever it may be Like we would never do that surgery. Or put me on these medications, whatever it may be Like we would never do that. That's completely crazy. But essentially that's what the person was saying is like give up all your agency and let other people make decisions for you, and I think that can be a fatal mistake and that's why I'm so passionate about this topic of financial literacy. That's why I do all these episodes and I put out all the YouTube videos and everything else. I have a program where I teach people how to increase their financial IQ, because this is so critical to empower yourself right Self-reliance is so critical, especially in this day and age. So let me explain here.

Speaker 1: 3:15

Going back to the doctor analogy, I'm not saying you have to go to school and understand how the body works and be an expert in the medical field. I'm not saying that at all. The same thing is true in the world of accounting and finance. I'm not saying if you're in business, you have to learn how a GL works and how to do debits and credits and tick and tie these schedules out and do all the things that are in the world of accounting and finance. I'm not saying that at all the things that are in the world of accounting finance. I'm not saying that at all, but what I am saying is that you should have a basic knowledge of things so you, as well as the expert, like working in conjunction. You can make good decisions together. It's not about outsourcing your financial IQ to somebody else and relying on them to make decisions on behalf of you, because if you do that and they go the wrong way right, or they make terrible decisions, you're just operating ignorantly. Then terrible things could unfold. Now, trust me, I've worked with so many companies, both big and small, across multiple industries, and I can tell you, those who are successful are the ones who understand both strategy and finance.

Speaker 1: 4:23

You can't just have a strategy for your business but it doesn't tie into the fundamentals of value creation, like free cash flow, growth and return on invested capital. So that's what I'm referring to here. It's like sure you can take your money and you can invest it in an index fund, and that may not be a bad strategy, but you should understand the mechanics of the assets in which you're investing in. The same thing is true with business. If you're running a company, it doesn't mean you need to get into the trial balance and understand all the debits and credits, the back and forth, but you should understand the story behind the numbers. For example, okay, what's the revenue of the business? What's the gross margin? What's the profit? How much free cash flow does the company produce? What's its working capital base? What about its invested capital base? What's its return on that invested capital? And so on and so forth. So just understanding the story behind the numbers is so critical, and that's what I wanna point out in today's episode.

Speaker 1: 5:18

You can't rely on other people to come and save you right In business. If you want to be successful, if you want to go up the ladder and become successful in your career, or if you're running a business and you want to make it profitable and you don't want to leave a ton of money on the table, you have to understand the basics of finance right. It would be crazy to just put all that in the hands of other people. Now I know companies that work with accountants and they get burnt because the accountant is supposed to watch over the numbers and make good decisions on behalf of the company. But oftentimes you know it's not like they're being malicious, but it's just through negligence or through ignorance, that these advisors, you know, steer companies in the wrong direction and therefore like if you just understand the basics of free cashflow, or growth or return on invested capital or the levers that you could pull in business, then at least a little flag, a warning flag, will go up in your head if something doesn't feel right. But if you have no clue, yeah, you're headed for some trouble.

Speaker 1: 6:27

Look back in the day when I was running my landscape company I've said this before, you know here. I was running a multi-million dollar business and I had no clue how to read the financial statements. And when I look back on that experience, I think, oh my goodness, things would be so much different if I understood how free cashflow worked right, because there are a lot of times where we were struggling to make payroll in the early days and if I understood the mechanics of working capital, for example, I could have changed some policies or our processes in order to lighten that burden. And I think the same thing is true with business. You know, if you understand these things, it's going to make your job so much easier.

Speaker 1: 7:10

So please, please, please, please do not outsource your financial IQ to other people. And I think that relates to other aspects in life. Don't rely on others to make all the decisions for you. Become educated, become empowered and take control of your life. It'll make all the difference in the world. All right, that's all I have for you. I hope you have a great week and, until next episode, take care of yourself. Cheers.