Simple interest? Compound interest? Effective interest? Is she interested in me?

Today we tackle the issue of the ole FL – the biggest indicator of future wealth (or lack there of).

Everyone knows what Financial Literacy is, the concept of Financial Literacy that is. “Dollars and cents lor”, my ex boss quips.

I like him a lot, but its a bit more complex and more important than that. My own highly professional definition of Financial Literacy is: the knowledge of prudent money management and the ability to make sound financial choices.

Make no mistake, financial literacy is big business to you. From paying taxes, managing credit card debt, to taking loans and *gasp* making investment decisions, having this skill is essential. But unfortunately not formally taught in schools today. (Whole other rant for another day)

Think you are financially savvy? Try answering these questions

1. What is the difference between simple, compound, and effective interest? What is the relationship between them?
2. How does the concept of dollar cost averaging work? Is it effective as an investment method under all market scenarios?
3. What is the difference between company tax and personal tax rate in Singapore?
4. What is the house edge of roulette in the casino? How about 4D? (I guarantee you will never visit Singapore Pools ever again if you knew the answer, assuming you are fully rational)

Financial Literacy is more than just the maths that go behind the decision of money management, but also a marriage of common sense and discipline. (Mom was largely right when she told you not to buy that car right after graduation)

People with a greater degree of Financial Literacy have larger retirement nest eggs, have larger pools of wealth and more importantly, have more than one way to generate wealth. People with less of this skill tend to borrow more, accumulate less wealth, and pay more in fees related to financial products. Article from Time here

Most people will never examine the black scholes equation to peer into the computation of options, nor will they delve deep into stochastic calculus to price the many financial derivatives out in the market today, but having Financial Literacy is far easier than that.

Let me introduce Fred to you. Fred is a person with a serviceable grasp of Financial Literacy.

He budgets his spending on a monthly basis, knowing which bills to pay and which types of debt to avoid. He uses credit cards for their perks but never for their true credit facility (banks hate him). When in Vegas, Fred politely looks on while others around him place their life savings on the gambling tables. In fact, Fred has never stepped into a Singapore Pools shop.

He knows the difference between buying a car and buying a status symbol, and he knows the difference between celebrating a wedding and splurging on a 6 star hotel banquet to “impress the in-laws”. He knows what type of housing he should purchase given his foreseeable income situation, but gives himself a comfortable buffer. Fred also commits to his insurance plans (bet you didn’t see this coming), opting to forgo a holiday or two in exchange for peace of mind.

I wish more people were like Fred. Loan sharks would be out of businesses, more marriages would survive (financial problems is the no. 1 killer of matrimony), CPF would then be redundant, making a certain HHH quite happy.

Hope this post inspires you to find out more about money management, prudent spending, and also seek out more friends like Fred.

Do you want to learn how to calculate the house edge in 4D? Simply ask in the comments below!

www.ClearlySurely.com aims to eradicate the knowledge gap between consumers and Life Insurance. Our Vision is that one day, every Man, Woman, and Child will be properly insured.