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The Financial Literacy Basics to Fall Back on During Instability

Years ago in a previous career, my boss gave me some advice on dealing with adverse conditions: “Respond, don’t react.” The word reaction is often accompanied by a couple of other words – knee-jerk – indicating the lack of thought that characterizes most reactions.

Many people believe we’re in a period of financial instability. We do have inflation and problems with some banks, but as a student of history and someone who has been around for seven decades, I can tell you it’s been way worse. Inflation is currently around 6%; in the early ‘80s, it was much higher. (Turkey’s current inflation rate is about 55%, if that helps any.) The Savings & Loan crisis of the late ‘80s saw thousands of savings and loan institutions close and billions lost. In 1932, one in four workers had no work. We survived all of that.

There is a natural inclination to want to react quickly when something happens in the world – the “Don’t just stand there, do something!” syndrome. Usually, the better response is “Don’t just do something, stand there.” The only time to make significant changes in your financial strategy is when your situation changes, not the daily ups and downs of world events. Remember: respond, don’t react. Here are some money tips to employ all the time, but even more so when that voice inside your head screams “Do something!”

Financial Literacy Basics

Make goals: Setting and writing down specific financial goals greatly increases your chances of reaching them. Specific money goals are quantifiable – they have an amount and a date.

Planning: A goal without a plan is just a wish. Plan for worst-case scenarios first. Insurance helps here. Plan for most-likely financial scenarios next. Long-term planning is important here. Plan for best-case scenarios last. Liquidity and flexibility enable you to seize those opportunities.

Retirement: Sign up for your company’s retirement plan the first day you’re eligible. Put as much into the retirement plan as you can. At least get every cent of the company match – it’s free money.

Assets vs. Debt: The asset side of your balance sheet is soft because asset values can change daily. The liabilities side of your balance sheet is hard because debt contracts lock you in. Take on debt reluctantly, and only to pay for things that will pay you back, like housing or improved job skills.

Investing: Investment success is roughly 10% investment selection, 20% asset allocation and 70% investor behavior. What you do matters more than what your financial investments do. In the short term, the market is a voting mechanism, but in the long term, it’s a weighing mechanism. Day-to-day market fluctuations mean nothing if you have a long-term horizon.

Wealth vs. Income: Income is what you make; wealth is what you keep. Wealth is affected far more by habits than by income. Patience and persistence are more important than intelligence in creating wealth. To become wealthy, financial independence must supersede social status. Your money has the potential to earn more than you can, but only the money you don’t spend.

Risk tolerance: Risk and reward move in tandem; greater rewards require greater risks. Low risk tolerance is often the product of fear, which is often the product of inadequate financial knowledge. Better financial education reduces fear, increasing risk tolerance and potentially increasing rewards.

Relationships: If and when you decide to settle down with someone, you must both be open about your finances and your views on money. Conflicts over money can kill relationships.

A CFP® professional can help you master these money basics and beyond. Find your CFP® professional at today.

US Inflation Rate by Year From 1929 to 2023
Turkey annual inflation dips to 55.18% in February
Savings and Loan Crisis
Americans React to the Great Depression

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