Handling money the right way is no piece of cake. Money doesn’t come by all that easily, at least not if you inherited it, and to ensure that one spends it wisely while also making smart decisions to achieve all one’s goals, one needs to be extremely prudent.
Smart management of money is what contributes to one’s financial intelligence quotient, more commonly spoken of as the financial IQ. In this article, we will explore some great habits every person can cultivate to improve their financial IQ but first, let us understand what the concept means.
Understanding financial IQ
Very simply, financial IQ refers to the ability to make one’s money grow by spending wisely, saving and investing right. A concept that was made popular by the bestselling author Robert Kiyosaki in his extremely popular personal finance book “Rich Dad, Poor Dad’, financial IQ or financial intelligence is all about using information and one’s wisdom to make the right choices in managing money.
At the core of the concept of financial IQ lies the understanding that one needs to make lasting changes to one’s understanding of how money works. We need to understand that money will not multiply by itself and that we are the ones who will make the decisions that will determine what happens to our money. Smart decisions about money management are what financial IQ is all about and decision making will only become better as we empower ourselves with enough knowledge about making money and budgeting.
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Why is financial IQ important?
It might not appear so at the outset, but a high financial IQ can bring great benefits to an individual. While everyone has some basic idea about their finances and how to manage it, not everyone is very successful in ensuring that they are great at not just making money but also saving and multiplying it. This is where financial IQ becomes important.
Everyone’s financial situation is different and there is no one size fits all when it comes to managing money the right way. Sure, you may have learned something from your family, friends, and peers but your particular financial situation may not work with the model you learned about. This is why it is important to have a high financial IQ so that you can spend your money wisely, save enough, and plan for your retirement, all with the existing corpus you have to start with.
Great Habits for Improving Financial IQ
Good financial IQ comes from managing your money better. Here are a few habits you can cultivate in order to boost your financial IQ and work your way towards financial success:
- Focus on saving
It needs no telling that an excellent habit of people with high financial IQ is saving money. No matter how much your income is, make it a habit to put aside part of your earnings every month in the form of savings. Having savings is important at every stage of your life as not only does this encourage prudent spending but also helps you create a fund for emergencies. With your savings, you can fund your goals in the short as well as the long term without burdening yourself with a loan or skewing your regular expenses.
- Evaluate your spending
If you feel your money is slipping through your hands like grains of sand, it is time to take a look at where all the money is going. Making a list of all your expenses is the first step towards a great habit and can be done on a daily, weekly or monthly basis.
This will be beneficial towards helping you manage your finances better by helping you keep track of the expenses which are important and those which you can do without. You can also maintain a personal diary or journal to keep track of your daily expenses if you have trouble remembering where you spent money.
- Plan your purchases
Every one of us has something or the other on our wishlist and some of these purchases are more expensive than we can afford. A new car, jewellery, electronics or even that expensive perfume–there is no end to the luxuries you can want. While you might want to make the purchase immediately, a great sign of high financial IQ is planning purchases and making them after saving up enough money. Make it a habit to keep from impulse buying and if you like something that falls outside your budget, save up and then buy it without affecting your financial health.
Saving money is a great habit but if you wish to multiply it, whether for the fulfillment of short-term goals or for retirement planning, investing money is a great habit to cultivate. There are numerous options to invest money such as the share market, real estate, fixed deposits, currency, etc. However, when you invest your money, make sure you research adequately on all the pros and cons of the market you intend to dive into so you can make good and steady returns.
- Track your net worth
Knowing how much you make is good, but it is not enough. It is important that you know your net worth as only keeping track of what you earn will not give you a clear picture. Your income may not give you your true worth as it will not tell you whether you are in debt or if your wealth is growing. To know your net worth, you need to subtract your liabilities from the sum total of all your assets.
Liabilities will include all your debts, including credit card bills, loan installments, and your expenses. If the figure is negative, it implies that you are in debt and need to restructure your finances. Keeping a regular check on your net worth will let you know if your liabilities change over time and how much you manage to keep in the bank or as assets.
- Limit your credit card spending
Owning a credit card is a great habit if you wish to build and improve your credit score. However, when it comes to improving your financial IQ, it is advisable that you limit the number of credit cards you own and use. Often, when one has too many credit cards, one tends to lose track of all the purchases made. When the bill is presented at the end of the cycle, the figure might throw your entire budget off balance. If you keep up this habit, it will also affect your financial stability in the long run.
- Take a loan only when absolutely necessary
In present times, purchasing even luxury and high-end goods has been made much easier thanks to the easy availability of loans. Instant purchase on EMIs might seem like a dream come true when it comes to financing your dream goods or services, but in the long term, it severely affects your financial health.
Consider a loan only when absolutely necessary and when you think that your income can sufficiently handle the burden of monthly installments. If you are looking for quick and hassle-free small personal loans with minimal documentation and processing time, download the PaySense app. Obtain loans up to Rs 5 lakhs at easy and affordable EMIs from PaySense with flexible tenures.
- Read books on personal finance
A good book can teach you much more than personal experience after you have made mistakes. There are some great books from great authors such as Robert Kiyosaki’s Rich Dad, Poor Dad’, Beth Kobliner ‘Get a Financial Life’, David Bach’s ‘The Automatic Millionaire’, Dave Ramsey’s ‘The Total Money Makeover’, among others.
These books will not just improve your financial IQ but also clarify many commonly faced doubts by people concerning personal finance. Also take time to read articles, blogs, and magazines on personal finance and budgeting which will provide you with the right tips and tricks for managing your finances the right way on a regular basis.
- Get help from a financial advisor/tax planner
If you are still unsure about how to get your finances in order, it is recommended that you meet with a financial advisor or a tax planner. With their technical know-how and expert knowledge of the domain of finance in general, they will be able to help you with how to manage your finances better. Additionally, seeking the services of a tax planner will also help you in working out the correct amount you need to pay, calculate where you can claim rebates and save on taxes without breaking the law.
When it comes to cultivating prudent habits for a high financial IQ, nothing works better than taking time out to learn more about personal finance. There is a need for every individual, no matter how young or old they are, to stay in the loop about the latest in the world of finance to make their money grow. You need not be a finance whiz but educating yourself about personal finance through different verified sources and learning new skills to budget better can go a long way towards boosting your financial IQ.
Aahna Gandhi is an enthusiast traveller, writer and a PR Professional. She likes sharing memorable moments from her travels and inspire others to live a life full of wonder. Known for her content, she has worked for travel, technology, lifestyle, health sectors as well as finance.
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