Wealth and money? Wealth or money. We all want it, but most people don’t have it. Some will even kill for it. Often confused as the root of all evil.
We need it to survive but very few know how to make it and how to keep most of it. While we claim to understand it, we are unable to make the best out of it. The basics go well beyond being able to open up a bank account or get a job. They entail knowing how to make a wide variety of financial decisions throughout your life.
Understanding and applying these financial basics to the money you earn is likely to make you wealthy. Not having a grasp of them can leave you in a perpetual financial bind.
Here are the 6 essential money and wealth basics:
1. Budgets and Budgeting
There isn’t anything more important than knowing where the money you earn is going. How you budget is not nearly as important as you actually keep track of what you earn and where you spend your money. Until you understand where you spend your money, ensuring that you are spending less than you earn, you are in no position to use any of the other financial information that you have gained as part of your financial literacy.
2. The Power of Compound Interest
To grasp the full potential and power of saving and investing, you need to understand the power of compound interest – how it works and what it can do over time. Save $150 a month (approx $5 a day) without compound interest, and in 30 years you’ll have $54,000.
Save the same amount with a return of 9% compounded interest and you’ll have nearly $275,000 after the same 30 years. When you understand the fundamentals of compound interest and time working together, you see how saving even small amounts of your hard earn money can have huge effects on the prospects of wealth creation.
3. Risk and Managing the Downside
When it comes to wealth and trying to grow the money you have, there will always be risks involved. Understand that risk is part of investing, and you can greatly increase your wealth by taking calculated risks to correspond with different points in your life.
At the same time, being too risk-averse or taking huge risks with your money in an attempt to get rich quick will likely leave you poor.
4. Rainy Days Emergency Fund
Life will always throw unexpected curves into even the best-laid plans. Realizing that this is likely to happen and being prepared with an emergency fund is an essential part of your financial literacy.
Unexpected financial losses can occur, and having an available resource for these emergencies can be the difference between remaining financially healthy and finding yourself financially struggling.
5. Depreciating Assets
Not everything you purchase is an investment. It’s therefore, important to understand the difference between an appreciating asset and a depreciating asset.
Many of the things people buy, such as cars, will decrease in value over time. That doesn’t mean they are bad purchases to make, as they can be an important factor in your overall earning potential. However, it does mean you should be purchasing these at the best price you can and not buying more than you actually need.
Understanding whether a purchase is likely to appreciate or depreciate over time, think about what value you will get for the same asset when you dispose of it 5 or 10 years down the line. One consideration to take. One consideration to take into account when purchasing a car is buying a three-to five-year-old used car, as opposed to a brand new one. Let someone else pay for the initial depreciation.
6. Taxes
They say life has two guarantees – death and taxes. You can’t avoid either but you can reduce your taxes by planning your finances well.
Although taxes can seem completely overwhelming and incomprehensible, understanding the basics of how taxes work is important. By understanding the basics, you can make moves in your daily life that will actually save you money over the long term. It will also help you determine what documents and receipts you need to keep track of that can reduce your taxes over time.
To Close Off
Know where your money comes from but more importantly, know where your money is going. Secondly, remember to pay yourself first in the form of investments and savings that attract compound interest. Understand that there is some kind of risk involved, calculate what risk you can take and prepare for a rainy day with an emergency fund.
Lastly, know that because a portion of your income goes to taxes, have the right supporting documents to keep track of what you are giving to the taxman.
