Do you know how to calculate your net worth? I learnt it today while researching for this article and realised that our generation is weak when it comes to understanding money. Hence, this article: 7 Money Concepts: Know Them for Better Adult Years.
When we start earning money, we make some irreversible money mistakes due to lack of knowledge about where and how much to spend. However, there are 7 money concepts or financial concepts that you need to learn about before you turn 30 so that you can have a smoother adult life.
1. Pay Yourself First
Not everyone will be able to see the importance of this point at first but let me explain it. When we get our salary, the first thing we do is pay our bills and then spend money on our wants and needs with a thought in the back of our mind to save or pay ourselves whatever is left at the end of the month. The truth is that our needs and wants are unlimited so there is no way you will be able to pay yourself in the end. So, make sure that this saving that you need to do should be one of your bills as you would pay yourself.
2. Assets and Liabilities
We often blend the concept of assets and liabilities and forget the difference between them. Most of us buy mobile phones and cars thinking we are investing in assets but we are wrong. Such items are our liabilities because we might have to pay EMIs upon buying these things and even if we bought them in cash, their value will deteriorate with time without question.
On the other hand, assets are something that can help us earn some additional income or something that can grow its value over time like a Mutual Fund, Fixed Deposit, or a Plot.
So, from now on, make sure to understand the difference between investing and spending because we need to invest more and spend less.
3. Net Worth and Cash Flows
Do you know how you calculate your net worth? You basically add your assets and subtract your liabilities to get your net worth. Cash flow is the movement or use of money to buy stuff for our life. If we buy assets we will be putting the flow in good direction and if it is a liability then the value lessens.
You should divert your cash flow towards investing in assets so that they can overpower your liabilities and increase your net worth.
Insurance is one of the best things you can invest in but you buy it without the intention of using it. However you buy it, it secures your and your family’s future financially. Your and your family’s health insurance and term plans can be a great aid to your family. In fact, even if you are buying a vehicle, you should get that insured too because it can save you a fortune in the need of the hour.
Inflation sounds like something that is difficult to understand but hear me out. Inflation is the rate of increase in prices over a given period of time. And we ignore it like air in the atmosphere though it affects all our financial planning. But since we chose to not learn about inflation, we do not know its effects.
From now, we will learn about it and see how it is affecting the prices of general and food items, bank interest rates, our investments and more so that we can plan our monthly expenses accordingly.
6. Emergency Funds
Do you have any emergency funds? I don’t and I didn’t realise that I needed them until I was writing this article. Emergency funds can help us pay for some unexpected expenses and saves us the trouble of being cash crunched or getting into debt.
People suggest that saving 6 times your monthly expenses in your emergency funds is the best way to go about it. However, ensure that this fund should be different from your savings.
7. Compounding Money
Compounding money basically means increasing the value of the investment that happens because of the interest earned on the principal amount as well as the accumulated interest. We should understand that saving money would give us nothing but investing it in a better place would compound it and we will be able to make money from money.