Your first bank account and pay-cheque, unfortunately, don’t come with a how-to manual, but understanding how money works is an important element of wealth building. So, we’ listed five important concepts that can assist you on the road to better money management and prosperity.
Your net worth is the result of your total assets minus the total amount of money you owe. Assets include cash and investments, your home (if you own it), cars or anything else of value. Liabilities are what you owe on those assets, including car loans and bonds, plus loans and debt. Most young people have a low or negative net worth because they are just starting out, but as your income increases, their net worth is likely to improve.
Inflation refers to the continuous increase in the price of goods and services over time. As prices rise, we tend to be able to afford less and less, unless our income increases at a higher rate. To combat inflation’s effect on savings, it’s advised that you increase your savings yearly by at least the current inflation rate.
Liquidity is how easily accessible your money is. Cash is the most liquid your money can be as you can access it immediately. Money invested in the stock market, for example, is not as easy to access as cash because you risk losing some of the value if you withdraw funds when the market is low. A successful investment portfolio consists of cash and fixed assets.
Your risk tolerance refers to how financially comfortable you are with big upward or downward movements in the markets, and depends on how much time you have to invest, your future earning potential, and the assets you have that are not invested (such as your home or inheritance). Generally speaking, the younger you are, the higher your risk tolerance should be
5. Time value of money
This is the idea that money available at the present time is worth more than the same amount in the future because it can be ‘put to work’ now earning interest in an investment or savings account.
Getting familiar with the above concepts is the first step on the road to financial stability, but it’s always a good idea to speak to your Standard Bank financial advisor, too. Our dedicated team is on hand to create an effective financial management plan that will suit your current lifestyle and needs.