Most of us have developed bad money habits in our 20s; almost around 25, we start to see the importance of saving, budgeting, and adopting better financial habits. Before you hit your 30s, you want to have a stable way of building wealth. Personal finance is very important – and knowing how to master it will allow you to build wealth.
Here are some important money concepts that you should understand before you are 30;
1. Net Worth
Your net worth can be described as your financial health. It is everything you own (total assets) without your liabilities or things you owe. Celebrities mostly use net worth to calculate how far they have come.
Inflation occurs when the price of goods and services rises, the cost of living. There is normally a rate of 3 % annually, and as the price increases, the power of currency decreases. One way to prevent inflation is when salary increases and the cost of living.
Liquidity represents how easy it is to change an asset into cash without affecting the market. Cash is the most liquid money, as it is quickly accessible. For example, your salary or emergency fund is the most liquid asset, while your house or car is the least liquid of your assets.
Interest is applied when you have a saving account; you start receiving money when you have a certain amount of money in your account. In other words, you are putting money in your account, and it is working for you, giving you more money; the more money you have in the account, the more interest money you will receive.
How does it work? You allow the bank to borrow your money, and they are paying you back for that. However, the amount can rise or drop, depending on the country’s economy.
However, on the other side, if you borrow money from the bank – the more time you take to return the money, the more you will have to pay.
5. Compound Interest
Compound interest is an advantage for you. When you have an account where you are receiving interest, when you receive interest, the interest will later receive interest (easy, right?).
Let me put it into context; If you have $ 100 with an annual interest of 5 % after a year, you will have $ 105. The following year you will receive 5.25. So you are earning $ 5.25 instead of $ 5. And after each year, if you do not use the money, it will increase.
6. Bull Market
A bull market is a period where prices are rising or are expected to rise. Normally stock prices rise by 20 % from a low.
7. Bear Market
The bear market is the opposite of the bull market; stocks are down by 20 % from a high. It normally means that the economy is in a bad state with a high level of unemployment.
It is important to remind ourselves that the stock is always fluctuating between bull and bear, and people should not resort to panic every time they encounter a market shift.
8. Risk Tolerance
As mentioned above, the stock market is always fluctuating, and risk tolerance is how comfortable you are with these fluctuations. This is an important component of investing, as there is a high risk in investment, as you should have realistic expectations.
If you have a high-risk tolerance, you may invest aggressively, while you may be more cautious if you have a low-risk tolerance.
You must know the different terms that are often linked with money to manage your money well. Let us know in the comments if there are other terms that you want us to explore…
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