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8 BASIC Personal Finance Concepts EVERYONE Should Know.
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Asset.
Simply, an Asset is a thing that has a value.
Examples:
- Car
- House
- Property
- Pensions
- Jewellery
- Cash / Investments
This is the positive side of your Net Worth.
Simply, an Asset is a thing that has a value.
Examples:
- Car
- House
- Property
- Pensions
- Jewellery
- Cash / Investments
This is the positive side of your Net Worth.
Debt.
Any money that is owed to another party.
Examples:
- Car loans
- Mortgages
- Student loans
- Pay-day loans
- Credit card debt
These are generally payable with Interest, sometimes at VERY high rates.
This is the negative side of your Net Worth.
Limit your debts.
Any money that is owed to another party.
Examples:
- Car loans
- Mortgages
- Student loans
- Pay-day loans
- Credit card debt
These are generally payable with Interest, sometimes at VERY high rates.
This is the negative side of your Net Worth.
Limit your debts.
Net Worth (NW).
Net Worth = Assets - Debts (Liabilities)
For example, if a house is valued at $500,000 but has a $300,000 mortgage, its NW is $200,000.
Higher NW = better.
Your goal: Make your Net Worth grow!
Net Worth = Assets - Debts (Liabilities)
For example, if a house is valued at $500,000 but has a $300,000 mortgage, its NW is $200,000.
Higher NW = better.
Your goal: Make your Net Worth grow!
Depreciation.
Some assets lose value over time.
PRIME Example: Cars
Your car's value decreases every year.
Pro-tip: NEVER hold debt on a depreciating asset.
The debt's value does not decrease because the asset's value does.
You end up paying more than it is worth.
Stupid.
Some assets lose value over time.
PRIME Example: Cars
Your car's value decreases every year.
Pro-tip: NEVER hold debt on a depreciating asset.
The debt's value does not decrease because the asset's value does.
You end up paying more than it is worth.
Stupid.
Cash Flow.
The flow of money into and out of your household.
Examples:
- Income from 9-to-5s, hustles, etc.
- Expenses to lenders, for purchases, etc.
You MUST HAVE a positive cash flow equal to >30% of your income.
This is money you can invest.
Higher Cash Flow = better.
The flow of money into and out of your household.
Examples:
- Income from 9-to-5s, hustles, etc.
- Expenses to lenders, for purchases, etc.
You MUST HAVE a positive cash flow equal to >30% of your income.
This is money you can invest.
Higher Cash Flow = better.
Investments.
This is when you take your positive cash flow and use it to buy assets that will grow for you and/or generate their own cash flow.
Good examples:
- Real Estate
- Mutual Funds
- Growth stocks
- Dividend stocks
- Index Funds/ETFs
Your money should make you money.
This is when you take your positive cash flow and use it to buy assets that will grow for you and/or generate their own cash flow.
Good examples:
- Real Estate
- Mutual Funds
- Growth stocks
- Dividend stocks
- Index Funds/ETFs
Your money should make you money.
Interest (on Debt).
Interest is the calculated percentage of the value of a debt, payable to the lender.
It is often presented as an annual percentage.
For example: a 3.49% interest rate on a $100,000 loan = $3,490 in annual interest payable.
(con't)
Interest is the calculated percentage of the value of a debt, payable to the lender.
It is often presented as an annual percentage.
For example: a 3.49% interest rate on a $100,000 loan = $3,490 in annual interest payable.
(con't)
Lenders charge interest because there is a risk to lending money.
The higher the interest rate, the more risky the debt AND/OR the more risky the recipient.
If you receive a loan, you must pay back the loan AND the interest.
The higher the interest rate, the more risky the debt AND/OR the more risky the recipient.
If you receive a loan, you must pay back the loan AND the interest.
Compound Interest.
This is VERY important.
It is the interest earned (or return gained) on an investment.
Usually calculated as an annual rate (i.e. 7%).
BUT!
This 7% grows over time.
Consider a $10,000 investment left for 5 years.
(con't)
This is VERY important.
It is the interest earned (or return gained) on an investment.
Usually calculated as an annual rate (i.e. 7%).
BUT!
This 7% grows over time.
Consider a $10,000 investment left for 5 years.
(con't)
Yr 1 = $10,000 x 7% = $700
Yr 2 = $10,700 x 7% = $749
...
Yr 5 = $13,108 x 7% = $918 = $14,026
40.3% return in 5 yrs (8.05%/yr) because
7% in 5 yrs > 7% now.
This is Compound Interest working FOR you.
BUT it can work AGAINST if attached to a debt.
More investment. Less debt.
Yr 2 = $10,700 x 7% = $749
...
Yr 5 = $13,108 x 7% = $918 = $14,026
40.3% return in 5 yrs (8.05%/yr) because
7% in 5 yrs > 7% now.
This is Compound Interest working FOR you.
BUT it can work AGAINST if attached to a debt.
More investment. Less debt.
