3 Financial Concepts You Need to Understand Now

The key to financial success is to pay attention to your money. When you understand basic financial concepts, options open up. Even if you never plan to become a financial expert, you should understand the following concepts to maximize personal financial success.

 

Low Income Loans Australia is a site that helps low income earner access financial assistance through non-profits and different government financial initiatives. In assisting thousands of people each year, the below 3 concepts are often brought up.

 

Liquidity

Basically, liquidity is a term that refers to the accessibility of your money. Cash is considered liquid because you can grab it and use it right away. Retirement account funds, money in an IRA and equity in your home aren’t as liquid because it takes longer to access the funds. Money markets funds fall somewhere in the middle.

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When creating an emergency fund, it’s a good idea to have cash on hand as well as an easily-accessible bank account because you will need quick access to the funds during an emergency situation. Money in the stock market and retirement funds usually have some penalty or other process tied with accessing the funds.

 

Net worth

Think of your net worth like a money-health grade.  To determine your net worth simply subtract your debts from your assets. A very basic example: If you have $30,000 in savings and $50,000 in debt, your net worth is -$20,000. Having a net worth far into the positive is a sign of good financial health.

 

This is a great test to see how much you are improving your financial health as you pay off debt. When you hear of a celebrity having a net worth of $5 million dollars, it means that have $5 million in assets after their debts are considered.

 

Interest/Compound Interest

If you have a loan or credit cards, you’ve definitely felt the effects of interest. But, if you understand how it works you may be even more inclined to ditch accounts that charge interest and start investing in interest-bearing accounts.

 

If you invest your money in an interest-earning account, your money is actually working for you. Say you invest your money into a retirement account. The funds earn interest over time. Money in a bank earns interest because a bank is paying for the benefit of borrowing your money. Interest rates fluctuate, and you are more likely to get the best returns in mutual funds, though these are higher risk than the traditional bank account.

money man

 

When you pay interest, you are losing money. You are paying for the privilege of borrowing money. While you may only get 2 percent interest on a bank account, credit cards typically charge you upwards of 24 percent or more! Talk about highway robbery.

 

Compound interest is earned on rolling balances, not the initial principle. This is great for investment and terrible for debt. As an example: If you invest $1000 at 10 percent interest and you don’t add any more money the entire year, you will have earned 10 percent on that $1,000 giving you $1100 at the end of the year. The next year, you’ll earn 10 percent interest on that $1100. It sounds small, but more money and more time make huge increases.

 

When you are paying off debt—this can work against you, especially if you make late payments.