Whether you are managing a business or doing a full-time job, keeping track of finances is essential for everyone. You may already know how important money is for everyone, but how you spend matters the most.
The moment you are going through this content, it is possible that someone is spending money on his favorite food. On the other hand, someone could be planning to invest money to get better returns in the future and to ensure financial stability.
Everything has two sides to the picture. Therefore, you have to improve your financial knowledge to make better decisions in your life.
Better financial knowledge allows you to overcome bad financial habits such as overspending and not living a life as per your needs. It gives you the proper financial sense to spend your money wisely.
Especially when you are running your own business, it becomes more critical for you to know about different financial aspects that can make or break the game.
Let’s explore some of the finance terms that you should know better while making other financial decisions.
1. Compound Interest
Compound interest is the amount of interest you have deposited or borrowed. Whether you are saving or investing, compound interest is earned through your deposited amount.
It also includes any interest that you have accumulated with time. On the other hand, if you are applying for a personal loan, the compound interest will be charged on the loan amount.
However, it is better to consult a finance broker before applying for a loan. To make a better decision while applying for a loan, you should understand what does a finance broker do. It will help you get the best loan deal as per your financial needs.
2. Net Worth
The difference between your liabilities and assets is known as net worth. You can add all money you have invested or anything you own to calculate your net worth.
It could be your car, home, or anything in savings or retirement account. Then you have to subtract all the debt, including credit card balances, mortgage balance, and other obligations.
The net number that you will receive will give you a better idea of your overall financial health.
3. Asset Allocation
Asset allocation is the process that allows you to decide where you want to put your money. The three major asset classes include bonds, stocks, and cash. Each of these classes reacts differently to the economy and market conditions.
So, you have to pick the best class as per your financial goals and risk tolerance.
If you want to invest in stocks, then you can grow your money with time. On the other hand, if you want to earn money through investment, then you should put your money in different buckets.
4. Capital Gains
The difference between how much something was originally purchased and its current worth is known as capital gains.
However, you cannot calculate the gain until the asset is not actually sold. On the other hand, if the value of an asset or investment decreases, it is known as a capital loss.
You can pay taxes in the form of long-term capital gains and short-term capital gains when you sell a particular investment.
Rebalancing is known as the practice that can bring your bonds and stocks together to the desired percentage.
For example, if your target allocation is 70 percent stocks and if the stock market is going well, your allocation can be shifted to the 80 percent stocks.
If you want to rebalance your financial portfolio, you can also sell some of the stocks and invest your money in other bonds.
6. Stock Options
Stock options are known as the management incentives that companies offer to employees. It means you have the right to purchase an employer’s stock, but it is not obligatory. You can buy it at a pre-set price within a particular period.
Let’s say if a manager can increase the value of the stock more than the price of his option, the manager can purchase the stock at a low price.
It means a manager can keep the gain if they sell the stock, but all shareholders will get benefit from the increased value of the stock.
7. FICO Score
A FICO score is used to measure the reliability of the individuals that either they can pay back debts or loans on time or not.
It is also known as a credit score that lenders, banks, and financial institutions use to determine the trustworthiness of individuals. Different factors are involved in it, such as payment and credit history.
Higher FICO or credit score means that an individual has a better chance to get more favorable conditions on a personal loan.
A debt or a certain amount that one entity owes to another is known as liability. Bank loans, credit card debts, and payable accounts are some of the liabilities examples. Also, current and non-current are the types of liabilities.
The current liabilities are usually due within a period of one year. In contrast, non-current liabilities last for a longer period, including leases and mortgages. Just like assets, it is important to include liabilities on the balance sheet.
You have to know about different financial aspects to strengthen your financial position. You will be able to make better financial decisions by investing your money in the right place and accomplishing your personal goals.
Also, you will be able to elevate your growth by analyzing what can be beneficial for your financial health. So, you will be able to build new assets, improve your financial stability, and keep track of your expenses.