Monday, April 02, 2007

Your Personal Finance Skills and Some Sound Advice...

Times Leader brings to light an interesting study on peoples financial skills, and puts forth some sound advice to help you with YOUR financial skills. The people of Harvard, Princeton and the Federal Reserve came together to compile a report: The Age of Reason: Financial Decisions Over the Life cycle.

After reviewing the financial records of tens of thousands of borrowers, they've basically found that the average person's financial decision-making skills reach it's peak at the age of 53, and then gradually decline.

"We find that younger adults and older adults borrow at higher interest rates and pay more fees than middle-aged adults. For the young, the lack of experience outweighs the sharp mind. With older folks, dimming faculties undermine even a lifetime of experience."


They mention a few simple principles you can keep in mind when making some big financial decisions. Here are some of them:

If you plan on hiring any type of financial consultant..

  • Get objective advice. That means relying on advisers who have no stake in whether you do what they suggest. A broker who earns sales commissions has a financial incentive to urge you to buy and sell, even if that’s not in your best interest.


  • Consider hiring a “fee-only” adviser who is paid a flat or hourly rate instead of commissions.


  • Fees matter. Sales commissions, annual account maintenance fees and other “incidentals” add up.


Or if you are a "do it yourselfer"...
  • Don’t rush. Whether you are young or old, assume that investments, loans and other financial choices are commitments you will stick with for years, so you have nothing to lose by taking a few weeks to make decisions.
  • Read all sales materials, prospectuses and other disclosures. Be sure you know your options if things don’t turn out as you expect. Suppose interest rates change or you have a financial crisis? Would you be able to reverse a decision?
I'm not crazy about reading those prospectuses. If you don't either, try a place like morningstar.com or my favorite yahoo finance. If you would also like to see how your financial skills rate, I found a little "financial IQ test" @ MSN.

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