How To Increase Your Financial IQ

We all know about IQ, and what you’ve got is what you’ve got. Some of you may know about EQ, or Emotional Intelligence, and this is something that we all need to improve on, but that’s a topic for another blog. Today we’re going to talk about Financial IQ, or FQ. I wanted to title it Financial Understanding Quotient, but suggesting that you may have a lousy FUQ seemed like it could be taken wrong, so we’ll stick with FQ.

Understand Your Spending Habits

The first thing you need to realize is that most people don’t buy what they need, they buy what they want. They buy what makes them feel good. Go to any gas station and park for an hour and people-watch. You’ll see beater cars that are falling apart, and the driver will go inside and get a pack of smokes, a case of beer, and a handful of lottery tickets. If you go ask that guy about getting a better car, he’ll tell you he can’t afford a car payment. He doesn’t realize that he has a $400-a-month gas station habit that’s keeping him out of a decent ride.

Another common thing is spending everything we make: buying the most expensive house/car we can afford, moving up to the next cable package when we get a raise, etc. Half of Americans live paycheck to paycheck with little to no savings. We live in a consumption culture, so we’re doing exactly what we’ve been trained to do, but it’s not in our best interests to live this way.

Where Does It Go?

There are some basic categories that our general purchases fall into. Analyze each thing you buy, and see which of the following categories it fits into:

Essentials: Real food from the grocery store, gas, house payment, electricity, insurance, medicine, car repairs, a new washing machine when the old one dies, and things like that. These are not expenses that we can avoid, nor are they frivolous in nature.

Feel Good: Starbucks, soda, Gatorade, booze, restaurants, unnecessary clothes, movies, cable TV, vacations, make-up, manicures, books, hobby things, etc

There’s nothing wrong with buying some Feel Good things, but you need to be smart about how often you buy, and where you are getting things. If you are trying to save money, or shrink your budget, you need to limit your Feel Good purchases. Lots of people are visual leaners, so using a budgeting tool can help you see how much you’re spending on these things every month, and where you can make some changes. There are some great free budget spreadsheets available through Excel, and other online resources.

Emotional Buy: This is the shop-aholic, compulsive spender, “but it was on sale, I had to buy it” person. The goods/services purchased were not necessary except to make you feel better temporarily.

It’s important to know why you’re buying something, and just to be clear, the fact that it was on sale is not a good reason to buy something. Is it an emotional buy? Are you feeling down/sad/mad/hurt, and subconsciously you know that buying yourself something frivolous will make you feel better? These purchases are often followed by guilt or remorse. That’s an addiction thing, just like drinking or drugs. Be honest with yourself about your motives, and if you have a problem, get some help. There are 12-step groups that are free and effective.

Status Buy: Things that you buy to impress other people.

Some of the things we buy are pure ego. We buy them to affect how other people perceive us. One of the current fads I see people throwing large amounts of money at is the jacked-up truck with massive tires, custom rims, and the back end slammed to the ground. This is a pure Status Buy, because it has absolutely no other function. Other things would be expensive/high fashion clothes and accessories, tech gadgets, expensive watches, jewelry, cars, etc. The money spent on things in this category would be better spent on counseling so that you don’t need to buy things to impress other people.

Impulse/ Bad Buy: Anything at a gas station except gas, high-interest financing (Rent-to-Own places, payday loans, title loans, bad car loans, credit card debt), anything you can’t afford but buy anyway, recreational drugs, etc

I have a friend who is addicted to gas stations. He goes 2 or 3 times a day and gets something to drink, and maybe a granola bar or a pack of cigarettes. For what he spends in a day at the gas station, he could buy in bulk at a grocery store and it would last him a week or longer. He’s wasting at least $300 a month, and he could save that without cutting his consumption simply by buying smart and breaking a habit. My advice? Pay at the pump, and don’t ever go inside a gas station.

Anything that’s on the Bad Buy list needs to be dealt with. Paying off credit card debt is paramount to financial freedom. As your Financial IQ increases and your buying habits improve, then you won’t need to finance things with high interest rates, or take out payday loans.

Create New Spending Habits As You Build Your Financial IQ

Being conscious of your actions will help you increase your Financial IQ. Get in the habit of categorizing everything you buy, whether it’s at a store or online. What kind of purchase is it? If it’s a non-essential, reconsider it. Again, there’s nothing wrong with buying Feel Good things, but if it’s going to negatively impact your budget or your goals, then you always have the option of putting it back. It will still be there later. If it’s an Emotional, Status, or Impulse buy, just don’t do it.

Set some financial goals, and make a savings plan for the money you’re now going to have. Put a specific amount into your savings account, or your 401K, or your coffee can in the freezer every payday. Only 25% of Americans have more than $8,000 in savings, and that’s the quarter you want to be a part of!

Justin B. Long is an author, blogger, website developer, and the CFO of Springhill Equine Veterinary Clinic. In his spare time (ha!) he likes to paint, read, canoe, and hike in the wilderness. You can subscribe to this blog in the blue block, and future blogs will be delivered to your email. Warning: Subscribing may increase your awesomeness quotient. Please feel free to comment, and share this blog on your favorite social media page! To learn more, please visit JBoydLong.com.