In this August 6th article from the Wall Street Journal ($ subscription required for full access), they list 6 concepts that financial professionals say are the most important to know in order to be financially literate. The article goes into more detail, but take a look at these terms to see where you stand:
- Compound Interest – This is the power of long-term time horizons combined with diversification, which is #5 on this list. Getting a diversified return over long time horizons leads to significant growth in wealth. A 7% annual return over 10 years will double the value, and you can quickly do the math to see how much that grows over longer periods.
- Good Debt – Debt has a very negative perception in some people’s eyes, especially in some Christian evangelical circles. The perception comes from the incessant drumbeat from some advisors or authors about the topic. But like most everything else in life, debt is about moderation, and some of it can be good.
- Credit Utilization Rate – This is one of the lesser-known concepts on this list, and it has some relation to #2 above. Having credit, and knowing how to use it smartly, is important for many reasons. And as the author points out, credit limits aren’t meant to be a test to see if you can reach that limit. The goal should be having a reasonable credit limit, and only using a small percentage of that limit.
- Pay Yourself First (PYF) – We would modify this one slightly by saying pay God first, and then yourself. PYF by setting aside some funds each month for a rainy-day fund or to pay for the vacation you’d like to take, or that car or… It’s the old fashioned lay-away plan concept, or as it is said in many bible verses including this one, “The plans of the diligent lead surely to abundance, but everyone who is hasty comes only to poverty.” (Proverbs 21:5)
- Diversification – King Solomon is well known to have been one of the richest man ever to live, and many of his insights into faith, life and wealth are captured in the book of Proverbs. But it is in another book that he offers this commonly used saying about financial diversification, “Give a portion to seven, or even to eight, for you know not what disaster may happen on earth.” (Ecclesiastes 11:2)
- Liquidity – The final concept on this list is to try to have some money accessible quickly, in case of emergencies. The point is to have control over when you buy and sell assets like stocks or real estate and not be forced to sell at the wrong time in order to cover that emergency need for cash.
If you’re unfamiliar with any of these, you should talk with your financial advisor to better understand why they are important to you as an investor and your planning. Even if you are comfortable with your financial literacy, these may be great conversation starters at your next update meeting with your advisor. If you don’t have a financial advisor, OneAscent can help.
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