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Sunday, February 22, 2009

Financial Literacy

Perhaps the most important task in our quest to become wealthy is for us to become financially literate - we must learn accounting.

Why must we learn accounting, if we don't want to be an accountant? It is because accounting is the language of money. This is best explained by an analogy:

As a child, we learned our ABC's. After you learned them, you could open a book, and you could say the name of every letter in it. While you may think you understand the book, but you really can only recognize the letters. An older child has learned how to put letters together to make words, and he can point out and say each word in the book. But, he still does not understand the story in the book. Only after much practice can people read and understand the stories in books.

The same principle applies to accounting. Most people can recognize the numbers, but that's it; this is like the child who can recognize the letters. Others have learned some basic accounting, and can recognize the different statements and what each mean; this is like the child who can recognize words. But, some people can read and understand the stories behind the financial statements. These people are who we strive to be.

Accounting really is a foreign language. Fluency in accounting gives one x-ray vision into a company. A medical doctor does not see the human body as just a human body - he sees the body as a collection of interconnected systems: the circulatory, the skeletal, the muscular, the nervous, etc. When we are fluent in accounting, we see a company as a collection of interconnected systems. We can look and see which parts are good and which parts are bad, and we can see clearly if it is a good company or a bad company.

This skill is critical. We must become financially literate.

1 comment:

  1. Due to present economic downturn, making your child financially literate is imperative. Check out some different bodies who can educate children, children learn the basics of money management at home, after that school teachers can educate their children by financial literacy resources, non-profit organizations have taken the initiative to educate children about money management, there are many banks offer financial education either independently or in collaboration with schools. So, i conclude that financial literacy is become very important for their bright future. For more details refer financial literacy for kids