You’ve probably heard of emotional intelligence. But do you know what financial intelligence is? You should. After all, it’s a fantastic concept that can help you make the most of your finances in Nigeria today.
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.
In this article, we’ll review the basics of financial intelligence — including its components and pillars — and discuss the required skills to practise it. Afterwards, we’ll explore the importance of financial intelligence and learn just how you can be financially intelligent.
An overview of financial intelligence
Financial intelligence is crucial if you want to unlock financial freedom, but it’s also simple to learn. Let’s start by clarifying: financial intelligence isn’t about living by finance tips — no matter how useful they might seem. Instead, it’s a thorough understanding of money, as well as being equipped with financial skills and knowledge.
Fortunately, it’s possible to learn financial intelligence. And it is important to be grounded in the areas of understanding that make up the concept.
These areas offer a complete overview of financial intelligence and allow you to understand just how it fits into your financial situation.
Here are the four areas of understanding that comprise financial intelligence:
- Understanding the foundation: This area deals with financial measurement and documentation fundamentals, including balance sheets and bank statements. In essence, you’ll need to understand the difference between concepts like income and profit to be financially intelligent.
- Understanding the art: Your finances are both a science and an art. Financial intelligence ensures you know how financial rules and assumptions can affect the results of your calculations.
- Understanding the analysis: Financial intelligence also refers to the capacity to do in-depth numerical analysis, like analysing your income and relating it to your expenses.
- Understanding the big picture: Finally, being financially intelligent means knowing how your financial numbers fit into a larger context. In other words, it means understanding how external factors (like the economy and CBN-driven monetary policies) affect you and your finances.
These four areas are the building blocks of financial intelligence — and the concept is rooted in them. They are also sometimes referred to as the competencies of financial intelligence.
What are the components of financial intelligence?
There’s not much you can do with a knowledge of just the areas of understanding of financial intelligence — except maybe look smart at parties or impress your crush. If you ever want to apply financial intelligence to real life, you’ll need to know its more practical aspects — especially its components.
The components of financial intelligence are:
- Emotional intelligence. This is the ability to recognise, understand and control your emotions and behaviour in financial situations. It means balancing your spending and earning habits wisely, managing procrastination, and improving your money mindset.
- Financial literacy. This is the ability to understand and apply financial skills and concepts to your personal finances. It covers all the basics like budgeting, saving, investing and the time value of money but also refers to more complicated ideas like compound interest and debt management.
- Numeracy. This is the ability to understand and analyse numbers using arithmetic operators and ideas. In other words, it means applying mathematics (including addition and multiplication) to everyday financial concepts.
Now that we’ve explored the components of financial intelligence, let’s dive into its pillars.
What are the pillars of financial intelligence?
The pillars of financial intelligence are the main areas you must focus on in your financial journey. In other words, they’re the aspects that you’ll need to grow your skills and knowledge in to manage your finances effectively. They’re all derived from the financial intelligence components, each pointing to a core aspect of personal finance.
The following are the pillars of financial intelligence:
- Income: This refers to all your cash inflow from various sources, including salaries, wages and allowances. It is the foundation of personal finance and a central part of financial intelligence.
- Budgeting: This is the process of creating an income spending plan (a budget) for a specified period (daily, weekly, monthly or yearly). This allows for better decision-making since you can monitor and control your income and overall spending (including savings and investments).
- Spending: This refers to all your cash outflow and is generally where most of your income goes. It includes all your expenses — including major ones like rent and groceries — as well as minor charges like entertainment (Netflix or Spotify subscriptions) and travel.
- Saving: This is the act of setting aside a part of your income for future purposes. You can use your savings to cover future expenses, emergencies or later investments.
- Investing: This is the process of putting money into ventures that bring later income (profits). You can invest in stocks, crypto, businesses, real estate and other assets that bring profit.
- Risk management: This is the identification, appraisal and understanding of financial risk (like unplanned expenses) to control its effects. For example, it could refer to a proper understanding and management of the effects of loss of income from losing your job.
- Debt management: This involves an in-depth understanding of debt and its effects. It also means controlling your debt using a combination of financial planning and budgeting.
- Financial planning: This is the process of assessing your current money situation and outlining your plans to achieve long-term financial goals. It involves accounting for how your income, budget and other pillars of financial intelligence can influence these goals.
The pillars of financial intelligence are intertwined, so understanding one usually means improving many others. The reverse is also true: Being weak in one could affect your competency in others.
Still, there are several skills you’ll need to learn if you ever want to succeed financially. The next section of this article discusses these in detail.
What are the skills for financial intelligence?
The skills for financial intelligence enable you to learn and apply the relevant knowledge you’ve acquired. They’re all familiar and learnable concepts — but growing them means you’ll also grow in financial intelligence.
The required skills for financial intelligence are:
- Cost and benefit assessment. This involves listing and objectively weighing all the advantages and disadvantages of a new venture or idea. For example, listing your costs and profits from a real estate investment is advisable and ideal.
- Critical thinking for problem-solving. This skill is the ability to analyse available data and options to make informed financial decisions.
- Spending control. This skill involves reducing your expenses to a minimum and only allocating your income to necessary or profitable ventures.
- Planning. This is the ability to set and meet financial goals by creating step-by-step objectives while optimising your resources.
- Finance Prioritization. This refers to the ability to optimise your earnings by analysing and increasing your sources of income.
- Communication and collaboration. This is the capacity to cooperate with others to reach financial objectives.
You might need several other skills for financial intelligence (like time management and resilience), but these are the core ones to know.
What is the importance of financial intelligence?
But why does all of it matter anyway? What’s the point of being financially intelligent in Nigeria today? Are there any benefits to being financially intelligent?
Here are the top benefits of financial intelligence:
- It allows for better financial decision-making.
- It improves your relationship with money — from spending to investment options.
- It gives you the necessary skills to protect yourself in emergencies.
- It enables you to achieve a better quality of life.
- It allows you to afford the things you want and need.
- It promotes increased financial security even in the face of worsening economic conditions.
There’s no end to the benefits you can get from being financially intelligent, regardless of how much you earn right now.
How to be financially intelligent
As we’ve mentioned, your financial intelligence doesn’t matter if you can’t apply it to real-life situations. Therefore, we’ve curated a list of practical tips that can help you achieve true financial freedom.
Here’s how you can be financially intelligent:
- Read finance books. There are several insightful books (like George S. Clason’s “The Richest Man in Babylon”) that can help you learn more about the skills and components of financial intelligence. Also, check out the PiggyVest e-book, Understanding Money, if you don’t know where to start or if you need something more relatable.
- Read the PiggyVest blog. The PiggyVest blog is more than just fun stories and exciting quizzes. Here, we share several profound tips around core money concepts and everything in the middle.
- Use insurance. You can insure your health, properties and even your assets to receive compensation for damages, accidents or illnesses.
- Hire professionals. Employing specialists to do your work might seem financially counterproductive, but it can help you save money in the long run. It works in the same way that hiring a professional to help with your plumbing issues helps you solve the problem once and for all.
- Know your income and net worth. Knowing just how much you earn and the total value of your assets can help you make better financial decisions.
- Create a budget. Budgeting is a core part of personal finance and financial intelligence and can help you make the most of your income.
- Track all of your spending. You can only improve what you measure, and you can track your spending using pen and paper, your notes app, or a spreadsheet. You can also use your PocketApp to easily spend and track every transaction you make on the platform.
- Start saving. As a Nigerian, your savings can save your life and be a gateway to financial discipline and freedom. Fortunately, the PiggyVest app offers many options to explore if you want to start saving.
- Take finance courses. You can take free online classes to learn more about financial intelligence and related concepts. You can find these courses on YouTube or on platforms like Alison.
- Invest in safe and secure ventures. You can use your PiggyVest app to invest in several low-risk ventures and earn up to 35% annual returns.
- Practice debt management. We’ve had many conversations about how setting up payment plans and increasing debt repayment instalments are some of the top ways you can manage debt in Nigeria. Unsurprisingly, you can practice financial intelligence by simply applying these tips.
- Enjoy your money. Although it might seem counterintuitive, enjoying your income is another way to be financially intelligent. After all, spending your money on yourself can do wonders for your mental health and help you better appreciate the benefits of having income in the first place — just remember to spend within reason and according to your budget.
Note that there’s no step-by-step play to building financial intelligence; you might need to apply all of the tips above to increase your ability to better manage your finances.
Remember: making more money is always a good idea, but financial intelligence will help unlock true wealth and financial security.
We’ve always been about building healthy financial habits at PiggyVest. It’s one of the reasons we started this blog and it is why have remained committed to helping Nigerians save and invest their funds securely.
The tips we’ve shared in this article are perfect if you live in Nigeria. In fact, you can start using them today — no matter what you do or how much you earn.