Study: Good financial decision-making skills linked to wealth accumulation
By Mary Hightower
U of A System Division of Agriculture
- Study links healthy financial decision making with wealth accumulation
- Saving, on-time payments can help
LITTLE ROCK – A study from the Center for Household Financial Stability reveals a correlation between healthy financial decision making skills and increased chance for wealth accumulation.
“Researchers developed the ‘Financial Health Scorecard’ that asked about financial decision making behaviors such as saving, on-time payments, and debt load,” said Laura Connerly, assistant professor for the University of Arkansas System Division of Agriculture. “Researchers concluded that our financial health scorecard was very good at predicting how much wealth a group was likely to have.”
She emphasized that “while correlation is not necessarily causation, it seems likely that consumers who make healthy financial decisions will increase their chances of building wealth.”
Connerly offers some healthy financial practices that consumers may want to adopt:
- Save money. “Aim to save at least 10-15 percent of your income or more,” she said. Those savings can be used for emergencies, retirement or college. “Save for large and small expenses and avoid the cost of using credit,” Connerly said.
- Make payments on time. “By making on-time payments, you increase your credit score and save the cost of late fees,” she said. “ Also, the more payments you miss, the more difficult it becomes to catch up.”
- Don’t carry a balance on your credit card. “Interest and fees add up,” Connerly said. “Pay off your balance or keep it low to minimize costs and build your credit score.”
- Have an adequate emergency fund that is easily accessible. “Aim for enough money to cover at least two to six months of expenses,” she said. “Your emergency fund needs to be liquid – which means it needs to be in a form that’s easy for you to use if you need it.” Assets like stocks, bonds, real estate, etc. might take time to liquidate. “When you have a crisis, you usually need cash on hand,” Connerly said.
- Monitor your debt load. “Over-extending yourself on credit can leave you vulnerable. Home mortgage payments, including taxes and insurance, should be kept to about 30 percent of your income or less,” she said. “Debt load excluding your home mortgage (is best at 10 percent or less.” Debt load is calculated by your total debt divided by total income.
The University of Arkansas Cooperative Extension Service provides research-based information to help Arkansans build financial security. Visit the website at www.uaex.edu.
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Media Contact: Mary Hightower
Dir. of Communication Services
U of A Division of Agriculture
Cooperative Extension Service