Why is Financial education important?
Robert Kiyosaki has constantly said that our education system does not teach us about money. It teaches us to go to school, get a job, get paid, get out of debt and save for retirement. So the question arises, is he right? Does the academia provide us enough knowledge about financial education to help us sustain our lives? What would be of us during times of crisis such as the one we are facing right now? Are we financially stable to survive a long-term economic downturn? Are we prepared enough to survive a lay off from our jobs? After all, it is a goal for most of us, to go to school and get a job, isn’t it? To address these questions requires a deep financial knowledge. However, with this article I am in no way trying to discourage anyone from going to schools. Neither am I trying to advocate against the importance of school education. With this article, I am just trying to express my views regarding true financial education and the importance of it to all of us after having gone through few books about financial literacy. Let us look at what financial education is.
Before getting deeply into financial education, let us imagine ourselves into a scenario. Suppose you have been in a job for quite a long time. You have a great career and have developed great set of skills. You are happy with your job, it pays well, and you get all the weekend with your family. However, a great crisis hits the world. The employers cannot afford to pay for the employees and you are laid off. Sounds too harsh, but it is kind of what we are facing right now. Over 30 million Americans filed for unemployment after their industries were hit by corona virus pandemic (Guina, 2020). Boeing, the largest aircraft manufacturer laid off 6,770 workers during this crisis (Voytko, 2020). Therefore, it does not sound illogical that employees are bound to be laid off during times of crisis, does it? Now, after getting laid off what are your plans? What is your plan B? Have you saved a substantial amount of money and plan to open a business? But, did you develop the skills and mindset to run a business. Do you plan to become an entrepreneur? Again, do you have the skills and the mindset? Can you stay motivated enough to start from the scratch? You do not have a plan B and look for another job.
Do you know that most of the corporate executives and CEOs have plan B? The plan B is to exercise their stock options. You see, many CEOs prefer to be paid in stock options rather than cash. Once they do a good job, the company does well and the stock price goes up. The CEOs simply exercise their stock options and voila, they get rich. Elon Musk has done the same. He is essentially a cashless billionaire. Musk does not take a salary from the company. The billionaire gets paid in stock options and can now buy 1,688,670 shares at $350.02 a piece, or 79% below the stock’s closing price. Musk is worth some $40 billion on paper but the billionaire is ‘cash poor’ and has relied on mortgages and loans for daily expenses because most of his wealth is held as Tesla stock. (Rapier, 2020).
In order to have a good plan B, we must have a good financial education. Let us dig right in. Real financial education is about understanding how to make money work for us rather than working for money. I am essentially speaking the words of Robert Kiyosaki because I believe that it is true. When we work for money, we drool to get a pay rise from our jobs. We essentially become slaves to money. Nevertheless, the sad part is no matter how much raise we get or how much money our jobs pay us, our expenses increase in the same proportion and we end up where we started. Kiyosaki likes to call this “The Rat Race.” In order for us to make money work for us, we must let go off the greed that we have in ourselves, the greed of a higher paycheck. Essentially, a higher paycheck ultimately means higher expense for us. We buy the shiny Royal Enfield Interceptor that we longed for or the Land Rover that we laid our eyes on. It is essentially the greed that gets us down.
So, how do we make money work for us? Again, let us dig into the wisdom of Robert Kiyosaki. In order to make money work for us, we must let go off the greed and understand the difference between assets and liabilities. Money will not solve our problems. Many people who have high paying jobs still struggle with money problems because they fail to understand the difference between an asset and a liability and they do not know how to make money work for them. I will not go into the full details. If you are interested, check out Rich Dad Poor Dad by Robert Kiyosaki.
An asset is something that puts money into our pockets and a liability is just the opposite; it takes money out of our pockets. So true financial education is about letting go off the greed and investing in assets that eventually will pay off all our expenses. Ask yourself this question, if you get laid off your job, or your business gets shut down in the crisis, how many days can you survive without a paycheck? If you had invested in the assets from your paycheck, your assets would put money into your pockets and cover your expenses. The money that your assets earn for you can be put to earn even more assets and ultimately all of you expenses will get covered and you no longer need to rely on the job to pay for you expenses. However, our greed kicks in and we purchase liabilities rather than assets. We take loans and pay EMIs to purchase the Royal Enfield Interceptor that we talked about earlier. Therefore, true financial education is about understanding to let go off the greed and making money work for us by investing in assets.
Similarly, true financial education is about understanding the importance of debts. People influenced by greed take debts to purchase liabilities. Remember, a liability takes money out of our pockets. For example, you get a pay rise and to celebrate, you purchase a Land Rover Discovery on loan. You make EMI payments that essentially includes principal and interest. This takes money out of your pocket. However, what if you took debt to purchase an asset that gives you returns higher than the interest payments that you make on your debt.
There is a term called “Carry Trade” that currency speculators usually use. Carry trade, in simple terms means borrowing money in one currency where interest rates are low and then using the proceeds to incest in another currency where interest rates are high. For example, if the interest rate on borrowings in Japan is 1 percent, but the interest rate on deposits in American banks is 6 percent, it can make sense to borrow in Japanese yen, convert the money into U.S dollars, and deposit it in an American bank essentially earning a margin of 5%.
Understanding how to use debt to put money into our pockets is truly what financial education is. Purchasing assets from the debts that ultimately gives us higher return than the interest expenses will not only make us financially sound but also well prepared during the times of crisis.
So this is it. This is what financial education is. Understanding assets and liabilities and using debt to purchase assets by letting go off the greed that we have in ourselves. However, one question still arises did we learn this in our school?
References
Guina, R. (2020, May 5). Coronavirus Layoffs – Job Losses And Furloughs Are Even Impacting Safe Jobs.
Retrieved from Forbes https://www.forbes.com/sites/ryanguina/2020/05/05/coronavirus-layoffs-are-impacting-safe-jobs/#2fa6f11e3e17
Rapier, G. (2020, May 29). Elon Musk has officially hit the first milestone of his $55 billion compensation package.
Retrieved from Business Insider:https://www.businessinsider.com/elon-musk-unlocks-first-part-of-55-billion-compensation-package-2020-5
Voytko, L. (2020, May 27). Corona Virus Layoffs:Boeing Lays off 6,770 Workers Amid
Pandemic. Retrieved from Forbes:
https://www.forbes.com/sites/lisettevoytko/2020/05/27/coronavirus-layoffs-boeing- lays-off-6770-workers-amid-pandemic/#69339c7445bd
Congratulations Benish koirala 🎉
It was really outstanding article….
Well done 😊😊 hope to see more interesting article in upcoming days😊😊
Congratulations Benish koirala 🎉
It was really outstanding article😊well done 👍hope to see more interesting articles in upcoming days😊
This article is very suggestive and educational. Yeah,We will be poor dad although we have good academic education.
Great Article.
Wealth Creation 101: Own a part of Business. The equity will essentially earn for you, simultaneously while you earn for yourself.