Core Financial Concepts You Need to Understand

Creating wealth is the American Dream. Whether by owning a business, working in a high-paying career field, investing, or any combination of the three, you need a strategy to build lasting prosperity. However, you have to understand money in order to make it work for you.

There is a huge difference between having money and knowing what to do with it. That’s why you likely hear as many riches to rags stories as tales of rags to riches. Continue reading to learn some financial concepts that will help you to prosper now and in the future.

Liquid Assets

img

The first essential financial concept we’ll discuss is liquid assets. Liquid assets could best be described as all of the assets you can quickly and easily turn into cash without losing their value. Liquid assets include, but are not limited to cash, any money in a checking or savings account, and even certain types of investments.

Sometimes when you apply for a loan or are audited by the IRS, you’ll be asked to describe your liquid assets. In that case, you would detail the type of assets you have and their total value.

Debt

To succeed financially, the most important financial concept to understand might be debt. Debt is whatever money you owe to lenders or creditors. People take on debt for many reasons, but some of the most common ones are college tuition, mortgages, credit cards, and automobiles. How much debt you owe is one of the key factors of your net worth, which is another financial concept we’ll discuss later.

Net Worth

img

To understand wealth, you have to understand how to measure your wealth. The term net worth is usually used to express wealth. Your net worth is your assets’ total value, including real estate, liquid assets, and investments, compared to how much debt you owe. Many people have millions of dollars in liquid assets who have a low or negative net worth because they don’t understand how money works and have more debt than assets. Strive never to become one of those people.

Investor

An investment is any asset you buy intending to make a profit, and an investor is someone that, ultimately, everyone should seek to become. An investor is any corporation, such as an investment company or an insurance or company, or a natural person, which is an individual who lends money or buys stocks intending to get more than they paid.

There are many means of investing. One of the most common ways to invest is in real estate. People also invest in stocks, which are portions of a company, and bonds, which are a way of loaning money to a corporation or government.

Qualified Investor

If you and your spouse are high-income natural persons or you and your spouse have a combined net worth of over $1 million, you can become qualified investors. A qualified investor is someone who invests in hedge funds, venture capital funds, and other unlisted securities.

To become a qualified investor—also called an accredited investor or qualified institutional buyer—you—and your spouse, if you’re declaring your joint income—will have to go through a qualification process.

The purpose of the qualification process is to determine your investor status and ensure you can manage the liabilities of high-dollar investments. They may also put a limit on how much you can invest before undergoing the process again. Ultimately, the filing process is to ensure you have an income level that would allow you to live on if your investment funds were to dissipate.

Bankruptcy

img

Another financial concept you need to be aware of is bankruptcy because, depending on how you use it, it could be your saving grace or downfall if your debt becomes insurmountable. If your debt grows beyond your ability to pay it, then a Louisville bankruptcy lawyer with great credentials and a winning reputation can help you get out of debt and get a fresh start. You don’t necessarily have to have a lawyer to file bankruptcy. However, bankruptcies are difficult to arrange and work through, so it’s best to allow a bankruptcy lawyer to handle your case.