Once you understood the basics about money, it is getting easier to know your patterns on money management and to decide on your way of dealing with money in future. These five financial terms will help you to understand the basics:
Assets
To keep it simple: Assets is the money you have plus everything you could turn into money right now.
Liquid assets
This includes all the money you have in cash or in the bank account or that you have invested.
- Cash
- Checking accounts
- Time deposit accounts
- Saving accounts
- Stocks – current market value
- Bonds – current market value
- Mutual funds – current market value
- Life/retirement insurances – current cash value
Fixed assets
This includes houses, apartments, objects, cars, ... - everything that you could turn into money, but would have to sell first.
- Real estate - current market value
- Cars - current market value
- Valuable possessions, jewellery, gold – current market value
Liabilities
Liabilities are the contrary of assets – it’s all money you actually have to give to someone else for whatever reasons. Liabilities include all kinds of debts:
- Loans on real estate – current balance owed to it
- Car payments
- Other loans
- Credit card debts, bank overdraft
- Outstanding bills
Balance sheet
The overview of all your assets and all your liabilities is your balance sheet. If the sum of all your liabilities is higher than the sum of your assets, you are in trouble.
Compound interest
One of the most powerful tools to make money. The compound interest is the interest you get on your interest. If you invest 10,000 USD at the stock market, and the value of your papers increases annually 5 percent, you have 10,500 USD after the first year. Second year, you have 11,025 USD. You made 25 USD on your interest. Fast forward 30 years: You invested 10,000 USD, made 15,000 USD on the invested money and another 18,219 USD on your interest. You have 43,219 USD in total. Learning point: Compound interest needs time; start investing when your young and let your money work for you.
Bulk risk
It’s not exactly a financial term but indispensable when investing money. When investing, there is never this one, quick and absolute secure way to make money. Never. Nobody knows how the real estate market develops, wherever in the world, nobody knows how companies like Apple, Amazon or Adidas will develop in future. Investing means to know the rules of the system you are investing in, and to know the risks.
But whatever you do, to minimize the risk of losing all your money, do different things with different risk levels. Have your private pension fund, although it might not have a high return on investment; invest at the stock market, but prefer ETF with a wide range of companies, or get shares with a buy and hold strategy if you feel secure to do so and have enough reserves that it’s not a disaster if you lose it all; get real estate, but never spend all your money plus going into a lot of debt into one property – never mind if you want to live in yourself or you want to rent it out. And if you trade, never spend all your money on a few shares only. Diversify your investments. Always.
