Money WhizDom: Does your financial quotient line up with your EQ and IQ?

Adhvith Dhuddu, CT regular columnist

Wednesday, March 12; 12:00 AM

Your IQ is probably what got you into this excellent university, but developing your emotional quotient is equally important in shaping your personality. By graduation, our experiences in and out of class boost our IQs and EQs significantly.

But your financial quotient is what will shape your financial future. Your financial knowledge will dictate how well you handle credit, the quality of your savings and investments, how well-padded you are in a crisis and how well you plan for retirement. Whether you like it or not, financial planning is an integral part of everyone's life, and with a high FQ you can successfully plan your finances and finance your plans.

Closely scrutinizing yourself to see how you score on the FQ scale is relatively straightforward and easy. Your FQ is primarily derived from the following aspects: how well you handle debt, investment planning to battle inflation, spending habits, tax planning (when you step into corporate America), and finally, saving and retirement planning. Having worldly knowledge in these five areas will greatly help secure your wealth.

Many of us take on debt early on in life through credit cards, college, and car and home loans that we strive to pay off our whole lives. Although all debt is not bad, it's important to understand the difference between good and bad debt. Undertaking debt for college to add value to yourself, to help you climb the social and economic ladder, is without a doubt good debt. Devouring your credit limit for unnecessary purchases that you will spend years paying a 17 percent rate on is bad debt.

People undermine the importance of investing and often fall prey to myths suggesting the high risks involved in stocks, bonds and commodity markets. These are safe investment vehicles and will inevitably be part of your long-term portfolio to create wealth.

In the last 80 years, stocks have returned 9 to 10 percent compounded annually, compared to corporate bonds and government bonds returning 4 to 5 percent and treasury bills earning 3 percent. In the same period, inflation averaged 3.5 percent, and these numbers are likely to hold going forward.

So the best way to battle inflation is certainly not treasury bills and savings accounts earning 1 to 2 percent, but a balanced blend of quality stocks and corporate bonds. The power of compounding clearly shows how inflation devalues your money. For example, $1,000 you earned in 1980 is worth approximately $380 today.

Clearly, a penny saved is not a penny earned because that penny will depreciate in value (bacause of inflation) if it sits idle in a checking or savings account. This also does not mean all your earning should be invested in high-yielding securities and bonds. There are many risk-free financial instruments, such as certificates of deposits, high-yielding savings accounts, and treasury inflation protected securities, that will preserve the value of that penny.

The American economy is driven by spending and consumerism, and every individual seems to have an unending desire for material wants. Indulging in extravagant purchases beyond your means is sure to get you into a financial ditch. Clearing all outstanding debts before big purchases is vital.

Planning and managing your taxes will be another important part of your career. Mastering the voluminous tax code would take a lifetime, so this department also calls for basic understanding and an intelligent tax adviser.

Having basic understanding of the above-mentioned concepts is crucial for two reasons: to prevent your financial planner from exploiting your ignorance, and to understand what your adviser tells you so that you can cautiously assess the pros and cons of your financial plans.

Online link to this article:
http://www.collegiatetimes.com/stories/2008/03/12/does_your_financial_quotient_line_up_with_your_eq_and_iq_