Ten Concepts to Know to Become a Personal Finance Master

Personal finance is a concept that few people know enough about. It’s why there are high levels of debt across the country. You need to know about the various concepts that make up being a financial master. Only 57% of US adults are considered financially literate. This guide is going to help you understand what it takes to become educated about the world of money.

Net Worth

Net worth represents the overall picture of your financial health. You must know how healthy your finances are so you know whether you need to act. It’s the combined value of your assets minus your debts. The number should be well into the positive. If you have a negative net worth it means that you’re losing money every single year and you should consider making changes.

Commission Advance

The concept of a commission advance is a simple one. It’s an agreement between the buyer and seller to sell commission in advance of sales actually happening. How much a commission advance costs depends on the agreement and the needs of the seller. It’s always done to help entrepreneurs free up capital at an early stage.

FHA Loans

The FHA loans available are provided by the US Federal Housing Administration to those who want to buy a house. What makes them different from conventional loans is that lending standards are less strict and payments are lower. You may want to consider taking one of these out if you’re buying your first house.

Inflation

Inflation is the constant devaluation of currency through more money entering the financial system. It’s the law of supply and demand in action. There’s always a consistent demand for US dollars, so the more of them there are the less valuable each individual unit is. The fewer US dollars in circulation the more valuable each dollar becomes due to consistent demand.

This makes your money worth slightly less every single year, and it’s what steadily pushes prices up.

Invoice Factoring

Invoices for your small business that are due in 30, 60, or 90 days are automatically converted into cash. This is a financial service that can give you an immediate income based off of the money you’ve already earned. This is not a loan. All invoices are automatically paid to the factoring company.

You’re essentially selling the rights to your outstanding invoices through invoice factoring.

Liquidity

Liquidity is a representation of how much cash you have available at short notice. Your cash flow is defined by where your money is kept. For example, if 90% of your money is tied up in real estate you would have low liquidity because it could take months for you to actually extract your money. However, someone with 90% of their money in a bank account has easy access so they would have high liquidity.

Insurance

Insurance is something everyone should have. It doesn’t matter whether it’s home insurance or medical insurance because this is something you can’t do without. There are many types of insurance to take into account. Make sure you shop around because when you own a number of policies the premiums can quickly add up.

Diversification

Most Americans have at least some investments. There’s an inherent risk that comes with every investment. The way to minimize this risk is to diversify. Diversification involves investing in multiple unrelated areas, so if one investing area collapses it doesn’t impact the others, thus protecting you from major swings.

Interest

Interest is something that can work with you or against you, depending on the situation. In the current era of low interest rates many people are enjoying it because it means mortgages and other loans are growing at a miniscule rate every year. Their repayments are remaining relatively stagnant, thus enabling them to pay less in the long-term.

On the other hand, low interest can be a problem for anyone who wants to save money. Low federal interest rates also mean that bank accounts pay low savings rates, making simple saving a low return venture.

Compounding

The magic of compounding is what all good investment strategies are based on. It’s the idea that as annual returns are based on the annual returns of the previous year every single cycle will bring greater and greater returns. It’s the interest earned on your rolling balance.

Conclusion – Become a Financial Master

These ten financial concepts are the most important. If you want to master personal finance, study these ten concepts and apply them to your daily life.

Which concept do you think is the most important?

This post was published on the now-closed HuffPost Contributor platform. Contributors control their own work and posted freely to our site. If you need to flag this entry as abusive, send us an email.
CONVERSATIONS