Financial literacy opens up a whole new world

‘Without understanding the key words of accounting-speak, it’s a bit like trying to read Greek.’
Issue Date 16 March 2007

‘Without understanding the key words of accounting-speak, it’s a bit like trying to read Greek.’

Have you ever imagined what it’s like to be illiterate? I once got the feeling during a visit to Athens, where was trying to locate a street. It was impossible. The street signs are in Greek, and could find no one who spoke English. was a desperate situation.

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Illiterate people live in a world like this all the time. Financially illiterate people live in this world when it comes to finance. I’ve been a bit repetitive over the past few weeks about financial literacy. hope you have gained some insights into the often confusing world of finance.

It’s really quite simple, but without understanding the key words of accounting-speak, it’s a bit like trying to read Greek. Being able to read and understand financial statements is an important foundation on the road to financial literacy, but it’s only one facet of many.

There’s the question of structuring the businesses’ accounts so that you know where money is being made or lost; how best to finance an asset, such as a new tractor – whether it’s best to lease or buy; forecasting the return on a new project, taking into account of the present value of money.

That’s before we start delving into personal financial issues such as home ownership, education funding, insurance, retirement, estate planning and the like. W ithout fundamental financial literacy it’s impossible to understand and assess the quality of the advice one gets.

Robert Kiyosaki in his best-seller Rich Dad Poor Dad is highly critical of the education system of the US, which, much like ours, largely ignores the need to equip kids with these skills. His book sends out a very clear message. “You will never be rich unless you are financially literate.” He takes strong issue with the way accountants classify assets and liabilities. To Kiyosaki an asset is something that puts money in your pocket; a liability takes it out. So your home, which you thought was an asset, he says, is actually a liability. Accountants will beg to differ, but his book will make you think. Read it.

One of my lecturers used to refer to the “alchemy” of finance. I would imagine a wizard stirring a bowl of credits, debits, assets and liabilities, and conjuring up a mixture from which a genie would leap, brandishing a set of totally comprehensible financial accounts. It never happened, but still haven’t give up hope.

But once you understand the language of finance, it will open up a whole new world. Who knows, if you master it, maybe Kiyosaki is right – you may become rich. • Contact Peter Hughes on (013) 745 7303 or e-mail [email protected]. |fw