Importance of Financial Literacy

Florida just became the largest state to mandate personal finance education in high school. And in the United States, April is set as the month to pay attention to finances every year, so that basic financial knowledge is applied.

In life, there are countless common knowledge about finances such as stock investment, bond and interest rate relationship, compound interest calculation and application, credit card interest rate, home loan, student loan investment and loan, retirement investment, and insurance.

The first generation who immigrated to the United States put all their time and effort into educating their children, but they are not interested in the financial knowledge necessary for a lifetime. It may be because parents also do not recognize the importance of financial education and they themselves do not know the contents of financial education well.

As an example of the importance of financial education, the premiums of the five largest auto insurance companies in the United States are set according to the individual’s credit rating. Individuals with poor credit ratings can pay 65% ​​more for car insurance than people with high credit ratings.
In some cases, insurance premiums are paid twice (2) times or more, depending on your credit rating, even if you have never had a car accident. The interest rate on a home loan required to buy a house also varies greatly depending on your credit rating.

If your credit card limit is $10,000 and you pay off your credit card monthly, I don’t think your credit rating will be affected. However, the credit company counts the card limit and the amount of debt you spend together. For a $10,000 limit, it is 10% if you use $1,000 and 20% if you use $2,000. This is called the Utilization Ratio, and the lower this number, the higher the credit rating. Credit rating companies recommend keeping this ratio in the single digits, ie, 10% or less, and it’s a simple way to improve your credit rating.

The general investor wants to choose stocks that hit the jackpot when investing. The timing of investment is also very important. But in order to save money, you must first save. The stock market goes up and down periodically. But saving $100 to $100 more is a 100% increase. It should not be forgotten that some great investment method does not create wealth, but steady savings is the first step in investing and is the basis for accumulating wealth.

A gambling or stock jackpot is expected to increase investment money in a short period of time. Wouldn’t it be great if the money grew as you thought it would? However, the probability of this happening is very slim. It is fortunate to keep the original shrine, and it hurts both the body and the mind. Investing right is what keeps your investment money growing steadily over the long term.

A return of 10% means that the money invested doubles every 7.2 years. An investment of $100,000 is a remarkable return that increases to $200,000 in 7.2 years, $400,000 in 7.2 years, and $800,000 in 7.2 years, that is, 22 years later. It absolutely takes time to receive the compound interest effect. Korea’s ‘quick-quick culture’ is the most fatal to stock investment. Impatientness not only prevents you from receiving amazing stock market returns, but also leads to investment failure.

In the past three years, the yield is 27.9% in 2021, 18.4% in 2020, and 31.5% in 2019 investment. It is a high return that anyone can receive if they invest in the stock market, one of the 500 largest companies in the United States, without expecting a jackpot. The average annual average for the past 13 years is 16.03%. This is an incredible return on a $100,000 investment that has grown to nearly $700,000.

In the hectic daily life of immigrants, it is not easy to understand all the financial common sense and apply it to your life. However, you need to understand basic financial common sense, such as what your credit rating is, how to save money to invest, and why you should start investing as early as possible. Financial education is a very valuable asset that anyone can pass on to their children rather than inheriting assets.

Myung-Duk Lee, Ph.D., Registered Investment Adviser (RIA)

Copyrighted, Dr. Myung-Duk Lee’s Financial Column All rights reserved.

MI Asian
Author: MI Asian