The Basic Financial Concepts
These Simple Financial Rules Are The Most Important Concepts in Building Wealth
The basic financial concepts needed to thrive financially are highlighted throughout our site. However, we've listed them here with links to the detailed pages. You must understand all of these if you are to really understand your own personal finances and learn how to drastically increase your chances of building long term wealth.
List of Basic Financial Concepts
- The Time Value of Money. By far the most important financial concept, describes how important the value of time is in building wealth. Money invested today is worth more than money invested at any point in the future. That's because it has more time to grow and compound. It is also the main reason that you'll want to get started with your investing as early as possible.
- Diversify your Risks and Investments. Another important concept to keep your finances balanced. Don't keep all of your money in just a few assets like your house or your company stock. Make sure that you spread your investments over many different asset classes. Also, make sure that if you hold a lot of mutual funds, that they do not overlap, or you may not be diversified as you think.
- The Compounding Effect of Money. Maybe the second most important basic financial concept to understand. Understanding this is key to being able to forecast future growth. Your money may grow at the same rate each year in terms of percent, but in terms of actual dollar growth, compounding means that your money will grow faster and faster each year as a result of earning money not just on your investment, but also on the returns from that investment.
- Understand the Stock Market. A basic understanding of the stock market can be applied to your everyday finances to help you manage your money better. Find out how understanding the stock market can help you weather its highs and lows. After all, people fear what they don't understand and most beginners don't really understand the stock market. Heck, even most advanced investors don't understand the stock market.
- Keep a Household Budget. This basic financial concept is needed to really understand the breakdown of your personal finances and to learn how to optimize them. If there is one tool you use to keep your spending in check and help you save money each month and year, it should be a well crafted budget worksheet.
- Opportunity Costs. Understand that wherever you spend your time and money is a cost that you cannot spend elsewhere. The money spent on a car could be invested in the stock market. The car will decline in value while the investments will thrive. Make each decision while paying attention to other ways that you could spend or invest that money. Choose the opportunity that maximizes your long term wealth.
- Interest Rates. You must understand how interest rates and overall rate of returns affect almost everything in your financial life. For example, investing your money at 7% versus 5%, over 40 years, means that you will have twice as much money, that's right, twice as much money, for retirement. This is also the precise reason that it is so important to lower your investment fees. Buying low fee funds or ETFs and foregoing a financial advisor can easily make the difference of retiring early or late.
See Also: Financial Rules for Success