What is Financial Intelligence?

Financial intelligence refers to the ability to understand financial matters and effectively manage one’s financial affairs. It encompasses a broad set of skills and knowledge that enable people to make informed and effective decisions with their financial resources (their money).

Apart from understanding complex financial statements and mastering investment strategies, it is also about being familiar with the basics of saving, budgeting, and making the right everyday financial decisions.

PiggyVest has the following definition of the term:

“Financial intelligence is the ability to gather and apply relevant knowledge and skills to manage your finances effectively. It’s also a deep understanding of core financial principles that enables you to improve your relationship with money and other financial resources.”

Financial intelligence vs. financial literacy

These two terms are closely related, but they refer to slightly different concepts. Here is how they differ in the field of personal finance:

  • Financial Literacy

Financial literacy is the basic understanding of financial principles like saving, investing, and budgeting. It involves knowing how to manage personal finances and make informed decisions with money, focusing on practical skills and knowledge for everyday financial tasks.

  • Financial Intelligence

Financial intelligence includes all the skills and knowledge of financial literacy plus the strategic use and analysis of financial information.

It involves applying financial knowledge to make strategic decisions, understanding financial reports, managing risks, and planning for future financial health. It’s about the deeper analysis and application of financial data to achieve goals.

2 images of people managing their finances plus a definition of Financial Intelligence
Image created by Market Business News.

Financial intelligence – understanding how money works

If you understand how money works in the world, you have financial intelligence. You understand how people earn money, make it, manage it, and invest it. You can identify financial risks as well as opportunities.

Also, you can also make informed financial choices and know what you need to do to achieve your goals.

Critical components of financial intelligence

  • Budgeting

A fundamental aspect of financial intelligence, budgeting is the process of creating a spending plan. By budgeting, you know in advance what you can and can’t afford.

Budgeting is not just for people with limited financial resources. It is a tool that helps all of us ensure that we are spending our money on what is most important to us.

  • Saving

Saving involves setting aside some of your income for future use. Apart from depositing money into a savings account, it is also about understanding why you are saving.

It could be to prepare you for unexpected emergencies, retirement, buying a car or another major purchase, to travel, to fund educational expenses, to create an opportunity fund for seizing unexpected investments or business ventures, or to save for a down payment on a house.

Knowing why you are saving helps guide how much you should put aside and where you should keep that money.

  • Investment

In an article published by Market Business News, I wrote the following definition of “investment”:

“The word Investment refers to either the application of money to make more money, the purchase of goods that are not consumed now but are used in the future to make money (create wealth), or a monetary asset that will rise in value and be sold at a higher price or provide income in the future.”

Investment is basically about making your money work for you. Understanding the basics of how each type of investment works and the risks involved is a fundamental part of financial intelligence.

  • Giving back

Financial intelligence includes understanding the importance of giving back. Donating to causes that you care about not only helps others – you can benefit too through tax deductions and the personal satisfaction of contributing to good causes.

Conclusion

Financial intelligence is a crucial skill set for everyone, not just wealthy people or those with a background in finance. It can help you make smarter decisions about your money, leading to a more secure and fulfilling life.