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Thought: Financial Intelligence

“It is not real estate, stocks, mutual funds, businesses, or money that make a person rich.  It is information, knowledge, wisdom, and know-how, a.k.a. financial intelligence, that makes one wealthy.” Robert Kiyosaki (Rich Dad, Poor Dad)   Last year we looked at financial literacy, and this year we are building upon this framework to understand how one’s attitudes towards money and emotional intelligence around financial matters has a huge role in success. Research repeatedly shows that individuals who have a high interpersonal competence and are self and socially aware tend to perform better career-wise than those with high intelligence.  A 2006 study by Accenture concluded that emotional intelligence (EQ) beats intelligence quotient (IQ) as a determinant of career success. This also applies to financial success. In one of the earliest assessments on the relationship between EQ and financial success, a 1970 study conducted by the Carnegie Institute of Technology revealed that 85% percent of financial success is as a result of EQ and only 15% is as a result of IQ.  More recently, a similar 2012 study by Schmidt shows that individuals with high EQ make $29,000 more annually than those with low EQ. It stands that mastering one’s emotions and attitudes towards money is equally as important as theoretical financial acumen. Especially now, with computer algorithms taking over the financial advisory function of investing, emotional intelligence when applied to finances is the perfect competitive advantage tool. So how do we build financial intelligence?  For age-old wisdom and financial principles that are incredibly relevant in an era of algorithm trading, globalisation and bitcoin billionaires, we turn to a classic in financial literature, George Samuel Clason’s The Richest Man From Babylon and his universal laws of prosperity. First published in 1926 as a series of parables in the ancient city of Babylon, Clason dispenses financial advice and sage financial wisdom through the business and household dealings of his fictional Babylonian characters. At the summon of the King of Babylon, rich man Arkad delivers a lecture series “Seven Cures for a Lean Purse” to teaching the Babylonians how to become independently wealthy.  His 7 principles are just as relevant today:

  1. “Start thy purse to fattening.” (Pay Ourselves First)

 “I found the road to wealth when I decided that a part of all I earned was mine to keep. And so will you.”   Arkad Arkad attributes this as the most important principle in his “road to wealth”.  Essentially it is a principle of saving 10% of ones earnings, however the idea of paying oneself makes it a positive reward rather than a necessary concession, or worse, an afterthought once everything else has been paid or spent.  Put simply, we cannot accumulate wealth if we do not save what we earned.

  1. “Control thy expenditures” (Live below our means)

Budget your expenses so that you may have money to pay for your necessities, to pay for your enjoyments and to gratify your worthwhile desires without spending more than nine-tenths of your earnings.” If we have paid ourselves first at least 10% of what we earn that leaves us with 90% or less of our income to live on.  In a materialistic and aspirational society, it can feel like a punishment to live below one’s means however this is essential to positive money management.  It requires a sobering look at what we actually can (and more importantly cannot) afford and making mature decisions on that basis. When we live below our means we accumulate wealth faster.  We can think of it in this way, our earning power is our ‘offense’ and controlling our expenditures is our greatest ‘defense’.

  1. “Make thy gold multiply” (Make our money work for us).

”Put each coin to work so that it may reproduce its kind even as the flocks of the field and help bring to you more income, a stream of wealth that will flow constantly into your purse.” With the 10% that has been saved, it should start to be put to use as passive income through an investment vehicle.  Many financial experts advise investing only after having built an Emergency Fund sufficient to cover 6-8 months worth of expenses.  It is only then that we should consider about investing our money on other investment vehicles.  It also provides a buffer that can allow for higher risk, higher return investing.  Described by Albert Einstein as the eighth wonder of the world, compound interest investment is how we can make our gold multiply over time.

  1. “Guard thy treasures from loss.” (Insurance protects our wealth).

“Misfortune loves a shining mark… we must first secure small amounts and learn to protect them before the gods entrust us with larger.’ We diverge from the general at this stage to speak very specifically.  As this past week at The Office Space has brought into dramatic focus, a sound insurance policy is essential for every business and asset or value.  A chance fire from a client’s computer has had significant ramifications on not just our business, but on our client’s businesses.  Thankfully, our insurance policy has provided a safety net and a means to rebuild our business.  Without it, the business would not have recovered from extent and value of contents damage and the significance of the business interruption.  Regardless of the size and nature of your business, the very minimum insurance should be business Public Liability and we highly recommend you check your own business and personal policies.  Now from unfortunate first hand experience, we can highly recommend our insurance brokers at Bruce Chiene Insurance Brokers.

  1. “Make of thy dwelling a profitable investment” (Our home is our biggest expense)

“Own thy own home.” It’s Hanging Garden’s were one of the seven wonders of the ancient world, but we are sure even Babylon couldn’t compete with Sydney’s astronomical property prices.  Still, the Great Australian Dream is ingrained in our psyche and owning a home is potentially the biggest financial goal for many.  If we have learned anything by the subprime mortgage crisis that preceded the GFC, we must ‘live below our means’ and buy or rent a home we can comfortably afford. Whether you are already in the property game or looking to buy your first home, be realistic about your financial situation and future. Our Equip offer this month is worth taking advantage of – a free consultation with Reservoir Client Dylan Salotti from Divitis Finance Mortgage Brokers.

  1. “Insure a future income.” (Have a retirement plan).

“Provide for in advance for the needs of thy growing age and the protection of thy family.” Again, the universal principles of setting aside wealth and compound interest come into play.  It’s a long-term play, but having an optimised superannuation plan is essential to think about now whilst we are in our earning peak, to prepare for when other things like our golf swing or spending time with our grandchildren take priority. A great place to start thinking differently about super is by checking out our Profile interview with Superannuation expert Jason Clarke from Lonsec.

  1. “Increase thy ability to earn.” (Invest in ourselves).

Cultivate thy own powers, to study and become wiser, to become more skilful, to act as to respect thyself.” The best way we can increase our earning is by investing in ourselves.   We can do that by continually learning and striving to develop ourselves.  Knowledge is literally within our fingertips thanks to the Internet, but it’s also essential to look at real life examples around us.  Talk to people who are trained and experienced in financial advice (like this month’s Insight guest Paul Ahearn from Locums Group) or get money literate with publications like Money Magazine (which has been overseen for over 20 years by another July insight guest Effie Zahos).  Also look at successful people around you and ask them their own secrets.  Our Profile interviews each month are exactly that – a way to distill and share the learnings from within our community. Don’t forget, investment in self does not just relate to your knowledge but extends to your health and wellbeing.  Why not jump on the health bandwagon and join our twice weekly workplace exercise sessions Monday and Wednesday evenings from 5:30pm in Harmony park.     These simple lessons from the fictional Arkad are very real universal principles of wealth building habits that can help all of us build a firm financial foundation on our way to becoming more wise and enriched as we move through life.

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