Friday, February 25, 2011

Financial Education Is Not Enough To Save You From Yourself

Do you think you have enough financial knowledge to handle your own finances? I'm talking about all facets of your finances, from soup to nuts. If your response is no, thanks for being honest, I'll get back to you in a minute. If you said "Yes", we need to pursue this further.

I believe there are 3 types or levels of financial knowledge. The first is "Financial Literacy". Financial Literacy is a general knowledge of financial vocabulary, financial instruments, and when and why they are used. This consists of knowing of what an investment is and the different types. In banking you know the difference between a checking and savings account.

Next there is "Financial Knowledge". This a deeper knowledge of all things financial. You know about investments. You know the difference between mutual funds, ETF's, IRA's, cash accounts, derivatives, and types of brokers. You can actually tell me if a mutual fund is better than another mutual fund. You know when it's good to own bonds and when it's not. You have knowledge of health, disability, life, and long term care insurance. You can tell me all about fixed and variable annuities.

The third and final type of knowledge is "Financial Capability". This kind of knowledge is when you actually put into effect what you know and are successful at implementing it. The evidence of this knowledge is an emergency fund, a hefty retirement account in the correct vehicles, your living below your means, you have no credit card debt, you have a college fund for your children and your home is paid for or your close to paying it off.

Financial Capability is the final step in the journey of financial education because it describes financial knowledge, competence, confidence and practical skills, such as balancing a checkbook or household budgeting.

Are you at this last step yet? If not, why not? Where on the journey are you? You will never succeed financially if you don't reach this last step. We all know what's good for us, but do we do it?

For those of you who were honest enough to say No to my question, what are you going to do? You admit you don't have the knowledge to run your own finances. Is this a lack of knowledge or a lack of will? If this is a lack of knowledge then find the knowledge. Read a book. A complete book that will help you is Dave Ramsey's Total Money Makeover, read it, do exactly what it says and you will be successful with money.

If you have a lack of will, we call that being lazy in my house. That can be fixed to but not by reading a book. That problem has to fixed on the inside. Make the decision and be a financial winner.


  1. Financial Capability is not knowledge; indeed, all the Financial Literacy and Knowledge won't make you Financially Capable if you live on a poverty level income.

    You're not going to be able to own a (paid for or not) home, have a hefty retirement account, or maintain an adequate emergency fund, and you're going to be hard pressed to live consistently below your means.

  2. The principles behind successful personal finance are pretty simple and universal. Controlling emotions, the impulse to spend for immediate gratification and having the discipline to stick to a plan are the hard things.

  3. Every little bit adds up and can do so quickly, especially if you give in to the hype of packaging. There will always be outside factors impacting our incomes, but learning what you can through resources like will help people hopefully make better decisions.


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