Financial Concepts That All Individuals Should Know About

Financial Concepts That All Individuals Should Know About
June 08 17:55 2017 Print This Article

If you want to take charge of your money, you should have an understanding of the basic financial concepts. You may be wondering just what these financial concepts are that you should be knowledgeable about. We’ve included them below. Take a look.

Net Worth

Measuring your financial health is simply done with discovering your net worth. It’s likely you’ve heard of this term when it comes to wealthy individuals, but it’s important for those with modest means to understand as well.

Net worth can be easily computed by totaling all of your assets and deducting all your debt. If this number is positive, you have a healthy financial standing. If your net worth is in the negatives, you need to get to work creating a more positive balance.

Inflation

You’ve probably heard this and know it means the cost of commodities goes up over time. However, you need to use this knowledge to better plan out your financial future. The average inflation rate is 3 percent per year. Your income should be increasing at least this amount to ensure you will be able to continue to afford the things you need.

Liquidity

Many wealthy individuals have money diversified in many long-term assets, such as real estate. Just because you have a high net worth, doesn’t always mean you have a ton of money in the bank. Your liquidity is how much money that is accessible right now, in other words, the cash on hand that you have access to. Money in accounts, such as QuestIRA or real estate is not liquid and would take some time to get access too.

Compound Interest

You may know that this is a good thing, but not quite understand the concept of it. Let’s take a look at a definition to help you to better understand. Compound interest is money that you earn on a rolling balance. This is not just interest earned on a principal investment amount.

For example, let’s say you invest $100 in a savings account. The interest rate is set at 7 percent. After the first year, you will have earned $7 in interest. This makes the total balance in the account $107. After the second year, you will earn $7.49 in interest. This is a 7 percent interest gain from the total balance of the $107 that was in the account after the first year.

Needless to say, compound interest is your friend. This is why it pays to invest early. Your savings will roll over in these compound interest accounts and make you a lot more money in the long run.

By taking the time to fully understand these basic financial concepts, you will be better able to ensure you have a healthy financial future. We encourage you to search online for an answer to your financial questions. There are many free courses and financial sites that can help you to better understand any financial concept that you may come across.

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