Financial Education and Competency – Episode 643

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[00:01] Welcome to the Prosperity Podcast. Prosperity thinkers, in today’s episode, we’re going to be talking about financial education and competency. And this is one of those that can be taught to our youngest listeners all the way up to people that have made it and maybe they don’t have to actively earn income anymore, but they still need to be learning and doing. It’s so interesting, we were talking in a previous episode about you can’t just sit in maintenance. And this is true of our brains as we progress through life. We must always be learning things. And money cannot be homeworked. We would love it if we could just give our child a book or have them watch a video and they would learn what they learn about money.

[00:53] But even the high schoolers that earn their credit for their financial class, you know, that a lot of states are requiring in this financial literacy space, I find need so much additional capability to get to financial competency. So what are some of those things? And I’ll just start with, I know when my kids were in high school, they learned how to trade stocks. That was their financial class. Now that was 10 years ago, but still I was so disappointed because things like the truth around car financing, financially competent people understand, for example, that zero percent is not zero percent. Like yes, the car financing companies offer and advertise these zero percent financing deals or 2.9 or, you know, these crazy low rates.

[01:50] We need the financial competency to understand the ability to step back and take a look at that. Okay. I probably get that the car financing company makes money on this. Like the car manufacturers have their financing arms, and frankly, that’s where they earn the bulk of their money. So you can’t do that zero percent to what’s going on. And so please seek out the whole truth around car financing. And the quick answer for you, those like to bottom line things like I do, is that the car financing companies add the interest to the cost of the car and then they take that whole block and call it zero percent. Then you will not get fooled. Furniture industries, by the way, do the same thing. There is a cash price for the furniture and there is a financing price and they

[02:36] are not the same. So that’s something that should be worked through. That can be, you know, maybe like a perfect class, 45 minutes long, right, to help children and adults. I have 50 year olds that don’t understand this understand the truth around car financing. Okay, that’s one space. Now, let’s take a look at rents and mortgages. Right. So you have most kids out there these days that are renting. Some of them are desiring to have a house. They’re looking at maybe a three percent down first time home buyers loan. Awesome strategy. Some children, however, you know, maybe they have some family money or they got a signing bonus for their job or whatever and they have the capacity to put down more.

[03:21] Very important to understand the concept of other people’s money as it relates to home financing and other places. So the quick and dirty answer on the mortgage environment is to put as little down as possible and then not make extra payments. Oh, but wait, the bank is offering me a deal if I take a 15 year loan. Well, again, let’s step back from that. Why are they offering you that deal? Because it’s a better job for the bank to do that deal short term. But it’s not the better job for you to do that mortgage short term or for you to pay extra into your mortgage at all. So, again, we need the whole truth. We need to understand things like the time value of money. One of the very common conversations out there.

[04:11] And this is such a great example of the difference between financial literacy and financial competency is literacy says, oh, I have this big mortgage or this big car loan or whatever it is, and I’m just going to add up all the interest that I’m going to pay. That is a mathematical exercise. It is correct and verifiable, but it’s just a fun fact. Financial competency says, wait, I have to have the time value of money in that compilation, that computation that gets made. If I’m looking at money and it’s over anything more than a day, I have to involve the time value of money. Sometimes this is referred to as the cost of money. And so over a 30 year period, for example, I can’t just add up all my interest

[04:59] payments. I have to take into consideration that’s done over time. And the way that you do that is you plan interest rate of 4% or 5% or whatever. So this is another example of financial literacy says, I can just look at this one thing by itself. Financial competency says, wait a minute, I need to look at the big picture and I need to apply scientific analysis, which says if I’m going to analyze something, I have to only change one variable at a time. So if I’m going to do a 15 to 30 year mortgage comparison, as an example, I’ve already got my one variable 15 years versus 30 years. Every other variable in my scientific analysis has to be the same. The interest rates have to be the same. I know the bank offers a better deal.

[05:48] We’ll get there. But the time frame is my differential. My savings count interest rate that I’m doing my comparison and my time value of money with my cost of money included, that has to be the same as the mortgage interest rate, et cetera, et cetera, et cetera, all the way around the wheel so that my scientific analysis is accurate. Only change one variable at a time. That’s the difference between financial competency and financial literacy. And I could keep going, you know, the life insurance space. You’re going to have term insurance. That’s great financial literacy. It’s talked about all the time. That’s beautiful. And you want to add financial competency in there, which is how can I change an expense called term insurance, term life insurance to an asset,

[06:35] which is what whole life does, whole life insurance, W-H-O-L-E. One is financial literacy. The other is financial competency. So I’ve talked about cars. I’ve talked about mortgages. I’ve talked about life insurance. You could involve mutual funds and qualified plans because financial literacy says my 401k has a $200,000 balance. Financial competency says, and that is entirely taxable. So I can’t be thinking of it as 200,000. I need to think about it as about half of that. And there are just so many things. Same with the mutual fund arena. My stockbroker says that the S&P has averaged 10 percent or 11 percent or whatever average time frame you want to use. And that is not actual. Financial literacy says the average rate of return is X.

[07:29] Financial competency says, wait a minute, what about the varying of the interest rates? What about taking an actual dollar through there and figuring out what it actually earned? What about the fees that I have to remove from that account that create opportunity costs? Fee year one creates opportunity costs in year two through 30. Fee year two creates opportunity costs in year three through 30, on and on. So these are the differences between financial literacy and financial competency. Yes. You know, you were talking about the literacy versus competency. And the thing that kind of struck me in this conversation is that when I’ve had conversations with people that are really good at quoting something they’ve

[08:21] read or referencing a statistic that they know, but they don’t understand the principle. And that’s what happens. And you can sound really confident stating something, quoting something, referencing a statistic, but you can be confidently wrong if you’re not competent in that area. So as we wrap this episode, what are the principles? And I know we have the seven principles of prosperity, but what are the core principles that you refer to when you’re finding new information that challenges your thinking? I love it. Absolutely. So let me see if I can pull these from the top of my brain because at Truth Concepts, which is Todd Langford, my husband’s company, where all of our calculators involve the time value money, make sure they’re telling the

[09:14] whole truth. He has a set of seven standards. Now, some of them relate to being a salesperson, like, for example, Don’t Poulter, P-A-L-T-E-R, which is bringing up fun facts like total interest paid, which is irrelevant. But he has some others that are just so valuable. And one of them is that time value of money element. So time value of money, opportunity, cost, right? We think about opportunity as a gain. Todd’s even starting to say it is an opportunity gain or cost. It’s just opportunity. And some of it’s positive, some of it’s negative. That’s really important. Cost of money is sometimes what it’s termed. So time value money must have it included. Opportunity cost or cost of money must have it included.

[10:02] The scientific analysis absolutely must have it included. And then the ability to look at things long term, which is not so much maybe a standard other than just a way of always viewing things, because I’ll have people, for example, and not that I would necessarily compare life insurance to a 401k plan, but they want to. And they’ll say, well, you know, I can’t get at my money the first year. Well, you can’t get at your 401k money until you’re 59 and a half. So you’re wanting to compare this little short-term period for your life insurance policy, but you’re looking at a 20 or 30 year period for your 401k plan. So similar timeframes, very important. And ideally long timeframes, right? Because we have the whole accumulation of wealth, the whole building of wealth.

[10:54] But then we have the entire distribution of wealth. Also, a successful trip up a mountain is not successful if you don’t make it back down alive, you got to get up and down. So that’s, I think, a very important point as well. And then just really being clear that the math that you are applying is bringing in all of the elements that need to be applied to make the decision. I’ll have people say to me sometimes, well, I make my insurance decisions separate from my investment decisions. No, you don’t. Your family has one economy and all of the decisions are made within that one economy and we must optimize that economy to get all of the dollars working together for you. So those are the really off the top of my head standards, if you will,

[11:51] that to work through personal finance questions, you must have in place. And if you don’t, please reach out and get some help. Yeah, that was great. That was the whole truth. That wasn’t a partial truth. It wasn’t a sentence of truth. It was the whole truth. That was good. Really good. Send an email to hello at prosperity thinkers dot com with any of those questions. And again, if you have a question that you want to hear on the podcast, send it to that email address. Kim, thank you for sharing more information and truth and principles to help all of us. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you. Visit ProsperityThinkers.com