Friday, October 30, 2009

Where Did You Get Your Financial Education?


Just as a guesstimate, I'd say 98% of us got our financial education from our parents, and not directly. It's more from their attitudes toward money, and what they want you to become. The other 2% are either lucky enough to have a Rich Dad (tm) like Mr. Kiyosaki or found a way to get financial education themselves. And I do NOT mean a degree in finance.

Your parents probably wished you to become the richest people they know personally. Very often, they'd be doctors, lawyers, engineers, and so on. The exact choice will depend on their profession, but the result is about the same: your parents wish you to become S-quadrant (self-employed or small-business owner) esp. if they were E-quadrant (employees) all their life. They don't really understand B (big business) or I (Investor) quadrants, so they would not recommend it to you. They are going by their own experience.

How many parents, besides Donald Trump's parents, and Donald Trump himself, tell their kid, "Son, I want you to become a big-deal real estate investor"?

I doubt Bill Gate's parents tell him when he was young, that "Son, get rich by starting a software company."

I know for sure that Michael Dell's parents told him to stop wasting time on computers and get good grades in school. (see "How Dell Does it" )



So, you have to chart your own path, because in real-life, father do NOT always "knows best", and nor do mothers. They are limited by their own knowledge and life experience. And in the early industrial age, if you're not born rich, then you're expected to work and work and work. That was their life.

So why is a financial education important? I hate to use cliches and proverbs, but often, they serve a purpose, so here goes another one:

"Give a man a fish, and he'll feed for a day. Teach a man to fish, and he'll feed himself for life."

I'm sure everybody has heard of this one, but there's a lot of truth to this. If you get the education to catch fish yourself, then you can feed yourself (assuming of course, you got the equipment, and there are fish around, more on that later). If you get the financial education, then you can work your way toward financial freedom. Keep in mind though, financial education is merely a tool you use toward your goal of financial freedom. (and so are financial advisors and such. They are tools also) If you learn, and keep it inside your head instead of actually using some of that knowledge, it's almost worse than if you did not learn it, as you've wasted all that time.

Mr. Kiyosaki used golf as his metaphor... finance is a lot like golf. You can hire the best teachers, you can get the best tools, but neither will completely solve your problem. You need both. However, out of the two, education is more important than the tools. Think of it this way. Which is more likely to solve your golfing problem: golf lessons? or better golf clubs? The answer is of course, golf lessons. Without the golf lessons, you cannot get full use out of the clubs, be it good or mediocre. Same in finance: if you don't have the financial education, you wouldn't know what to ask your financial advisors and other advisors that you have, and use the various investment tools properly. How can you plan for retirement if you don't even know that 401(k) or IRA or Roth IRA or other tax-deferred investment vehicles are and how they benefit you?

Yet a lot of people just happily go on living their lives, with little to NO financial education, and wonder why they can never get rich no matter how hard they work, and curse the rich for being rich and how the world is rigged against them, when they actually handicapped themselves by not learning the rules.

Remember, unlike driving, investing has no minimum competency requirement, not to mention insurance against-loss. Why? Because those competency requirements are there to protect the public from YOUR follies, not to protect yourself from your own follies. When you drive, if you make a big mistake, you can hurt a lot more people than just yourself. While you're required to carry insurance in most states to drive, the requirement is that your insurance must cover damages you may do to OTHERS (i.e. liability insurance). Insurance for your own damages (collision) is optional. In investing you can't hurt a lot of people (unless you're LTHC, see reference), just yourself. SEC added additional safeguards by limiting buying on margin to 50% because a lot of people borrowed too much money too fast, and made a normal drop in 1929 into a huge crash due to a ton of margin calls.

[Sidenote: Back then, brokerages allow margin as low as 10%. Say you have $1000 with a brokerage. You bought some stocks with it. The brokerage will lend you 9000 more dollars, you have 10%, the have 90%. You can then buy MORE stocks with it. However, if the original stocks of that $1000 drop in price, say, to $900 worth, your buying power just shrunk to $8100, instead of $9000! Thus, you need to pay up $900 of real money. That's "margin call". Now you have two choices: you can either pay the $900, or you can sell the stocks you bought with the $9000 until you reduce your holdings to $8100. A lot of people have invested every last cent they have, and thus have NO money to cover the margin calls, and thus, it's sell, sell, sell! The panic selling to cover the margin calls triggered more price drops which in turn caused more margin calls, which caused more panic selling... until the entire market collapsed. ]

However, investing without a financial education is like bringing a knife to a gunfight. That is not the kind of game you want to be playing.



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