Everyone would love to build wealth, but it’s hard to build something you don’t understand. Even if you’re a high-income individual, there’s a big difference between being financially literate and financially lucky. Being financially lucky doesn’t mean you lucked your way into a high income, but it means if you’re not financially literate, you’re lucky that you make enough money to cover for it.
There are some pretty complex financial concepts, but even a working understanding of the basics could carry you a long way. Whether you’re getting your start in the real world or you’ve been around the block and are looking for a fresh start, you’re never too young or old to start learning about money. Continue reading to learn some basic financial concepts everyone needs to understand.
Assets
One of the most basic financial concepts is assets. Assets are anything that can be converted into cash, with cash being the most common asset. Other financial tools, like stocks and bonds, are considered assets as well. Non-financial assets, physical assets that hold cash value, are called alternative assets. Fine art, investment properties, and rare cars are among the most common types of alternative assets.
Liquid Assets
Liquid assets are one of the most common financial terms and one of the most basic financial concepts. Liquid assets are anything from bank accounts to cash to stocks and can best be described as any financial tool that can quickly and easily be converted into cash. Cash is the most common liquid asset because it’s the easiest to move.
Income
Income is cash you bring in or attain, whether through working, investing, running a business, or annuities. Most of their cash flow comes from employment for most people, but, as you can see, that’s far from the only kind of income there is. There are other great ways to turn a profit by earning passive income than by putting in hard work at a day job.
Debt
One concept that it’s crucial to understand if you want to make wise financial decisions is debt. Debt is whatever money you owe someone, whether to creditors, lenders, or family and friends. Many people will tell you that it’s best to never go into debt, and while it’s a novel idea, it’s not a very practical one.
Debt can be a powerful financial tool when you use it wisely. The chances are you’ve already used debt to buy a home, car, or pay for college, but using it and understanding it are two different things. One of the main reasons people run into financial problems is they take on debt without understanding how it works, but borrowing can be your best friend or worst enemy.
Some of the most successful real estate investors on the earth have used debt to purchase commercial properties. One of the things that are so attractive about passive real estate investing is that you can get a mortgage to pay for the investment property
and develop it into your own personal money machine.
The important thing to remember about debt is that as long as you have income and a decent credit score, you’ll always be able to get debt by taking out a mortgage or another loan for significant purchases like homes, cars, renovations, and even leisure.
Bankruptcy
Unfortunately, there are instances where people take on more debt than they can handle, and they have a difficult time managing it. Bankruptcy is a financial option when you have a lot of debt and not a lot of money.
Bankruptcy allows you to get a fresh start with your credit history and work with the lenders and creditors to pay them off at a time and in a way more suitable than for you. Depending on what kind of bankruptcy you file, you may even get to keep some of your unpaid-for items.
Bankruptcy cases can be tricky to navigate, so do your due diligence to find the best bankruptcy lawyer in Louisville, KY, to help you with your filing process. The last thing you want is to set yourself up to get a raw deal in your bankruptcy case, but the right lawyer can help you to work out agreeable terms that will help you get back on your feet.
Net Worth
Another term you’ve probably heard of, even if you’re not sure of its exact meaning, is net worth. While some people consider liquid assets and wealth to be synonymous, most experts hold net worth to be the truest indicator of wealth.
Net worth is the total value of a person’s assets against how much debt they have. It’s possible to have millions of dollars in cash and other assets and have a negative net worth—it’s actually a common phenomenon amongst financially illiterate, high-income individuals. That’s why it’s not uncommon to see reports of celebrities and athletes filing for bankruptcy after having sensational careers.
