In this post, I will write about something that might make you scratch your head. It’s a topic that people don’t like to discuss, personal finances, and what keeps people poor or broke. The #1 thing that keeps people poor is not what the majority think. You might be thinking, “Wait, what? How can one thing be responsible for all financial woes?” Well, buckle up because we’re about to dive right in.
Financial Literacy: The Invisible Barrier
You might not have heard of this term before, or maybe you have but didn’t pay much attention to it. Either way, it’s time to bring it to the forefront of your mind. Financial literacy is the key to unlocking the door to financial success, and sadly, it’s the very thing that keeps so many people poor. Now, this applies not just on the individual level, but also to companies, governments, and political organizations that cause poverty through their actions. I would argue that most world poverty is caused by bad national economic policies and bad economic leadership. Financial illiteracy causes poverty as the correct economic principles aren’t used to create wealth.
Let’s look at the personal financial level, assuming you live in a place with financial markets, independent businesses, and a stable economy.
Why Lack of Financial Literacy Keeps You Poor
Now you’re probably wondering, “What does financial literacy have to do with being poor?” Let me break it down for you in a way that’ll make your head spin:
- Lack of knowledge: If you don’t know how to manage your money, you’re probably not doing a great job. It’s like cooking a gourmet meal without knowing how to boil water. You’re bound to make a mess, and that’s precisely what happens with your finances.
- Bad habits: Without proper financial knowledge, you’ll likely develop bad habits, like living paycheck to paycheck, accumulating debt, or not saving for emergencies
- Fear and avoidance: A lack of financial literacy can lead to fear and avoidance of dealing with money matters. This means you might miss out on opportunities to grow your wealth, like investing in stocks or starting a side hustle.
- Limited opportunities: Poor financial decisions can lead to limited opportunities, like not having the credit score to qualify for a mortgage or insufficient savings to start a business.
- No skills to increase earnings power: It’s crucial to understand you must have marketable and monetizable skills that are both scarce and valuable enough to create demand by employers willing to pay you will as an employee.
- No access to capital: Understanding capital’s power in leveraged business ideas and investments is crucial. Not understanding how capital works can keep you poor. Knowing what to do but not having any access to capital also keeps you trapped.
These combined factors create a vicious cycle, trapping people in poverty. But don’t worry! I’m here to help you break free from this cycle by teaching you some crucial financial literacy lessons.
Financial Literacy Lessons to Raise You Out of Poverty
It’s time to arm yourself with the knowledge you need to take control of your financial future. Here are some essential financial literacy lessons that can help you break the cycle of poverty and achieve financial success:
Create a Budget and Stick to It
A budget is the foundation of sound financial management. It helps you understand your income and expenses and ensures you live within your means. Follow these simple steps to create a budget:
- List all your sources of income.
- List all your fixed and variable expenses.
- Set financial goals, like saving for an emergency fund or paying off debt.
- Allocate your income to different expense categories.
- Monitor your spending and adjust your budget as needed.
The point of a budget is to give you the ability to quantify your spending and understand the urgency of increasing your income. The fastest path out of poverty is to increase your earnings power and stop spending more than you earn. The drivers of earnings power is work ethic, and the driver of decreasing spending is self-control. These two factors can lead to savings. Savings can be converted to investment capital. This is the core of financial literacy on a personal level.
Build an Emergency Fund
An emergency fund is a financial safety net that can help you cover unexpected expenses, like medical bills or car repairs. Save at least three to six months’ living expenses in a separate account. This can give you a buffer between you and extreme poverty. This is more important than any other discretionary spending behavior. Not understanding the importance of this safety net shows a lack of financial literacy.
Understanding the Different Ways to Make Money
Robert Kiyosaki, the author of the best-selling book “Rich Dad, Poor Dad,” introduced the concept of the four cash flow quadrants to explain how people make money and achieve financial independence. The four quadrants represent different ways of generating income and are divided into two main categories: active income (E and S quadrants) and passive income (B and I quadrants).
Here’s a brief explanation of each quadrant:
- E (Employee) Quadrant: People in this quadrant work for someone else and earn a salary or hourly wage. Their income depends on the number of hours they work, and they generally rely on a steady paycheck. Most people fall into this category, but achieving financial freedom solely as an employee isn’t easy.
- S (Self-Employed) Quadrant: Individuals in this quadrant work for themselves, such as freelancers, consultants, or small business owners. They have more control over their time and income than employees but still trade their time for money. While the potential for higher income exists, financial freedom can be challenging due to the reliance on personal effort and limited scalability.
- B (Business Owner) Quadrant: People in this quadrant own and operate large businesses or systems that generate income with or without their direct involvement. These individuals have built a team and infrastructure to run the business efficiently, allowing them to earn money even when they’re not actively working. This is a more scalable and sustainable way to achieve financial freedom.
- I (Investor) Quadrant: Investors make their money work for them by investing in assets like stocks, bonds, real estate, or businesses. They earn passive income from their investments through interest, dividends, capital gains, or rental income. This quadrant offers the most potential for financial freedom, as the income streams are not tied to the individual’s time or effort.
Kiyosaki emphasizes that the key to financial independence lies in moving from the E and S quadrants to the B and I quadrants. By focusing on building passive income streams, you can achieve financial freedom and gain more control over your time and resources. Just understanding this is the first step in gaining financial literacy.
Wrapping Up: The Power of Financial Awareness
In conclusion, financial illiteracy is a major obstacle that prevents many individuals from escaping poverty. Investing time and effort into understanding the world of personal finance, business, and investing is crucial to overcome this invisible barrier. By doing so, you’ll be better equipped to break free from financial hardship and achieve prosperity.
To recap, some of the fundamental principles and lessons we’ve discussed include:
- Increasing income earning potential through education, skills, and experience.
- Crafting and adhering to a budget ensures you live within your means.
- Establishing an emergency fund to safeguard against unforeseen financial challenges.
- Eliminating bad financial habits, such as excessive spending or accumulating unnecessary debt.
- Proactively engaging with financial matters to seize opportunities for wealth growth.
- Building up capital to invest in stocks or your own business.
- Understanding all the different cash flow quadrants where money can be earned.
Remember, knowledge is power. By embracing financial literacy, you’ll improve your financial situation and empower yourself to create a brighter future for future generations. So, don’t wait any longer – start your journey toward financial literacy education today.