Whether you’re an entrepreneur, a seasoned professional, or a recent retiree, you probably know that gaining a big picture perspective and understanding of the financial world can be a crucial element to your personal and career success.
But have you ever stopped to ask what Financial IQ is, and why it matters? In this blog post, we’ll uncover four little-known factors that can contribute to your Financial IQ, and how mastering these could lead to a more stable and prosperous financial future for you and those you care most about.
What is Financial IQ?
Defining ‘Financial IQ’
Financial IQ refers to your ability to understand and wisely manage the many aspects of your personal and professional finances.
When we reached out to Greg Liszka (CFP®, RICP®), President and Advisor at IPF, to hear his thoughts on Financial IQ from an introductory perspective, this is what he said:
“Financial IQ is about understanding the basic language of finance — which most people do not. Finance has its own language with its own acronyms that most people have no clue about — let alone how different financial instruments correlate, or any of the strategies involved…
Even basic things like why you hold investments and when, and how those investments are structured ‘under the hood’ — for example, what is a mutual fund? Most people have heard of the term, but do they know what it means? In my time as a financial planner, I have seen that most people have no idea.
So having a better Financial IQ is, on a basic level, about understanding the terminology, and maybe even the technology of the financial world. And then, after that, the correlation of how those work and fold into each other…”
In other words, Financial IQ isn’t just about individual skills like balancing a checkbook or reading through a simple financial statement; it’s about understanding the broader principles of money management, investment, and risk reduction. One level above that, once you have that foundational understanding in place, you can start making purposeful choices with all of the financial tools at your disposal.
It’s a bit like the humorous proverb: “Knowledge is knowing tomatoes are a fruit; wisdom is knowing not to put them in a fruit salad.” The highest levels of Financial IQ are all about that kind of wisdom: learning how to apply the theory in your head.
Why Financial IQ is So Important
No matter what background you are from, a high Financial IQ can make the difference between financial stability and financial turmoil — and, on a positive note, it can even lead you to a place of long-lasting, meaningful impact on the world around you.
A high Financial IQ can equip you with the knowledge you need to plan for the future, avoid costly mistakes, and make values-based decisions for the greater good. So, whether you’re running a business, managing your career, or planning your retirement, we believe getting a good grasp of Financial IQ should be a high priority.
In this blog post, we’ll explore the four factors we think are not immediately obvious that contribute to gaining a high Financial IQ. You’ll gain practical insights and actionable advice that will help you enhance your financial acumen and make smarter financial decisions. Without further explanation, let’s dive in…
4 Little-Known Components of Financial IQ
1. Emotional Intelligence in Finance
Let’s face it: your emotions are likely to play a significant role in your financial decisions. Part of emotional intelligence (EQ) involves understanding and managing your emotions which, for our purposes, becomes very important around matters relating to money in particular. Those with high financial EQ can keep their emotions in check, make rational decisions, and avoid impulsive spending or selling.
Practical Example
Imagine you’re facing a sudden, sharp market downturn. Someone with high Financial IQ and EQ will stay calm, assess the situation, and make strategic decisions without panicking. This level-headed approach can prevent significant financial losses in the long-term.
As Greg puts it, the best thing to do in this kind of a crisis situation — the high Financial IQ option — is to focus on the math and stick to the strategy you’ve had from the start (which can include having built-in protections as a preventive measure):
“When you run the math, that gives you clear path to your unique financial goals. Now, in wealth management, we invest money, and there will be down years. That’s probably the only guarantee I can give somebody: at some point, we’re going to have a bad year.
I tell people that upfront. Even if they laugh, I’m being honest: there’s going to be a bad year somewhere… but we’ve lived through it before, and we’re going to live through it again. And it’s going to be OK, if we stick to the math, stick to the strategy, and avoid making an emotional decision in the moment.
Stepping back, I think we’re better able to set up for market volatility when we individualize it. If we can set expectations correctly from the beginning, and be open in our communciation, then when market fluctuation does hit, you’re OK, because we’ve built in protections to whatever level you need or want them.
Summarizing Greg’s wisdom, combining high Financial IQ with EQ means:
- Being clear about your financial goals;
- Knowing that there will be down years in the market;
- Having an individualized, long-term strategy in place that accounts for those years;
- Structuring in protections in case of bad years, as much as you can afford those; and
- Being aware that your emotions may lie to you in crisis situations, which is why it would be wise to have a clear financial plan to look back on as an emotional anchor.
Advice for Financial IQ and EQ Improvement
To improve your financial EQ specifically, we suggest you intentionally practice mindfulness and self-awareness. One way you could action this is by keeping a journal of your financial decisions and reflecting on the emotions that influenced them — both good and bad.
Over time, you will likely get better at recognizing your triggers and learning to manage them effectively, while also bringing the most positive elements of your emotions to bear on your long-term financial planning (for instance, reminding yourself about the way each of your financial goals make you feel, so that you can stay the course if and when things get tough).
2. Understanding General Economic Indicators
Economic indicators are important statistics that provide insights into the overall health of the national and global economy. These include inflation rates, unemployment rates, and GDP growth. Even though they operate on a ‘macro’ scale, understanding these indicators can help you make informed decisions about your personal investments, savings, and spending (i.e. on a ‘micro’ level).
Practical Example
Consider the impact of inflation on your savings. If you understand basic economic indicators like inflation, you can adjust your investment strategy to protect your purchasing power. For instance, you might choose to invest in assets that are likely to appreciate during inflationary periods (e.g. real estate or commodities like precious metals).
Advice for Improvement
You could start by subscribing to reliable financial news sources like The Economist, The Financial Times, and the Wall Street Journal. Or, if you don’t have the time and don’t want to spend the money, you could even sign up for regular, free updates to blogs like the one you are reading now. Regularly consuming resources like these can help you familiarize yourself with basic economic terms and, over time, better comprehend their implications on your personal finances and strategy.
3. Risk Management Skills
Using that fine economic education you’ve attained from all your hard work and reading, you might then be ready to tackle the next important Financial IQ booster: risk management skills (speaking of which, you could check out our in-depth article on risk management here).
Risk management involves identifying, assessing, and prioritizing risks, and then knowing how to apply your resources meaningfully to minimize or control the impact of those risks. Part of having a high financial IQ includes the dual ability to 1) recognize potential risks ahead of time and 2) proactively take steps to mitigate them (remember those “built-in protections” Greg mentioned earlier?)
Practical Example
A wise entrepreneur with strong risk management skills will diversify their investments. On the most basic level, this means that they will avoid putting all their capital into a single sink-or-swim venture.
Someone with a high Financial IQ will recognize that the “go big or go home” mentality is highly risky in the investment world — so pouring everything you own into penny stocks is an obvious no-no.
While there are no guarantees, having a diversified investment portfolio is likely to be a safer, wiser approach in the long-term, with more modest but consistent returns overall, even if one or two stocks in the portfolio don’t perform as well as hoped.
How to Improve Your Risk Management Skills
To enhance your risk management skills, we would suggest you start by:
- Diversifying your investment portfolio;
- Regularly reviewing your financial plan; and
- Staying informed about potential risks in the industries or markets you’ve invested in (see our second point about understanding economic indicators above).
Of course, if you wanted a little help, or if you didn’t have the time to worry about risk management on your own, you could also consider consulting with a certified financial planner, with whom you could develop a comprehensive risk management strategy.
4. Tax Optimization Techniques
Taxes are an inevitable part of financial management — indeed, “Nothing is certain except death and taxes” (Benjamin Franklin, 1789) — but understanding exactly how to optimize your tax situation can be a game-changer when it comes to enhancing your Financial IQ.
Practically speaking, this involves leveraging tax deductions, credits, and other strategies to minimize your tax liability and maximize your income. (For more on tax optimization, you could look into our dedicated article on some of those strategies here).
Practical Example
A current or prospective retiree with a high Financial IQ will understand the tax implications of the different retirement accounts under their name. They might choose to strategically withdraw from only their tax-advantaged accounts to minimize their tax burden.
Advice for Improvement
Especially when tax filing time rolls around, we recommend taking time to get updated with all the latest tax laws and regulations, for instance by scouring IRS bulletins. If you’ve been immersed in all economic resources we mentioned earlier, you might also find that you have already absorbed that information through your regular reading.
If you want to go even deeper, you could consider taking a course on tax planning or working with a tax professional to identify tailored opportunities for tax savings. Or, if you’d prefer to take a more DIY approach, you could utilize automated tax software to help manage and optimize your tax situation.
The Iron Point Process
Co-Creating a Professional Plan
Now that we’ve run through a definition of Financial IQ and four little-known components of this type of intelligence, we think it’s worth pausing to acknowledge: it’s OK if you don’t have the time for all of this; that’s where we can serve you. As Greg puts it,
“I would make a terrible nurse. I’d have no clue. That’s what they do; that’s their specialty. Our clients get the same feeling: “You want me to do what? What does that mean? And that? And that?”
I think that’s how nurses feel when they come into my office — into my world — thinking, ‘I just need to save a couple dollars. I don’t know where. I don’t know how. Here’s my bank statement. Can you help?’
They’re busy doing their thing. They don’t have time. It takes a lot of work and effort to understand it. It’s not easy. It constantly changes. The rules change. The tax laws change. They’ve got families, jobs, and hobbies, so they’re happy to just let us help them to ‘get there’.”
In other words, it would be easy to look at all of the individual components of Financial IQ and come away feeling as confused as you did at the start.
That’s why, at Iron Point Financial, we walk through a holistic, tried-and-tested process with each of our clients, to co-create a financial plan that suits your unique needs. We do our best to explain the entire plan (giving you the Financial IQ baseline you need), while acknowledging that, ultimately, you’re paying us to do a job for you.
Taking a High Financial IQ Approach to Each Area
So, if you were to come in for a meeting to craft a bespoke financial plan, this is what you could expect to discuss, in this rough order:
“The first step is determining what you’re actually trying to accomplish, which means a lot of goal-setting and definition. That involves walking through the different sectors of ‘cash flow’ and ‘tax planning’ to start.
And then any issues or concerns you have about risk management issues. I prefer not to focus on those (life insurance, disability insurance, etc.) but just identifying any problemns is important.
Then we move to portfolio management —the crux of what we do. ‘How do we need to allocate? Where is all of the money? Is it all spread out? How many jobs have you left where the money is all spread out? What is the best solution for everything you have?
And then estate planning, because we’re all going to die sometime. We’ll talk through that process: do we need to go above and beyond? We’ll talk about beneficiaries: are all of those correct? We might talk about different types of trust.”
We say ‘rough order’ because, although we are likely to touch on each of these four areas, we will likely focus on one or two sections in particular — however best serves your unique situation:
“Some people will put more importance on one section or the other, and we can certainly focus on whatever your biggest concerns are but, generally, we take a snapshot of your goals, where they are now, and then work those through the four main areas to improve your life and accomplish what we’re aiming for.
What all of this means is that we won’t require you to be the expert on every potential area of Financial IQ; instead, we will work with your unique circumstances to highlight the places that are the most relevant to your life trajectory and dreams. Niche parts of your Financial IQ might improve where it’s important you understand specific concepts or options but, generally speaking, you can leave the heavy lifting to us.
Parting Thoughts
Improving your Financial IQ is one of the best things you can do on your journey towards financial stability and success. By understanding and managing the four little-known factors we have talked through above — emotional intelligence, awareness of general economic indicators, risk management, and tax optimization — you can make informed decisions for a more secure financial future.
And even if you don’t feel like dedicating loads of time to up your Financial IQ, you now know what to talk to your financial planner about when you next meet: a baseline for further conversation and co-creation.
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Iron Point Financial is here to empower you to secure a brighter tomorrow. We operate physical offices in Grove City, PA and Greenville, PA.
We primarily serve residents of Pennsylvania, Ohio, West Virginia and Florida but we also have registered broker licenses for 22 other states across the continental USA.
Further Reading
Disclosures
- For a comprehensive review of your personal situation, always consult with a tax or legal advisor.
- Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
- This content is developed from sources believed to be providing accurate information.
- The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties.
- Individuals are encouraged to seek advice from their own tax or legal counsel.
- Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.
- Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities.
- Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.
- This material was developed and produced by Iron Point Financial to provide information on a topic that may be of interest.
- All investing involves risk, including the possible loss of principal.
- There is no assurance that any investment strategy will be successful.
