If you’re researching how to improve your finances, it can become overwhelming. Some concepts you come across may be overly complicated and hard to carry out. Finding a feasible way to start can then become discouraging.
Becoming financially literate is a lifelong process. Money systems change and have done so since the beginning. However, if you’re just starting out it’s important to keep it simple. This article discusses 5 need to know financial concepts.
It’s discussed in a straightforward way and is perfect for beginners. Reading this will help you get the ball rolling and will hopefully leave you feeling inspired to carry on educating yourself.
Compound Interest
Compound interest means that you will gain interest on the original investment amount. Additionally, you will gain interest on the interest as well! That’s how it becomes compounded.
For example, a $10,000 investment with a yearly compound interest rate of 5% over 3 years will earn $1,576.25. This is very good news when it comes to investments. However, this is not great if you’re taking out a loan with compound interest!
How much you earn on investment can also be accelerated if there are more periods of compounding. For example, an amount of money compounded semi-annually (twice a year) at 5% will earn more than the same amount compounded at 10% yearly.
If you aren’t comfortable with maths there are many online calculators you can use. You can enter details like the original investment amount, the interest rate, the number of years, and if the interest rate changes within a year. This will help you compare between credit types as well as investment types.
Simple Interest
Simple interest is calculated on the original investment amount and it never changes. The original amount of money is usually referred to as the ‘principal amount’. The calculation for simple interest is well, very simple.
For loans/credit, it is the principal amount multiplied by the daily interest rate multiplied by the number of days between payments. This means that paying debts on time (or in advance) will lessen the amount you have to pay overall.
Simple interest is usually applied to car loans or short-term personal loans. It is always advised to select credit that uses simple interest whenever possible. Compound interest is best for investments.
For example, a $10,000 investment at a rate of 5% per year for 3 years is $11,500.00. Compare that to the example above. The difference may not seem massive, but for a retirement plan or very long-term investment, this will have dramatic results.
Debt Snowballing
This is a technique used to find out which debt should be paid off first. Or at the very least which one takes priority. You will need to list all of the debts, their interest rates, and the time you need to pay each of them off.
Use an online calculator to discover which debt is the ‘most costly’. This may not even be the debt that has the largest principal amount! Prioritise this one and aim to pay it off first. Do this by possibly making larger early payments on the priority debt, and less on the other debts. Once it’s paid off, begin the process again.
Consider debt consolidation as it may make the whole situation more manageable. This is a great solution if you have many types of repayments and are feeling overwhelmed.
Bull & Bear Markets
If you want to get into investing and are learning online, start with these simple terms.
Bull Market
This is an indication that the market is on the rise and overall (probably) healthy. It refers to share prices and means that they are going up. Your returns will rise and your investments will increase. Stocks vary throughout a 24 hour trading period. As a result, a bull market refers to a longer period of time in which the market is performing well.
Bear Market
A bear market is the opposite of a bull market. It indicates that the market is declining. Some indicators include low share prices and high unemployment rates. This may seem like a downer, but it actually can be a great time to invest in some shares you’ve been eyeing out. Some people even refer to it as shares ‘going on sale’.
The economy changes between these two events, so sometimes holding onto your shares during a bear market can pay off as they may rise again later on. You may only lose on your initial investment if you decide to sell during a bear market.
Several Streams of Income
Quite often a 9-5 job is just limiting: there’s only so much money you can make. It’s rare for people to become the president or CEO of a company, that’s just a cold, hard fact. You need to find a way to make an income that is scalable and as a result, is never really capped.
Research has shown that the ultra-wealthy have around 7 streams of income*. You don’t need to have that many. To be fair, even 2 is better than one. Many people dabble in real estate, affiliate marketing, investing in blockchain, or even forex trading. If those don’t sound appealing, don’t worry there are so many more options out there!
Remember that the most lucrative things are the ones that don’t need your time or presence. That’s because you have limited time and money. If you can have an automated way of making money that’s even better.
Great Job!
You have taken a step to becoming more financially literate. You can only get wiser from here. If you want to build wealth, many of the concepts you need to know are very simple. It’s just a matter of getting your head around them! Building your financial education is like a big investment if you think about it.
If you want some more simple financial advice, simply read Credit24 blog. Additionally, if you want to try your hand at investing or need some help consolidating debt, consider taking out a personal loan. Visit our website today at www.credit24.com.au to get all the details.
Disclaimer:
*Source: https://danlok.com/7-income-streams-of-millionaires/ IPF Digital Australia Pty Ltd, trading as Credit24, ABN 59 130 894 405. Australian Credit Licence 422839. Lending criteria, fees and charges apply.
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