Do you know how your money works? I bet you don’t. Don’t take that personally! It has been my very real personal experience that most people don’t understand how to use, save or manage their money. Until recently, I didn’t even understand it, and I still struggle with managing it and planning ahead for it sometimes.

There are three main parts to financial IQ that can be broken down into hundreds of sub-topics. For the sake of simplicity, we’ll focus on the three basic areas of financial IQ.

• Income
• Expenses
• Investing.

These three areas make up the stable foundation to build your financial IQ. Let’s take a look at what goes into each of the three basic categories of financial IQ.

Income

This category is pretty self-explanatory; it is the money that goes into your pockets. For businesses, this has many different names depending on what stage the fiscal process is in. This can be called Net Income, Retained Earnings, or even Gross Margin.

For individuals, your income usually comes from your job or any other sources which provide money, such as retirement, social security, or side jobs. Your income also comes from assets. The more assets you can build up, the more income you are considered to have – also known as capital. Using income to do more, have more, and live more comfortably is one way to use your money. Using your income to increase assets is wise; using income to create liabilities is not wise.

Expenses

An expense is, you guessed it, the money that is taken out of your pocket. This can happen at any point in the payment process, either before the money ever reaches your bank account or well after it is deposited. Often referred to as liabilities, the money you pay out can come from paying employees, household expenses, putting gas in your car, or even giving good-ole Uncle Sam his due.

It is important not only to know where your money is going, but also to protect it from being taken without reason. Each household has tax incentives and deductibles to be aware of to keep the most hard earned money they possibly can. On another note, there are many tax advantages for being self-employed, but they are only effective if you understand them and the record keeping.

Investing

Let’s say you understand how your money is coming in, where it is going out, and how to hold on to as much as possible. Now you need to figure out how to make your money work for you. I bet you didn’t know that money has a job to do, too. If we define a job as a way to make money, then money has a job to do; be invested properly to make more money.

Creating a budget and savings plan are important, but it is just as important for your financial IQ to understand how to leverage your money in order to make more money.

If an individual doesn’t understand this, a family suffers. If a business does not understand this concept, their profits will ultimately fall to the floor. Investing is not just about the stock market or about collectables, but in knowing where to put money so you or your business can reap the benefits of making that money do its job working for you.

Investing is the hardest of the three basic categories to understand because the right choices for one person or company aren’t the same for the next person. Unlike income and expenses, you cannot look directly at the investment machinery and see where the money will come from or where it will need to go if something within the investment breaks. Investing is a living, breathing entity that needs care.

Once you have a good handle on these basics, you will have the beginnings of a healthy financial IQ. Then, you’ll be able to move forward with more confidence, and make friends with your money.

 So, where do you need to start? Do you need to organize, see or understand better your money streams for personal or business reasons? Try our tracking forms for business - or use them for personal finance too.