Financial Intelligence - Intro

If I had the magic opportunity to have dinner with Santa Claus and the head of the Department of Education together, and they were drunk enough to allow me to make a wish, I know exactly what to ask for. I would say, “I wish Santa would grant all the resources you need to make Financial Intelligence a compulsory unit in all schools, Mr Head of the Department of Education.” After all, financial intelligence is such a critical component of people’s intelligence matrix that it is a must-have to live an enjoyable life.

What exactly is financial intelligence? It is the ability, knowledge, and skills to drive money to serve one’s purpose. Let’s break down this sentence. The money in the above definition is a general term. It includes, but is definitely not limited to, the ten-dollar bill in your pocket. In fact, the money here refers to financial resources that one can spend in exchange for other goods and services. Cash is the most straightforward form of financial resources that can be used directly to buy. We also include financial instruments such as securities, options, futures, and bonds. These instruments are relatively liquid, meaning they can be easily converted to cash in a short period of time. We also include assets as a broader term of money, in that they can be turned into cash at a higher cost.

The keyword in the definition of financial intelligence is drive. It can be best understood in the form of a lifecycle. First, money is generated, where we understand income structure and income taxes. Then, money is kept, where we understand savings, interests, inflation, and portfolios. Next, money is spent, where we understand budgeting, lifestyle creep, donation, and behavioural economics. Then, money is re-generated, where we understand various types of investment (traditional financial instruments, fixed assets such as property, and cryptocurrencies). Next, money is regulated and protected, where we understand insurances, trusts, wills, and inheritance. Furthermore, money is borrowed, where we understand loans, credit cards, and buy-now-pay-later. It is important to make clear that all the above money lifecycle events are happening concurrently; therefore, the shape of a person’s financial situation is morphing all the time. To sum up, when we say financial intelligence is about driving money to suit a person’s needs, driving means control over generation, keeping, spending, investing, regulating, and borrowing.

Financial intelligence is not straightforward to develop, not only because of the above-mentioned complexity, but also because it is counterintuitive. Throughout human history from an anthropogenic perspective, people only deal with concrete ideas rather than abstract ones. Stone Age people knew what one apple, two oranges, three bananas were, but they had no idea of one, two, and three. Number, as the first symbol that humans’ minds dive into the abstract world, did not exist until 4000 BCE, when the Sumerians in Mesopotamia started using clay tablets for number symbols. Compared to humans’ first use of fire 1.5 million years ago, the invention of number is barely a moment. If human history so far is a 24-hour day, started by their first use of fire, number appeared in the last two minutes. Therefore, from an evolutionary point of view, number is such a novel thing that it is naturally hard to master.

Apart from number, financial intelligence requires another abstract element to make it further counterintuitive. That is the generalisation of the value. In economics, the generalised “how useful a thing is” is described as utility. For example, an apple can be eaten, making one feel less hungry. A cloth can be used to keep one warm. A hammer can be used to craft a table, which itself can be used for many other purposes. The degree of how much one feels full, warm, and satisfied by using the table is the amount of utility generated by the apple, the cloth, and the hammer. It is very hard to compare the fullness, the warmth, and the convenience of using a table directly, since they meet completely different needs. However, becoming financially smart requires answering these questions consistently and accurately. We have to convert the real use (being eaten or being worn) from the concrete world to the abstract world, and compare them directly.

Let’s pursue this “why financial intelligence is counterintuitive” angle by fully discussing four patterns. A concrete thinking approach to overcoming each pattern is presented to enable smart financial decisions when facing these patterns in real life.