5 “financial health” questions can predict your wealth. 1. Did you save any money last year? Yes = 1 No = 0 2. Did you miss any payments on any obligations in the past year? Yes = 0 No = 1 3. Did you have a balance on your credit card after the last payment was due? Yes = 0 No (or don’t have any credit cards by choice) = 1 4. Including all of your assets, was more than 10% of the value in liquid assets? Yes = 1 No = 0 5. Is your total debt service (principal and interest) less than 40% of your income? Yes = 1 No = 0 *Source: Federal Reserve Board’s Survey of Consumer Finances; questions were slightly modified for simplicity’s sake. Now add up your “financial health” score: A score of 5 is the strongest in terms of financial health and a score of zero the weakest; the mean score was 3.01. So what does this all mean? “If you save regularly, make all of your payments on time, pay off your entire credit card balance when due, maintain a healthy stock of safe and liquid assets, and never take on debts that put a heavy strain on your monthly income, you are very likely to be financially healthy and able to accumulate significant wealth,” the study authors write. Meanwhile, “if you do none of those things, you are very likely to be financially unhealthy.” In simpler terms, those who scored highly on the financial health quiz are significantly more likely either to already have high personal net worth or to have it in the future, says Bryan Noeth, the co-author, who is a policy analyst at the Center for Household Financial Stability. Noeth notes that there are a host of possible reasons for this, among them that liquid assets allow you to weather adverse economic shocks and help avoid wealth-depleting measures, savings feed into future wealth and paying down debt is expensive. Plus, he adds that high scores on this quiz are likely highly correlated with behaviors that are conducive to wealth building. “As an example, scoring high on these financial scorecards might be indicative of someone planning for the future,” he explains. “Independent of the direct effects of these activities, someone who plans for the future probably makes a host of decisions that affect future wealth in a positive way.” Source: Federal Reserve Bank of St. Louis
Posted on: Thu, 18 Dec 2014 09:11:14 +0000
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