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Gain Financial Literacy!

Aug 17, 2007
After reading the Rich Dad series, I concluded that I will not be able to accumulate great wealth without financial literacy as the foundation Without financial literacy, I will not be able to judge whether something is worth investing. Thus, I enrolled for a few courses on personal financial planning to beef up my knowledge in personal financial matters. It took me about 2 years of part time study to complete all the courses. And I have learned a lot of things and some of them are really bad news to me.

Why? With the new knowledge gained, I realized that there are quite a few of false beliefs that I had been holding with regard to money management. Just let me share a few false beliefs that I used to have and you judge for yourself whether financial literacy is important.

Firstly, I used to think that a dollar today is always equivalent to a dollar many years down the road. I simply have no idea on that value of money can change over time.

For example, I was able buy a bowl of noodles for fifty cents during my childhood time. Now which is about twenty years later, if I try to buy a bowl of noodles, it will cost me around two dollars. In other words, the two dollars today is almost equivalent to fifty cents during my childhood time. Thus, one dollar today may not be equivalent to one dollar in the future because they have different purchasing power.

In fact, the value of money changes almost every single day! Everyday, I will hear the news that the local currency either appreciate or depreciate against foreign currencies. If the local currency appreciates against a foreign currency, it means that $1 of local currency can exchange for more foreign currency. More foreign currency means that I can afford to buy more things from that foreign country since the value of local currency has increased.

Similarly, if the local currency depreciates against a foreign currency, it means that $1 of local currency can exchange for less foreign currency. Less foreign currency means that I can afford to buys less things from that foreign country since the value of local currency has decreased.

Secondly, I used to think that by putting my money in the bank is a good option. I felt that my money was growing in value by earning interest. To my horror, I realized that this is not always true. My money maybe losing in value instead!

If $1 today can buy more things than $1 in the future because they have different purchasing power, then there is inflation. Inflation rate is a measurement of inflation. If the inflation rate is 2 percent per annum, then the value of $100 today can buy the same amount of thing that is equivalent to the value of $102 next year.

Assuming that the bank only pay a 1 percent interest rate for my saving of $100 today, that means I will only have $101 next year in my bank account. But the value of $101 is less than the value of $102. In other words, my money will lose value if I have deposited my money into a bank that pays only 1 percent interest rate.

Next, I used to think that 1 percent difference in interest rate or return rate does not make much of a difference to increase the value of my money. Thus, I do not really bother to waste time moving my money or investment around. But when I have learned about compounding interest, I realize that it make a vast lot of difference especially over a long period of time.

For example, if I put a deposit of $1000 into a bank that pays 1 percent interest rate annually over a period of 30 years, the final amount of money that I will get is $1,347.85. The interest gained at the end of 30 years is $347.85. If I put into a bank that pays 2 percents interest rate, the final amount of money that I will get at end of 30 years is $1,811.36. There is a difference in interest gained between 1 and 2 percents interest rate is $463.51. What if the interest rate is 3 percent? The final amount of money that I will get at the end of 30 years is $2,427.26. The difference in interest gained between 2 and 3 percents interest rate is $615.9 that is almost 1.32 times of $463.51. For every 1 percent increases in interest rate, there is a huge jump in interest gained.

To me, financial literacy does make a whole lot of difference. Thus, I urge you not to neglect your financial literacy.

* Disclaimer *
The author only provides the material and information as a layperson's views about an important subject. The materials and information are from sources believed to be reliable and from his own personal experience, but he neither implies nor intends any guarantee of accuracy.

All the materials, information and procedure in this book are only the author's personal opinion. You must consult your own professional advisor and other reputable sources on any matter that concerns you or others.

The author, publishers and distributors are not competent and do not profess to give legal, accounting, medical or any other type of professional advice. The reader must always seek those services from competent professionals who can review your own particular circumstances.

The author, publisher and distributors particularly disclaim any liability, loss, or risk taken by individuals who directly or indirectly act on the information contained herein. All readers must accept full responsibility for their use of this material.
About the Author
Max Ng shares about his struggle for financial freedom at http://www.richdadsecrets4me.com
Get a free sample of his book "Your Greatest Gift! Why Waste It?" at http://www.yourgreatestgift.com
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