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5 Oct 2017

Financial Intelligence: Why the Rich Get Richer

(Watch short video at here)
As a Chartered Accountant by training, I want to talk about Financial Intelligence today.  This is because everyone wants to be rich, but few have financial intelligence, the key ingredient for richness.

Intelligence is the ability to make sense out of information, strategize, think and act appropriately. Most people have no intelligence, for they simply follow the crowd and react more than respond. For example, when times are hard, most people will cut costs, and they end up with lesser sales and less cash flow instead.

There are 2 indicators to show if you are financially intelligent:
  1. When you are empowered by numbers and take advantage of financial leverage, like make use of other people's money
  2. When you can act without money as the objective
There are two key elements in financial wealth: value and cash flow. These two are interlinked, for when you have more value, you will have more cash flow.  The rich can turn value into cash flow and turn cash flow into value. 

Value is what you are worth in the marketplace, not what you think you are worth in the marketplace. Value can be real or perceived.  

Value is what the marketplace is willing to pay you NOW and is determined more by your future than by your present. For example, Design Studio and Breadtalk are two listed companies with about the same annual profits of S$11 million. Yet the market value of Breadtalk is at least 7 to 10 times higher than Design Studio, because the market thinks that Breadtalk has more value in the future than Design Studio. 

Value is also what people can get out of you, note that price is what you pay and value is what you get. So people are willing to pay more for Breadtalk shares because they think they can make money from Breadtalk shares. 

Cash flow is cash flowing in and out continuously, year after year, month after month, day after day.  Cash flow has two flows; inflows and outflows.  Both of them can be active or passive, active means you have to work to get it flowing, passive means you work less to get cash flow.  For example, most people have active cash outflow, this means that even if they stop working, they still have expenses they have to pay. On the other hand, most people have active cash inflow, this means that the moment they stop working, they have no cash inflow. These are definitely not financially intelligent!

Why the rich get richer while the poor get poorer?  Because the rich can convert things into value and create cash flow out of this value created.  The poor do not create value and instead diminishes value. For example, the rich can attend a course and make good business contacts from there, whereas the poor only attend training to enjoy the free meals and they seldom turn what they learned into value. 

The rich also delays gratification while the poor yearn for instant gratification. 

Most importantly, the rich spend money to save time, and they use the time saved to generate more value and cash flow.  For example, the rich will pay for higher airfares to get better timing so that they can get a good sleep and be ready for next day's meeting. The poor will try ways and incur lost of time just to save money, and they end up with little money and time!

At the end of the day, Financial Intelligence is about you able to get more out of what you have, and to an individual, what you have is simply your self worth.

Written by Andy Ng of Asia Trainers. If you too want to learn more about Finanial Intelligence, come for our public seminar on 16 October 2017 Monday 9 am to 5 pm.  For details, text to Andy at 65-8201-4347 or email to andy@asiacoachingtraining.com now!