If you are studying a subject that deals with numbers, here’s a tip:

“Create a simple version and play around with it”

When studying finance, very common mistake most people make is they skim through textbooks and be satisfied by a “feeling” of understanding or learning something new and move on to the next chapter. I’m not saying that’s bad because that still gives you new perspectives. Sure, that’s good enough if you only want to pass the next exam. But, if you plan to pursue finance careers, I don’t recommend it. Why? Because finance is all about real life applications (actual uses). And when it comes to applications, it’s critical that you really understand 5W1H (When, Where, Who, What, Why and How) of it.

You might say “wait, most textbooks actually use real life samples like the latest 10-K of one of S&P 500 companies. Isn’t it a good exercise?” The answer is yes and no. Yes, because you get to know what the actual financial statements that you will encounter through your career look like. But, no, because of the following reasons:

1. Too complicated for early stage learners. It’ll just make you busy just by following numbers and wondering “where did this number come from?”, rather than allowing you to learn how specific concepts work.

2. Usually not consistently used throughout the textbook. One chapter uses 10-K of Coca Cola, while another chapter uses 10-K of Tesla. So you can’t see holistically how one concept affects the other.

3. Waste of papers. There are many 300+ pages finance textbooks, 250 pages of which are just copies of financial statements. To be honest, I haven’t met anybody who actually spends time looking at them. Plus….if you are interested, you can always see them on the internet. It saves trees and saves your money.

I’m not saying you shouldn’t. I’m just saying “you shouldn’t start with it”

Then, what should you do? You can always create a fictional company with fictional financial statements and work on it. You don’t need to use 6,7,8 digits figures of cash flow covering 10, 20 years to study NPV or IRR. You can create with Excel a very simple 3 or 5 years cash flow with simple figures like $10 and $250 and play with it. That also helps you understand how changing one figure affects another. If you are learning about discount rate, change the rate by yourself and see what changes how. What do you think the NPV be if the cost of equity was higher? What’s the hurdle rate for you if you want to achieve NPV $0? You cannot tell if you only skim through textbooks and follow instructions given. You can answer these questions only by you moving your hands and actually seeing the cause and effect among the numbers. So again, whenever you see a new concept or whenever you feel you are lost, create a very simple case and just play around with it. And ONCE you truly understand it, THEN you can start looking into real life samples.

Here’s another tip:

“Try to explain it by words”

This exercise will clarify whether you really understand something or not. When I say “explain”, it does not mean “With the formula, I got IRR 8%”. No. You should be able to explain “what IRR is, and what IRR 8% means”. It’s not “the tax shield is interest expense times tax rate”, but should rather be “it shields you from being taxed because interest expense is tax deductible”. Try to explain it to your friends. If he or she keeps asking you “why?” or “how?”, then you should study a little bit more. In other words, you haven’t comprehended it, yet. But if he or she says “Ah, that’s how it works!”, then…you really know it!

In addition, recall that I said earlier that “finance is all about real life applications”. In real life, especially in business, you are not expected to do only calculation or analysis. You are also expected to deliver the result. In other words, you need to present what you came up with to your bosses. And the quality of such delivery will also depend on whether or not, or how much you understand the concept. So, again, make sure you really….understand it.

By the way, if you are studying for an exam or for a certification program, I highly recommend you do this second tip. Sure, you can get 80%, 90% or even 100% on your mock tests. But remember these:

1. Mock tests are rather easy

2. The actual exams will not going to have the same questions as the mock tests (sometimes they do, but…don’t wish for it)

3. Most importantly, none of the hosting institutions wants to undersell their names.