Money Advice For Those In Their 20s: Financial Intelligence

Young individuals do not acquire financial intelligence while they are in school. People who possess it did so through practice and self-study. But when we are busy with our everyday tasks, self-learning can seem like a job or an extra effort. So, most people skip it.

The structure of our educational system does not allow for the inclusion of lessons on money in the curriculum. As a result, when we join the real world, all we understand about money is what it may be used for. But money also has three other facets: assets, liabilities, and cash flows.

We must examine all five aspects of money simultaneously in our effort to develop our financial intelligence. How do you do it? In this post, we'll see examples of this. The ideas presented in

The ideas presented in this article are drawn from Robert Kiyosaki's philosophy on money.

Introduction: From Where To Start :

©Abhisheksarda-Fintechstock48

To begin with, it's important to keep in mind that managing money involves more than just controlling spending and revenue. Building assets, managing liabilities, and managing cash flows are further aspects of this.

The first step in developing financial intelligence is understanding and accepting that managing money involves managing each of these five parts of it simultaneously. By handling one part better than the other, success cannot be expected. Why? Since no factor can be ignored.

A beginner must give up thinking of money as a bank balance or a piece of paper. They must begin to see money as it is represented in the infographic above: as income, expense, assets, liabilities, and cash flows.

Pro-investors can still locate these kinds of opportunities, nevertheless. Assume, for the sake of argument, that you have purchased a home with a high rental yield. All associated expenditures, such as loan EMIs, taxes, upkeep, etc., can be covered by the yield. Additionally, capital appreciation is also taking place covertly. Wouldn't this be a fantastic investment?

Every time you earn a Rupee (income), tell yourself how you are going to manage the further cash flows. This income can be used to buy an investment (expending on an asset). It can also be allowed to buy a gadget (expending on a liability).

Building wealth and financial independence is the goal.

What does managing money fulfil? The main goal is to create long-term wealth. All six components must be managed jointly in order to increase wealth. Each one is equally important to the other. Wealth development involves a sort of balancing act between assets and liabilities as well as income and expenses. Understanding the necessity of keeping a balance is a sign of financial knowledge.

©Abhisheksarda-Fintechstock48

It makes sense to assume that money needs to be handled properly. In actuality, we must act correctly in everything we do in life. The appropriate approach in financial affairs might assist one in accumulating more wealth over time.

Giving wealth creation a specific goal serves as a reminder. It acts as a reminder that we are being especially careful with how we handle our money because it has more significance.

Now, one would wonder, "Why generate wealth?" I do it in order to become financially independent. Why is having financial security important? because it can liberate one from being financially dependent on a job or work. The state of financial independence as it is depicted by Kiyosaki is shown below.

©Abhisheksarda-Fintechstock48

Investors Mindset :

The objective is to change one's perspective from that of an employee or businessperson to that of an investor.

The mindset of an employee may not apply to everyone who performs a job. Similar to this, simply purchasing a few securities or mutual funds will not guarantee an investor's thinking.

afore, before making the initial investment, one must first concentrate on developing an investor's mindset.

©Abhisheksarda-Fintechstock48

What is the mindset of an investor? Realizing that everyone on earth falls into one of the four categories (quadrants). View the images above. The people working are located in the first four quadrants. The self-employed are represented in the second quadrant. Businesspeople should sit in the third quadrant. The mindset of the investor permeates those in the fourth quadrant.

One must transition from the first two quadrants (E and S) to the second two quadrants if the goal is to become wealthy (B or I). Financial freedom can only be attained if the fourth quadrant is the focus (I).

Knowing which quadrant you are in at any one time is a sign of financial intelligence. Consequently, you must transform in accordance with your aim. Knowing which quadrant you are in at any one time is a sign of financial intelligence. You must therefore change yourself into Quadrant-B or Quadrant-I depending on your goal.

Start Buying Assets – Building Alternative Income Source :

An individual in their 20s who has recently held a job has at least 7–8 years left before starting a family. The time is ideal for investing. One should strive to invest around 80% of their income in purchasing assets. The infographics below depict the cash flow for such a transaction.

©Abhisheksarda-Fintechstock48

Building a secondary source of income should be the goal of asset acquisition. When we work, our job is our only source of revenue. However, assets open up a different revenue stream. Either passive income or revenue from a portfolio is possible.

Portfolio Income: Over time, assets increase in value. We refer to it as a capital gain in financial terms. These profits don't generate any cash flows until we sell the assets. They are essentially "virtual gains," as one of my friends once put it. Such revenue falls under the category of portfolio income. The price growth of the holdings' stocks, mutual funds, ETFs, bonds, etc. is one type of portfolio income. The portfolio income increases faster than inflation over time.

Passive income is generated when assets generate cash flows. Dividends from stocks, rent from a home, interest from savings accounts, and other forms of passive income are a few examples. Although passive income has a lower yield than portfolio income, it is nevertheless real money (not a virtual gain).

"The size of the alternative income will increase as we amass more assets over time. We will be financially independent the day that the income from a different source is sufficient to support our quality of living."

We must exercise caution as we try to build up our assets to generate alternate sources of income. We must choose our assets carefully. All of the things that people name assets around us are not actually assets.

What Do You Mean By Assets :

An asset is any investment that generates a profit for us (positive net cash flow). When we use the phrase "contribute money," we mean it literally. This is especially true for investments that bear costs.

A real estate property, for instance, has expenses like property taxes, maintenance, other fees, etc. An asset is any investment that is self-sustaining. A piece of real estate is considered an asset if it generates enough revenue to cover its tax and maintenance costs. It is a liability if not.

Both passive and portfolio income are being produced by the investment. The associated costs can be covered by the asset's passive income (cash outflows). The net cash inflow in this case is positive. Additionally, the asset's value is rising. Such an investment develops into a great asset.

If the above investment is a real estate property, the passive income is the monthly rent. The rental income can be utilised to cover expenses such as property taxes, upkeep, fees, etc.

Debt Instrument Assets :

Being net cash inflow positive when an investment purchase is financed with debt presents significant difficulties. The net cash inflow will be negative 90% of the time. Although long-term capital growth might be advantageous, immediate financial outflow will be felt. As a result, this investment will turn into a liability.

Pro-investors can still locate these kinds of opportunities, nevertheless. Assume, for the sake of argument, that you have purchased a home with a high rental yield. All associated expenditures, such as loan EMIs, taxes, upkeep, etc., can be covered by the yield. Additionally, capital appreciation is also taking place covertly. Wouldn't this be a fantastic investment?

There are three important things happening here for Robert Kiyosaki. First, is his financial intelligence, ability and experience to find such undervalued assets that can fund its cost.

Second, he frequently remains qualified for loans due to his high income. Thirdly, he can utilize his current asset base as security even if the banks are unable to finance loans for him based on his income.

So, individuals like Kiyosaki can benefit from debt. However, for newcomers in their 20s, debt-financed asset acquisitions might never meet the necessary math requirements.

Construct A Safety Net :

One cannot continuously purchase investments. In life, there are also other significant things happening. When the need occurs, we must also be ready for them. I'm referring to genuine life emergencies. Making emergency plans will save us from having to raid our savings when a crisis arises. Compounding is the key to investing. To fully appreciate an investment, it must be held for an extremely long time and if an emergency arises and we lack a backup plan, we can find ourselves forced to sell our holdings, the investments. Building an emergency fund is therefore crucial for us to do before stepping into the uncertain and new realm of investing. The emergency fund is covered in a different essay I've authored. To learn more about it, kindly click on the provided link.

Conclusion :

Most people do not have financial knowledge at birth. It is a skill that may be developed over time through practice and study. The issue, though, is that it is not a subject taught in schools. Children leave high schools and colleges with zero experience managing their finances. This is a danger. Why? As a result, when these people in their 20s begin to get money, they are ill-prepared to handle it. Time has already passed by the time they realize how important personal finance management is.

I've discussed what I've discovered about money and money management