Imagine walking into an auto shop to buy your dream car. The used car salesman walks up to you in a black suit, white shirt, and red tie. He has this air of authority figure that makes you believe he knows a lot about cars. He signals your attention to the Ford salon and advises you to go for it.
“Why?” You asked.
He replied that based on his expertise from years of selling cars, there is no better car in the market than the Ford. He goes on to tell you how driving this particular car will boost your confidence. And why this is the car people of your caliber are driving.
However, in reality, considering the road condition of where you live, how often you drive and your aptitude for cars, the Toyota would have been the better option for you. But because the salesman was going to make a 6% commission from the Ford and 3% from the Toyota, he convinces you to go with the former.
You took his advice.
You just bought your dream car based on expert advice and not based on education. And you may just regret your decision shortly. A similar scenario plays out in the financial world every day. Ironically, people do more due diligence when buying an expensive item like a car than they do when investing their money. As a result, many financial advisers make a living by taking advantage of people’s ignorance.
The most financial problem begins with the same root cause; people mistaking financial advice for financial education. People have lost their entire life savings, and fallen into depression because they took financial advice and assumed they were getting financially educated. The only way to protect yourself and your money from biased financial advice are to get a financial education. But how do you differentiate between financial advice and financial education? That is what you are going to learn in this video. Before we get to it, be sure to subscribe to After School TV for more insightful videos like this. Make sure to watch this video to the end because you will get a better understanding of this important subject.
Financial Advice Vs Financial Education
Almost every day on the radio and online, there is someone trying to convince you to enroll in a FOREX training program. One I listened to kept using the phrase ‘financial education’ to describe his program. These people apply every psychological trick to get you to take action. They focus on telling you how other people are making huge money from this industry. But they seldom talk about the risks and threats. They don’t talk about the overwhelming percentage of failure. It’s always all shiny and welcoming to everyone. And the advice is often not tailor-made for your need or circumstances.
For example, a financial advisor might try to persuade you to diversify your stock portfolio on the promise of high growth potential. But they don’t really know which stocks will rise and which will fall. In a lot of cases, they don’t really care because they’ll get their commission either way. In situations like this, all you are is a customer.
It’s similar to a banker advising you to deposit your money in the bank, get a credit card and take out a loan. What these people mostly offer you is financial advice and not financial education. They’re paid to sell their services to you. Hence, like the car salesman and the ford, their advice is often biased with conflicting interests. It is then your responsibility to probe every financial advice to determine what is right for you and what is not.
In a nutshell, when someone is telling you what to do with your money, you are getting financial advice; but when you are learning to decide for yourself you are getting financial education. Financial advice targets your emotion; financial education develops your intelligence.
You Only Need Financial Advice after getting Financial Education
“What business Should I Invest $1,000 in?” Very often, you’ll see people ask questions like this on forums and social media. Then they get a load of advice from strangers – some of whom have never even sold a pen in their life.
This is usually unproductive because most times, the person is left more confused than before they posted the question. A financially educated person knows it’s dumb to ask random people what to do with his money because knowing who to seek money advice from is a part of financial education.
To understand why you need financial education before you need advice, let’s go back to the analogy of purchasing your dream car. One reason there is a huge variety of car types, models and designs are for people to choose which is best suited for their need and want. The right thing to do before walking into a car shop is to learn about cars and what type of car is best suited for your need. You want to understand the common faults each brand and model is prone to develop, and whether it’s something you are willing to deal with. You want to know the major things to look out for when choosing a car like mileage, the vehicle history, the engine and so on. You ask people who don’t have any conflict of interest about specific cars.
Armed with this general knowledge about cars and specific knowledge about the brand and model best suited for you, you are no longer at the mercy of the salesman. You can ask specific important questions about each vehicle and make a decision based on the knowledge you gather about a particular car. The salesman can offer his advice but your decision is ultimately informed by education.
So how do you apply this to investment?
People who offer financial advice often don’t tell the whole truth. They may not lie. But they don’t tell you everything you need to know; like the risk involved in an investment; the amount of work required; the possibility of loss; the failure rate and so on. Financial and investment education allows you to ask the right questions to uncover the hidden truth or at least, a significant amount of what you need to know. To put it simply; financial and investment advice gives you general half-truths while financial education allows you to uncover the hidden truth as it applies to you.
Half Truth Vs Hidden Truth
Think about all the conflicting financial and investment advice out there. One expert says diversify to reduce risk, and another expert says to put all your eggs in one basket and watch that basket. One expert says never to take debt because debt is bad, and another says leverage with good debt to build wealth. One expert says the FOREX market is the key to riches, and another says more millionaires come from real estate than any other source. How are you supposed to learn how to manage your finances when the financial advice is conflicting? The reality is that each of this conflicting investment advice is partially true and partially false – depending on the situation and who is asking.
Most financial truths are more subtle and complex than the experts make it out to be. For instance, there is no such thing as risk-free investment. Every investment has some form of risk. Even the safest investment has the risk of losing your money to inflation. Education guides you to know when advice is true or false depending on your situation. It helps you filter all the advice and decide what is right for you at the moment. Financial advice can be helpful if it addresses your financial concerns, goals, and personality. But you need the education to use the advice.
Develop your Financial Education
According to Robert Kiyosaki, in his book, ‘Why ‘A’ Students work for ‘C’ students’, the key to financial education is the ability to see more than one perspective at the same time. For instance, debt can either be good or bad depending on how it’s used and what it’s used for. A business opportunity can be lucrative, high risk as well as competitive. What worked for one person may not work for another. The ability to see more than one perspective at the same time will help you control your emotions and make better decisions with your money. But you have to study and learn to develop this ability. Become a student of financial education by studying about financial education and specific kinds of investments and businesses. You learn by studying and doing. Here are few things you need to understand.
- Understand that one size doesn’t fit all
Despite what all the investment experts selling seminars and courses want you to believe, there isn’t anyone secret to investing your money. There are many roads that lead to wealth. You have to pick the path for yourself and educate yourself along that field.
- Understand that there is often conflict of interest
The only person 100% committed to your pocket is you. You cannot delegate your financial responsibility. Everyone else has a conflict of interest. You must learn how to invest your money because no one will ever care about it as much as you do. Everyone else is in business to serve their best interests.
Being intelligent with money is an investment that pays dividends for the rest of your life. People can steal your money, but no one can ever take your financial education from you. Once you know it, you can never un-know it. You cannot be financial independent if you are not financially educated. Following financial advice is easier than developing financial education. But in the long run, you are at high risk when you rely on advice over education.
Until next time, YOUR SUCCESS MATTERS.