Do you know 9 financial concepts and 15 common sense of finance?

9 Fundamental Financial Concepts

net asset value

Your financial health is measured by equity, which is your total assets minus your total liabilities.

If your net worth is positive, you’re in good financial shape; if your net worth is negative, it’s time to work on it.

inflation

Inflation, for short, refers to the rate of increase in the prices of goods and services, usually measured by the Consumer Price Index (CPI).

Higher inflation means that prices rise faster and the less you can buy with the same money. vice versa. Therefore, it is very important to ensure that your income growth rate is not lower than inflation. If your income cannot keep up with inflation, your purchasing power will decrease.

Most of the time, we are in an economy with inflation, moderate inflation is good for economic development, and the average inflation rate in the history of the United States is 3%.

fluidity

Liquidity measures the ability of your assets to be converted into cash. Cash is the most liquid asset because you can use it anytime. Assets such as real estate and pension accounts are illiquid because they take time to discount. The so-called long-distance water cannot quench near-thirst. When you need money urgently, liquidity is very important.

bull market

A bull market is when the market is going up, which is a good thing. In a bull market, stock prices rise. A bull market usually means that the economy as a whole is in good shape and unemployment is low.

bear market

A bear market is the opposite of a bull market. In a bear market, stock prices fall, the economy declines, and unemployment rises.

This sounds bad (and it is). It is important to understand that the market is a "roller coaster", which means that it will inevitably go up and down, and there is no need to panic every time the market goes down.

risk tolerance

Risk tolerance refers to the extent to which you can adapt to these fluctuations in the market. Your risk tolerance determines whether your investment style is aggressive or not.

Risk tolerance is not only determined by your emotional sensitivity, it also depends on your investment cycle, your potential future income, the amount of assets you have not invested, etc.

Asset Allocation and Diversification Strategies

Asset allocation, where you put your money, depends on your individual needs and goals. It's also the foundation of your diversification strategy.

The purpose of a diversification strategy is to spread risk - if you put all your eggs in one basket, what will happen to your wealth if the basket falls? So it makes sense to keep your assets in different places. "Diversification makes your investment more balanced. While you sacrifice some gains, you also reduce other losses."

It should be pointed out that simply diversifying investments does not necessarily diversify risks. For a diversification strategy to be effective, you must adopt a corresponding strategy across investment classes.

Interest

Depending on the situation, interest can work for you or against you. When you save money, interest means your money will 'make' more money for you. When you deposit money into a bank account, the bank borrows money from you and pays you interest, which depends on the state of the country's economy.

Also, when you borrow money from someone else—think your credit card—you pay that person interest on it, just as your bank pays you interest. You keep paying interest until your principal is paid off. "That's why stay out of debt, if you owe money, pay it off."

compound interest

Simply put, compound interest is interest that increases over time. Here's an example: If you save $100 at an annual interest rate of 7%, you'll have $107 in one year. The next year, your base for calculating interest will be $107 instead of $100.

Don't underestimate compound interest, this is an investment technique called the eighth wonder of the world by Einstein. Compound interest may not make you rich overnight, but given enough time, it will eventually. Believe it or not, Buffett did. Regarding this point, "Stock God" once published the famous snowball theory: "Compound interest is a bit like rolling a snowball from a mountain. At the beginning, the snowball is very small, but when it rolls down for a long enough time, and the snowball sticks properly, In the end the snowball will be big and big."

15 must-know financial common sense

There is no free lunch in the world, and of course there is no free income;

The necessaries of life are cheap, only the luxuries are expensive;

Don't buy a bad product just to be cheap;

A good product can also be a bad deal if the price is too high;

The purpose of insurance is to prevent financial catastrophe, and any non-financial loss cannot be remedied by insurance;

Financial products are nothing more than agreements written on paper. Read them anyway, over and over until you understand them;

The cost of borrowing money is interest and worry. So make sure that all borrowing is not to the extent that it worries you. Don't borrow money to buy products that will depreciate. Otherwise, you will lose money on both sides;

Never rely on the appreciation of assets;

If the price is too high, please be patient;

Complicated trades are generally a bad trade;

Don't confuse income with wealth. Earnings that end with a dismissal notice or rate change;

Don't rely on Social Security. The benefits you receive from Social Security will be a fraction of the Social Security benefits your grandparents receive now;

Inflation is not just an increase in prices, but a decrease in the value of money;

There are no warranties, only guarantors. When hearing "it's guaranteed," you should ask: "Who guaranteed it?";

Expediency is often costly, and neglect is fatal.

Traders, if you like this idea or have your own opinion about it, please write in the comments. I will be happy 👩‍💻

Trade active:

Read it carefully, I believe it will be of great help to your future transactions