8 Key Areas Of Finance You Need To Understand
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8 Key Areas Of Finance You Need To Understand
Understanding core aspects of finance could be a bit of a challenge if you have no finance background.
The reality is that even graduates from prestigious schools still struggle to put their financial lives in order let alone individuals with no college degree.
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Schools these days do not teach financial literacy… what you find mostly in accounting.
As long as you want to make money and handle it properly, financial literacy is a vital skill you need and that’s what I’ll be sharing in the article.
According to statistics by PossibleFinance, only a third of the global adult population understands the basics of finance.
With adulthood starting at 20, we could say there are about 4.1 billion adults in the world.
With that in mind, over 2.7 Billion adults struggle with issues relating to personal finance.
If this paints a picture of your situation, don’t worry, I will take you through eight areas of finance that you is vital for your financial success and freedom.
Key Highlights
🎯 Schools rarely teach financial literacy, you may need to learn on your own.
🎯 You can develop good investment skills by taking some online investment courses.
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🎯 Budgeting is one of the foundations of finance.
🎯 Once you understand the concepts of debts, it becomes easier to tackle them with a repayment plan.
🎯 Your credit report indicates whether a lender is safe to give you money or not.
🎯 You could consider draughting for information about finance via online courses and eBooks.
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SEE ALSO: 5 Sure Ways to Cut Expenses to Grow Your Business
Let’s get to the basics
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1. Investment
According to Investopedia, investment has to do with allocating resources (especially money), with the expectation of generating profit.
You can invest by starting up a business with available resources at your disposal or making direct investments in assets via purchasing real estate for future profit.
Investment is one of the most critical aspects of finance.
However, it turns out to also be a daunting topic for many.
Today, most people do not save enough for retirement because they fail to invest.
Via investments, your available cash could grow faster to compound enough funds for whatever purpose you have in mind.
Unlike some years back, you can develop good investment skills by taking some online investment courses.
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1. How Not To Suck At Investing: Understanding Stocks Part 1 (By Skillshare)
If you need to grasp clearer investment concepts, you should consider taking up any of the courses below.
2. Stock Market Course For Beginners “Investing 101” (By Stock Market Investing 101)
3. Investment and Portfolio Management Specialization (By Rice University via Coursera)
2. Budgeting
Budgeting is one of the foundations of finance.
As a result, it is one of the most critical areas you must understand.
To simply put, budgeting is the careful observation of your estimated income (especially in business sales/profit) in comparison to your expenditure over a particular period.
This area of finance deals with the financial planning of you or your business and how you intend to use resources over a specific time.
Despite being a critical area of finance, few people understand the basics of budgeting.
A popular budgeting method used across the globe today is the 50/30/20 rule.
Via this budgeting system, you allocate 50% of your income towards your needs (Insurance, housing, etc.), 30% to your wants (traveling, shopping, etc.), and 20% to paying debts or savings.
The 50/30/20 is a popular method of budgeting used by most business owners worldwide, and it proves to be very effective.
Some apps for easy budgeting in 2022
- YNAB (You Need A Budget)
3. Taxes
Tax is one of the most dreaded areas of finance.
However, it can become even more dreadful when you do not understand it.
Whether we are aware of it or not, we all earn income and pay taxes at some point.
While most people pay their taxes manually, they deduct it automatically before pay arrives in some cases.
Although it is not compulsory to be an expert in tax operations, it is advisable to have basic knowledge of the concepts of taxes.
To figure out tax concepts, you can consider seeking advice from an experienced accountant.
Alternatively, you could enroll in the ‘Taxes and decision making’ course on edX to understand taxes better.
4. Debts
As of 2022, research shows that personal debt in the United States currently totals $14.96 trillion.
Scaling down to the individual level, the average American currently has a debt of $58,000+. A whopping 77% of all households in America have at least one form of debt.
From the research citations above, you can confirm that debts are more rampant today than ever.
Despite being so common, many people do not understand the complete basics of debts and how to manage them.
It is crucial to understand debts, as it will enable you to know the whole policies of all the debts you have and how to treat them with the required urgency.
For each debt you have, you should understand the; interest rates, total balance, expected payoff date, and minimum monthly repayment cap.
Once you understand a debt completely, it becomes easy to tackle it with a repayment plan.
There are also a bunch of debt repayment methods like the Debt Snowball.
Via this debt reduction method, all you have to do is list all your debts from the smallest to the biggest.
In this manner, you have to start paying them off from the smallest to gain more psychological satisfaction as you complete these tasks.
5. Insurance
Despite being one of the most critical areas of finance, so many people know little about Insurance.
Although Insurance may seem unimportant, everything changes once an emergency hits.
During times of crisis, you could even blame yourself for not knowing much about Insurance policies and how they work.
As humans, we are prone to encountering accidents or breakdowns in certain aspects of life.
Whether in health or other aspects of life, Insurances always serve as the perfect backup.
As a result, it is one of the best finance topics.
Typically, buying an insurance plan is as easy as paying an insurance company a monthly fee to cover all liabilities in case of emergencies.
There are numerous forms of Insurance today.
Some of them are:
- Life Insurance
- Health Insurance
- Property Insurance
- Auto Insurance
- Disability Insurance
Some of the best insurance firms in the world are:
- United Healthcare (UNH)
6. Credit
Just as it is essential to know the basics of debts, it is also vital to understand credits.
Typically, credit is the ability to borrow money from a person or financial company.
When talking of credit in finance, it either represents your credit score or credit report.
A credit report is a comprehensive list of all your account transactions. This report includes your debts, how much you owe, and what you have paid.
Your credit report indicates whether a lender is safe to give you money or not.
Before securing a loan, most lenders require your credit reports.
On the other hand, your credit score is the numerical rating of your credit report.
These scores are often between 300-850, showing how trusted you are with debts.
Typical outline of the credit scores:
300-579 (Very Poor)
580-669 (Fair)
670-739 (Good)
740-799 (Very Good)
Exceptional (800-850)
7. Networth
While most people talk about net worths, only a few understand how to calculate it.
As simply as possible, your net worth is the difference between your assets and your debts.
To get a person or company’s net worth, you have to sum up all their assets and subtract the total from their debts.
You can also calculate net worth with the net worth calculator tool by Forbes.
8. Real Estate Ownership
Real estate ownership is one of the most common goals today.
According to the World Property Journal, the combined housing market in the United States hit an eye-popping $33.6 Trillion in 2020.
That should tell you that the real estate industry is indeed significant.
Moreover, homeownership is the dream of most average Americans.
Thus, it is one of the most critical areas of finance and business to understand.
With the required experience, a buyer can even buy a real estate property on a monthly payment basis, automatically deducted from your account.
Understanding property insurance and taxes are always of great advantage when real estate ownership comes to play.
As a result, you should understand the basics of all areas of finance in this article.
Final Thoughts
Having seen this article, you can confirm that financial literacy is necessary in this modern world.
If you lack sufficient knowledge in this article’s finance areas, you could consider looking for information via online courses and eBooks.
With basic knowledge in all areas given in this article, you can manage almost any financial situation, no matter how tricky it may appear.
In all, we do wish you success as you strive to improve your financial literacy.
