Question

Describe how the following financial habits contribute to well-educated families’ ability to build wealth over time:

6

Liquidity

Your Answer:

7

Diversification

Your Answer:

8

Low debt relative to assets

Answer 1

CONCEPT OF LIQUIDITY-

the well educated families are concerned about the money they would invest in any securities and rather than risking their capital they would prefer to yield lower rate of return,this means they are always protective towards their capital.these kind of people have patience and seek opportunity regarding investment and invest at the right time.they keep their fund in such form which can be liquidated at the exact moment and can be invested at the most favorable time.liquidity of funds is concerned with cash,bank balance,short term deposits.generally these securities are safe and can be utilized in any situation.this provide confidence to this segment of investors.

CONCEPT OF DIVERSIFICATION-

the well educated families don't prefer to invest all their money in one kind of investment segment.they prefer to make portfolio which includes gold,government bonds,fixed deposits,stocks etc.the main purpose to do so is to minimize the risk and if one sector is down then the loss may be compensated by the other investment sectors.this reduce the burden concerned with the market fluctuations and give higher positive return over invested amount.

CONCEPT OF LOW DEBT RELATIVE TO ASSET-

the main characteristic of the educated families is that they don't borrow money for non essential items and they borrow the money only for productive works like expansion of business,starting new business and for business machines etc.they keep the debt to asset ratio extremely and comparably low so in the recession period there is no over-burden of interest repayment.this ensures the smooth working of firm even if the firm need to repay its debt then there is no shortage of cash in the firm and dependency on the external funds are low.