Financial Literacy

Understanding how money works is the first key to success, starting with financial literacy!

5
 min read

One step of our counseling goals is to help you become financially literate. This means you have to understand how finance works as a whole. Here are some basics.

What's the difference between an asset and a liability?

An asset is something that brings in money, and a liability is something that costs you money.

ASSET:

-investment property

-stocks

-bonds

-business equipment

Liability:

-car

-house

-new shoes

-vacation home

I'm sure you've been told a house is an asset many times, Right? WRONG, unless your home is cash-flowing (bringing in money), then it's not an asset. It's a liability. Think of an asset as something that has an ROI.

Return On Investment (ROI)

Your ROI is the return on any investment (commonly calculated as a percentage). In most cases, the higher the ROI, the more risky the investment is.

Cash Flow

Cash flow is my favorite financial term! Cash flow is by far the most important, especially when becoming financially successful. Cash flow is the amount of money going through your business. I like to think of it as an engine to your business. The higher the positive cash flow, the bigger the engine is. When you have a big powerful engine in your car, what happens? It goes much much faster, right? In the same way, your business can grow at an accelerated rate.

Investments that have positive cash flow are dividend stocks or real estate investments. When talking about real estate's cash flow, it can get pretty confusing. But if you do have a real estate property which is bringing more money than the mortgage and expenses, that's known as positive cash flow (the holy grail of finance). If the Real Estate property isn't covering all the expenses, that's known as negative cash flow.

Negative cash flow isn't always inadequate, especially when talking about real estate.

Why? Because even though the cash flow isn't positive on the front end (having extra income leftover), you're still making money in the back end (tenants paying down the mortgage).

**Financial Intelligence is the ability to control the cash flow**

The diagram on the left shows what a financial statement looks like for people that are poor, in the middle class, and rich.

The poor person earns income that goes straight to expenses.

A middle-class person earns money that goes directly to paying for liabilities, which is an expense.

A wealthy person earns income that goes straight to purchasing assets that produce more revenue. The wealthy person knows how to control his cashflow!