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Do you need money to be good with money?

A couple of months ago, someone asked this question on one of the Personal Finance groups on social media, “Do you need money to be good with money?”

And it made me think…

  • Do I really need money to be good with money?
  • Or should it be the other way round? Is it because I have no money, therefore I should learn to be good with money?
  • Could it be, because I have money and therefore I know how make even more money?
  • Or maybe because I don’t have money, and therefore I am bad with money.

OR is this yet another chicken and egg question that no one can agree on?

It seems to me that there’s no one straight, definitive answer to this. Everyone’s life experience is different. The way we’re brought up, our family’s culture in handling money, the people we socialize with…it all plays a pivotal role in shaping how we view and deal with money today.

For the sake of delving deeper into different perspectives on this matter, I’ll answer this question with two answers. Yes and No. Both for different reasons, and yes, they’re both valid. At least it will be – if you put yourself in the shoes of the assumed persona in just a minute.

If you chose YES…

You believe you need money to be good with money. After all, if you don’t have money…how are you going to be good with something you do not have?

You believe that with money, you want to preserve and multiply your assets with a steady stream of both passive and active income. You have a comfortable amount of savings in your account and diverse portfolio of investments.

The truth is, rich people are rich and they stay rich for a reason. Having money is one thing, but preserving your wealth and multiplying it is another ball game altogether. This would explain why people who strike the lottery eventually lost everything.

The rich and wise are constantly on the move to improve their financial standing and safeguard their wealth. They do not merely stash their savings under the pillow or hide it in the bank. They know that $1 today is no longer worth $1 the next year or when their grandchild comes along. They also understand that the same $1 in their hands today could be $10 a few months from now due to the magic of compounding interest.

If you chose NO…

On the contrary, you believe that it is precisely because you need more money, then all the more you should step up your financial game plan. This is especially true for many middle-income earners. These are the ones that are not living from hand to mouth, but yearn for a better life and stress-free retirement.

Within this group of people, there are those that stay status quo and complain about how life is unfair and how small their paychecks are. And then there are those that hustle part-time on top of their full time jobs, save aggressively and invest whatever they can with the knowledge that they will see better days in the future.

The take away from this? It is not about what you have in your bank account. Rather, it is more about how much you want to change your current financial state for the better.

Bringing the two together

If you’re truly making ends meet, and all you look forward to is the next meal on your table, it can be hard for you to consider saving and investing. What will matter to you, is earning.

From the way I look at it, being good with money or having sound financial literacy, comes in different stages in life. What we understand about financial literacy today is often generalised as having essential knowledge of how finances and money work. This knowledge is then applied in real life to make smart financial decisions.

However, that doesn’t tell me much about how financially literate someone is. How do we measure financial literacy qualitatively? Obviously, quantitatively would mean the numbers in their bank account…but what about the other aspects?

It can be argued that someone is financially literate from the amount of money they have. That may be an indicator, but it does not tell us the stage of financial literacy the person is at.

Stages of Financial Literacy

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Stage 1

I would call this the first baby step to learning about how money works. This is the stage where you’ll first learn about earning and saving. Simple.

Even your child will have basic understanding of how this works. Money in, money out. Earn money. Spend money. Save money. The last part is easy to understand theoretically, but much harder to pull off in real life.

And traditionally, this is what many of our great grandparents or grandparents do. They work hard and are usually thrifty and careful with their spending. And they could also be keeping thick wads of cash or jewelry somewhere in the house or at the bank.

In summary, the basic formula for their modus operandi is:

Work hard (or more) + Spend less = Save More

The sad truth is, as the culture of consumerism grows many people struggle with this stage despite knowing the concept of saving.

Stage 2

Perhaps at Stage 1 you have an idea of how “money becomes smaller overtime” but you’re not exactly sure how it works. Now, this is the part where people learn that saving alone is not the best way to safeguard and grow your wealth. The concept of inflation and time value of money will begin to make sense and then it all clicks!

You’ll also begin to understand why your Fixed Deposit (FD) account should give you at least more than 3% return p.a as that is about the average inflation rate in Malaysia from 1973-2019. Anything less than that, you should be looking elsewhere to put your money.

Most likely, placing your money in a FD account would be your first venture into the world of investing. Low risk, predictable and consistently having guaranteed returns are your primary concern at this stage.

Stage 3

Now that you’ve gone past the first and second step beyond saving and venturing into FDs, you decide it’s time to take it a step further.

At this stage you’ll be looking at the benefits of compounding interest and FD returns no longer excite you. For the initiated, you’ll be reading a lot on personal finance, attending workshops and seminars or even opt to consult a financial adviser to plan for your dream retirement and hone your financial acumen.

This is when you start to explore other financial instruments and diversify your investment portfolio. At this stage, you’re also actively paying off your debt in full because you know how harmful accumulated debt can be. At last, you’re now looking to financial freedom instead of merely settling for a 9 to 5 job’s paycheck. Congratulations!

Stage 4

Most people stop at Stage 3, and that’s perfectly fine. But for the enlightened, there’s a 4th stage of financial literacy. In the previous article, we talked about the difference between retail investors and enlightened investors.

The main contrast between these two groups of people are their asset allocation. For the truly rich and wealthy (high net worth individuals), they look at investments differently from the average investor as their risk appetite and priorities are also different.

To sum it up…

Having sound financial literacy or ‘being good with money’ is definitely not something that people get it right overnight. Some of us may have innate tendencies to be more frugal, while there are also some of us that are more open-handed. There are also some of us that are naturally low risk takers, and vice versa.

We all learn at different stages in life and there is no shame in admitting that we still have areas for improvement. Our financial goal is definitely at Stage 3 (financial freedom) or even 4 (for the more ambitious). It’s hard to do it on your own, which is why we have a community of like-minded people like you on our Facebook page to share your views, insights or just to ask any questions.

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