How Financial Comprehension Can Change Your Financial Outlook...

If you have read my eBook on how I retired at 32, you know that financial comprehension is an important step for developing a residual income.

Let me tell you a story about some people I know who have made a lot of money over the years and how their lack of understand of bonds cost them a lot of money.

They made several good real estate deals where they fixed up a couple of properties and turned them into commercial units, received residual income rents for years, then carried the paper on the loan and are receiving income for years on payment for the property at the increase in value after years of collecting rent. Pretty smart investors. So how could investors like this make this mistake? Read on...



A lot of their money was invested in CDs, because they wanted "safe" investments. After years of receiving less than stellar results, CDs got so bad (currently not even paying 1.0% to tie your money up for 5 years), they finally talked to a financial advisor at an Edwards Jones. (Disclaimer: I normally dislike financial advisors / planners, because they often cost people more money than they make.  In this case, they find a great one.) So, after 2 years of investing in bonds, these people told me, "Gee, we wish we would have done this years ago..."

The moral of this story is financial comprehension is critical to your long-term success. These people are very intelligent people who made incredible investments in many ways, but a lack of understanding on bonds is ultimately what prevented them from investing in them a long time ago.

 It was a misconception surrounding bonds and the "worst-case scenario" if the bond issuer defaulted (the risk of bonds are more complicated than this, but I am just using this as an example.)

This is where financial comprehension can often "short-circuit" your goals.  You do not have to be a finance major or accountant to understand everything, but you should create a yearly plan on your finances. You should learn about one financial principle or investment a year.  These are reasonable goals that are achievable and give you something to work towards.

Financial comprehension is often missed, because people simply invest in their company's 401k plan, take advantage of an IRA, or just put their money in a mutual fund.  Most people have a "hands-off" approach to their retirement plan, so when they make extra money for investment, it's either spent on shopping sprees or "toys" or it's invested in the same areas that their retirement accounts follow. I have no problem with these tax instruments for retirement, except that they breed complacency in finances.

My point here is that for me to retire at a young age, I always learned something new in a lot of areas and financial comprehension was one of those areas.  Whether you want to have complete financial freedom and not have a job like me or not, financial comprehension is critical to your future even if you work until the normal retirement age.