What is Financial Literacy?

People know they should manage their money better. They know they have been taught how but there is a block to them actually doing what needs doing to manage their money properly. Human behavior is highly irrational with most things but especially with money. Personal financial problems seems to be more psychological in nature than financial. On the intellectual and government front there is a new interest in understanding the relationship of the humans psyche and its interaction with money. The concepts are Financial Literacy, Behavioral Economics, Financial Psychology, Financial Mentoring, Financial Coaching and Financial Therapy are being defined . On this website we outline a Financial Literacy Framework to help all understand why we cannot manage money properly. Once we accept our shortcoming we can then take appropriate remedial measures to harmonize with the rational and rigid mechanics of money.

To understand the story of financial literacy you need to know the characters. The frameworks consists of 12 concept characters. There are 4 groups of 3. The first group are:

The Angels

Money and managing it properly requires rational thinking. On a personal level rational management of money can be accomplished with three personal finance thinking tools that can be operated by most people. A Personal Budget leads to savings which grows personal net worth on your personal net worth Balance Sheet (the second tool). Use the Life Plan tool to help you identify your goals and dreams. In order to get what you want from life you must operate these 3 tools within the rational confines of money.

Trying to get your brain to use these tools is a huge challenge. Trying to get your brain to use these properly is an even bigger challenge. Humans are hard wired and have survived by relying on instincts built into their psychological makeup. They are more emotional than logical. We need to look to psychology for some answers about how and why we do not manage money rationally. We have identified concepts of psychology that help us understand our limitations to be rational with money. We call them our Financial Literacy Demons. There are two groups of Financial psychology demons.

The Dynamic Demons

The first group of 3 is our Dynamic Demons. Developmental Psychology has focused on early development and the teenage years but the capacity for rational thought is a process that changes throughout ones’ whole life. The Id, Ego and Superego speak to this process on many of levels. One of which is that our mind operates on two levels, The Conscious and the Subconscious.

The Static Demons

Our second group of 3 is our Static Financial Literacy Demons. The first is that we are not all created equally capable of rational thinking. Though it is a blunt tool, the IQ measurement is the most direct avenue of identifying this limitation. The second is that our psyche has as many anomalies, flaws and diseases as our physical bodies. Cognitive Disorders include a vast array of maladies from depression to addictions to debilitating diseases such as Schizophrenia. We are a social animal and many behaviors such as the use of Cognitive Biases is to rationalize ones’ acceptance of a lower social rank. We have 106 lies that we can use to soothe our feelings when we do things that are not the smartest but are the most expedient.

The goal of this analysis is to help the average person understand their psychological makeup and learn how to manage it. Manage your psyche and you free yourself to use the three personal finance thinking tools to manage your money and your life so that your expectations are in line with your reality (the definition of happiness). This is what makes this approach to personal finances different from everybody else’s.

You will need help. This is why you need some heroes to help you attain Financial Literacy.

Our Financial Heroes

Financial Mentors will help you with your budget, your balance sheet and your life plan. Some parts can get a little complicated so you will need some Financial Coaching along the way. Some parts can get downright overwhelming. You may need some therapy from a counselor or a psychologist or even a psychiatrist to chase the demons from your thought process. That will free you to address the logic processes of money and use the help of the mentors and coaches. This is our version of Financial Therapy.

The total package is our version of the Financial Literacy Framework.

Next - Now from the top down and the bottom up.

Our analysis is the outline of intuitive thinking about money. As it is expanded it explains why people behave in a way that is not consistent with who they say they are. The application for professionals dealing with clients who are financially challenged is very enlightening to both parties. It is especially a relief to the professionals now that they now understand why their clients act so damned weird. With this framework people can analyze their capacity to manage themselves and their money. They can see their limitations and know what they need to do to limit the damage done to their finances by their demons. This will allow them to embrace their angels.

From the top down the concept is to confront people with the reality of who they are so that they can deal with money using the logical tools of money to get what they actually want. It is amazing how many people rely on just a budget. When I bring the balance sheet and a life plan into a financial discussion with them it is amazing to watch lights go on and bells and whistles of financial comprehension go off in their heads. They intuitively knew it was there but they just did not know how to get to their money and make it work for them.

This tool offers bottom up experience as well for the general consumer. With a budget, balance sheet and a life plan you can analyze any purchase decision of any product. You simply analyze the purchase of any product financial or consumer and ask what it does for your budget, balance sheet and ask if it advances your financial goals in a way that is consistent with the other goals in your life plan.

Conclusion

There is enough intellectual material here to discuss, analyze and develop for decades. Financial Literacy has been identified as a major project by all of the economies of the G-8 and the G-20. However, the red tape of government and the incapacity of scholars to define and work with these concepts has left a complete vacuum of structure and material with a consistent theme to address Financial Literacy, Behavioral Economics, Financial Psychology, Financial Coaching and Financial Therapy.