In my opinion, the key to achieving financial freedom is becoming financially literate. Becoming financially literate is the best way you can achieve ‘quick wins’ financially, and move yourself towards the future you want.
As investment and business are rarely taught well in an academic context, financial literacy is pretty poor for most of our society. Understanding risk management, portfolio allocation and managing your taxes are skills that few have, which is why most people never become wealthy.
Holding a lack of understanding about credit cards, mortgages and investment opportunity is a real detriment to financial success. This ignorance leads many to pay for expensive advice from a profit focused financial services industry.
Although these firms play an important role in society, the reality is that they exist to make profit by charge fees to their clients. Whilst some hold a veneer of respectability by talking about their Corporate Social Responsibility policies and dedication to their Fiduciary Duty, they are there to serve their shareholders, not us.
Whilst few of their products are inherently bad, they’re often so burdened with fees, commissions and restrictions that they’re almost impossible to truly meet your needs. No surprise then that few people get rich by saving with their bank.
Becoming financially literate
In the same way that a surgeon can’t rely on his tools to carry out an operation on their own, don\’t rely on someone else to build your wealth. The only possible sustainable solution is long-term investment in your understanding.
Like many other fields, there’s lots of misinformation and opinions out there, and investing isn’t an exact science. There are also plenty of ‘wealth coaches’ who prey on people’s desires to get rich quick. These con artists make their living selling expensive courses which add little value to their students.
Fortunately, there’s also lots of good information available for free, if you know where to look!
First of all, make sure your mind is open to truly learning new concepts. If you turn the page every time you come across a term like ‘quantitative easing’ or ‘inflation linked bond’, you’ll never learn. If you don’t understand a concept, read up on it! Although I studied economics at A-Level, and regularly read the Financial Times, Economist, and Bloomberg Businessweek, I still find concepts I don’t understand. Instead of running from them, I read up on them until I feel I have a good understanding.
Secondly, get involved with the world of finance and economics. Knowing how to make a good investment doesn’t just require an understanding of one asset class. If you’re planning on investing in a REIT, you need to know how the property markets in general are performing. Do you understand the differences between the commercial and residential markets? How is government policy over the next 6/12/18 months likely to affect these? Askquestions and look for answers in reputable business journals like the Economist, and broadsheet papers like the Financial Times. Being well versed in national and global economics is an important part of becoming financially literate.
Make sure you research specific companies. I find reading annual reports and accounts to be a somewhat tedious experience, but it’s undeniably important for gaining an understanding of how businesses operate, they challenges they face and how they address them. These documents are available through a quick Google Search, or through a site like Morningstar.
Additionally, make sure you learn from those around you. Pick up contacts at seminars, at work and through your friends to widen your network. Find a financially successful role model, learn new tricks and tips, and identify opportunities to work together. A good mentor can be invaluable in supporting your learning.
Finally, make sure everything you do is with a long-term mindset. Picking up a single book and reading it does not make you financially literate. Take a lifetime outlook to your finances, and recognise that what is right today might not suit your requirements tomorrow. Markets and economies change, as do personal circumstances. Only by constantly seeking out new information will you move down the long road towards becoming financial freedom.