Have you recently graduated High School? Just moved out of home? Interested in investing? Have no clue about loans? Entering adulthood is hard sometimes, especially when you’re faced with financial jargon in everyday life. So, we’ve compiled a list of financial concepts you should know if you answered yes to any of the above questions! (You’ll also sound smarter around the dinner table…you’re welcome)
1.Time Value of Money
You know that question you get asked would you take $100 today or $150 in 1 year? Following this principle you’d take the $100 today. Time value of money is the idea that money is worth more today than it is in the future due to inflation.
Why is this important? If you’re investing in the stock market, the dollars in your hand can be used to earn interest and capital gains. A $1 today is not worth $1 tomorrow! So be greedy people and don’t settle for anything less than the future!
2.Buy low, sell high
This is a classic! The fundamental principle of investing. You don’t want to buy an asset when it’s overpriced, or sell when it’s underpriced. So remember this concept whenever you invest.
Why is this important? No one wants to get gypped when you’re investing in the stock market, so this principle is essential to your financial knowledge.
Interest on interest. Basically, you’re reinvesting your interest, to earn more interest.
Why is this important? To put it simply, you can turn the money you have today into a good stash of cash over time. More money for you!
Inflation is the rate where the general level of prices of goods and services rises, and as a consequence, the purchasing power of currency falls. Here’s an example…if a bottle of milk costs $2 today, and inflation is at a rate of 2%, then in a given year that same bottle of milk will sell for $2.04.
Why is this important? Good and services affect us every single day, whether we are buying or offering them, so this term is paramount to understand
Liquidity is the degree at which a security or any asset can be quickly bought or sold in the market without affecting the price of that security or asset.
Why is this important? You as a person can have your liquidity measured – and you’ll find this relates to you when you go to apply for a loan. It becomes a measure for YOUR ability to pay off debts as they fall due. So when you apply for a credit loan, your bank wants to know you are good at keeping up with your repayments and that you have the financial stability to make them.
The term ‘Risk’ is the chance that an investment’s ACTUAL return will be different from the EXPECTED return. Basically, you are at risk of losing some or all of your money. Risk is usually measured by calculating the standard deviation (high standard deviation = high level of risk) of historical returns for an investment option.
Why is it important? You will need to assess your level of risk when entering into any kind of investment so it’s important to understand this term and how to interpret the figures. Read up on our risk assessment article (Think You’re A Risk Taker?).
7.Diversification – Asset Allocation
This is the process of allocating your money in a particular way so that your exposure to any one particular asset or risk is reduced. E.g. you wouldn’t want to put all your eggs into the health industry where you could be earning better returns by just having the one egg in health, and another egg in say the tech industry. If you’re investing, diversification is key people!
Why is it important? We’re all about making our money work harder, so you want to be able to optimize your chances to do this. Asset allocation…do it!
Amortization refers to paying off your debt with a fixed repayment schedule (you may have heard of an loan amortization schedule) in consistent instalments over a period of time. Have you bought a car using a loan? Prime example!
Why is it important? At some point in your life (if not already) you will take out a loan. It’s important to understand the nuts and bolts of your loan and how your repayments work. Want to know more on a loan amortization schedule? Just leave a comment below and we’ll be happy to help you out!
This is an investment pool made up of different funds collated from numerous investors solely for the purpose of investing in securities (bonds, stocks, and other assets). They are managed by money managers who invest the fund’s capital with the goal to produce capital gains and therefore, income for the fund’s investors.
Why is it important? If you’re a smaller investor, a mutual fund will give you access to securities that are managed by a professional and you have access to a diversified range of assets to invest in.
A capital gain refers to the profit you receive if you sell an asset or security for more than the price you originally paid for it. A capital loss is just the opposite, you sell it for less than your original purchase price.
Why is it important? When it comes to tax time, you need to record your capital gains as this is technically income straight into your bank account and something you need to claim.
Did you find these helpful? Let us know by leaving a comment!
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