Levels of financial IQ

Tyler Durden · 2 May 2011

I've been thinking about this a bit recently. You can have a highly successful doctor who doesn't know a thing about managing money. Or you could have a high flying corporate business guy who earns a lot, but spends more than he earns. So to me, it seems that financial IQ is something independent of one's main skill for which they use to earn income.

On the lowest level, I suppose you'd have people who are in debt, and not only do they not know how to get out of it, but they get deeper in debt. On the other extreme, you could have a person who ensures every dollar they have is working to earn a ROI.

So I have two questions:
1) where would you rate someone who only knows how to save money but not know how to do anything else with it? That is, they think "yes, I'm earning x percent on my savings!" without considering rates of inflation and taxes, or at least the option of term deposits

2) what do you think is the financial IQ of the average person?

jimmyizgod · 2 May 2011

87 and 79

youngone · 2 May 2011

Tyler Durden said:
2) what do you think is the financial IQ of the average person?

Interesting topic, one that i havent really looked into. I take it the financial IQ level is between 1-150.

85< below average
85-120 average person
120> a gifted person

Tyler Durden · 2 May 2011

Well I'm not looking for a number...what I meant was, do you think the average person just puts their excess money into a savings account, hoping that one day they will be able to have enough for a deposit for a family home to then bound themselves for the rest of their lives by a mortgage?

Or is the average person somewhat more financially astute - choosing to spend on investment properties and shares etc?

Julia · 2 May 2011

youngone said:
Interesting topic,

Yes, it is. Goodonya Tyler.

120> a gifted person

I don't believe there's any such thing as a 'gifted person' in a financial IQ sense.
Anyone can improve their financial IQ if they are prepared to learn and accept some possible losses in the learning process.

The people who really irritate me are those who constantly whine about their Super balances but refuse to take any responsibility for improving either these Super accounts or their day to day finances. People who constantly fail to pay their full credit card balance every month, say they just don't have enough to go round, but go out to lunch at a restaurant five days a week!

A good deal of financial success in the early days of working toward your goals is self discipline.

awg · 2 May 2011

Tyler Durden said:
So I have two questions:
1) where would you rate someone who only knows how to save money but not know how to do anything else with it? That is, they think "yes, I'm earning x percent on my savings!" without considering rates of inflation and taxes, or at least the option of term deposits

2) what do you think is the financial IQ of the average person?

not wanting to insult your inteliigence too much but:

2) by definition the "average" IQ is 100 (bell shaped standard deviation curve)
1) you mean like the average person?..then 100

ROE · 2 May 2011

it is not something people get taught often.

Like any subject the more people talk about it and educate about it
the less likely they are illiterate in this area.

money management is one of those subject where you learn from experience, self taught
or have family members educate you.

It is a simple subject and doesn't require high IQ, people just need to be taught about it

Also I found good money management required self-discipline and not many people are good at self-discipline

I get free parking by walking an extra 10 minutes but lot of my friends couldn't be bothered, they said only cost $5-$7, that's $35 a week, 2 QBE shares

my 2c

youngone · 2 May 2011

awg said:
1) you mean like the average person?..then 100

Totally agree. The old IQ level is overrated. By definition the average IQ for today society should be over 100. "Hopefully" our society becomes smarter with time.

levin123 · 2 May 2011

Tyler Durden said:
2) what do you think is the financial IQ of the average person?

42 - The answer to everything.

RADO · 2 May 2011

Tyler Durden said:
Well I'm not looking for a number...what I meant was, do you think the average person just puts their excess money into a savings account, hoping that one day they will be able to have enough for a deposit for a family home to then bound themselves for the rest of their lives by a mortgage?

Or is the average person somewhat more financially astute - choosing to spend on investment properties and shares etc?

I think the average person is happy to just pay off a morgage for the rest of there life.
When it comes to investing everyone I know that does property wont touch shares because they don't know anything about shares. And everyone i've meet that trades shares wont touch property.

http://www.financialiqmeter.com/

Wysiwyg · 3 May 2011

Tyler Durden said:
So I have two questions:
1) where would you rate someone who only knows how to save money but not know how to do anything else with it? That is, they think "yes, I'm earning x percent on my savings!" without considering rates of inflation and taxes, or at least the option of term deposits

Risk aversion is normal because that is the level they wish to tolerate. I like risk so have a high tolerance.
I could lose it all tomorrow and never mind at all. (Some oldies would know that line)

Tyler Durden · 4 May 2011

Julia said:
A good deal of financial success in the early days of working toward your goals is self discipline.

Yes indeed, a lot of people who use their credit cards unwisely are those who lack self discipline.

awg said:
not wanting to insult your inteliigence too much but:

2) by definition the "average" IQ is 100 (bell shaped standard deviation curve)
1) you mean like the average person?..then 100

I wasn't really looking for a quantitative answer.

RADO said:
I think the average person is happy to just pay off a morgage for the rest of there life.
When it comes to investing everyone I know that does property wont touch shares because they don't know anything about shares. And everyone i've meet that trades shares wont touch property.

http://www.financialiqmeter.com/

This is the type of answer I was looking for.

As another example, how much financial merit would you attribute to a person who only saves and puts their money in term deposits? I mean, on the one hand they don't seem to see how inflation and taxes reduces what they think is the interest they're getting, but on the other hand at least they're not spending more than they earn.

Julia · 4 May 2011

Tyler Durden said:
As another example, how much financial merit would you attribute to a person who only saves and puts their money in term deposits? I mean, on the one hand they don't seem to see how inflation and taxes reduces what they think is the interest they're getting, but on the other hand at least they're not spending more than they earn.

Tyler, there can be multiple answers to this, dependent on the investor's personal circumstances and stage of life.

Fairly obviously if he/she were 30 and in full time employment there will be more choices than for, say, a retiree who has less opportunity to replace lost capital.

The retiree in pension phase is not going to be paying any tax so may be better off using cash deposits if they're doing that retirement travel thing e.g rather than worrying about trading a sideways market.

tothemax6 · 4 May 2011

Good topic, but its hard to give an answer to your questions.

A lot of it comes down to time preferences. One might argue that the saver and investor is 'wise' and the spender and debtor is 'foolish', but its not so clear. Some people just want more right now, and don't want to think about the future. Others are the opposite - I saw someone in this very forum claim that his investment time-frame was 30 years. 30 years is a long time. Neither case is 'right' or 'wrong', its just a preference. I would argue that in the current environment you should have a savings target of at least 40% of what you earn for safety reasons, but again - its a personal preference.
Then again, there is the 'making good trades' part of finance. Knowing not to buy a house in 2007 USA would be intelligent, buying one regardless of economics or the market would be regarded as either foolish or misinformed.

Regarding term deposits, I don't know why anyone would loan money to the bank for a fixed term, at a fixed interest rate, when the RBA is in a tightening cycle. One can put it in a savings account for the same rate. Yes, contrary to popular belief, you don't get 6.5%. You get nothing after tax and inflation (both thanks to the government) - but at least the money is relatively safe, especially from inflation.

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