When it comes to finance, education is power.
You may have spent your 20s developing some bad money habits — and hopefully kicking them — but as long as you master some important money concepts by the time you hit 30, you’ll be well on your way to building wealth.
Here are nine fundamental money concepts every 30-year-old should know:
1. Net worth
“Your net worth is a measure of your financial health,” said certified financial planner Mary Beth Storjohann, founder of Workable Wealth. It’s the result of your total assets minus your liabilities, or the amount you owe.
“Net worth can also be used to measure how far you’ve come over time,” Storjohann says.
You’re in good standing if your net worth is well into the positives, and you have some work to do if your net worth is anywhere in the negatives.
Inflation is the increase in the price of goods and services over time. Historically, the rate is 3% per year, Storjohann says. As prices rise due to inflation, the power of your dollar diminishes.
“What’s most important is whether your income is rising at the same rate as inflation,” Storjohann says. Use this inflation calculator to find out if your salary is keeping up with the annual inflation rate in the US.
“Liquidity is how accessible your money is,” Storjohann says. Cash is the most liquid your money can be, because you can access it immediately.
“Your emergency fund should be in a cash account since it needs to be readily available in case of an emergency,” Storjohann says. You may also store your emergency fund in a money market account — another safe and liquid alternative — where you can earn 1% interest on your money.
In contrast, assets such as your home or your retirement accounts are the least liquid. The money isn’t at your fingertips, but rather invested, allowing it to gain value over time.
Likewise, Storjohann says, “Money you have invested in the stock market is not as available, because you risk losing some of it if you take it out.”
Interest is a double-sided coin.
When it comes to saving money, “Interest means your money is going to work for you,” Storjohann says. When you put your money in a savings account at a bank, you’re letting that bank borrow your money. Interest is what they pay you to borrow it; it’s a percentage that can go up or down depending on the state of the economy.
Most traditional savings accounts have an interest rate of 0.01%, whereas a high-yield savings account could earn you 1% interest on your money.
On the flip side, when you borrow money from someone — whether your credit card issuer or your student loan lender — you pay interest to them for borrowing that money. The longer you take to repay a loan, the more you’ll pay in interest.
5. Compound interest
Compound interest is on your side; it’s basically the snowball effect applied to your money. As time goes on, the money in an account will earn interest, and that sum of money will earn interest on itself, and so on.
Here’s an example: If you deposit $100 with an annual interest rate of 7%, after a year you’ll have $107. The following year, you’ll be earning 7% interest on $107 so you’ll earn $7.49 instead of $7.
Compound interest is the bedrock of the financial world. Specifically, it can make all the difference when saving for retirement as it rewards those who start saving early and often.
6. Bull market
A bull market refers to a market where stocks are up 20% from a low. A bull market typically means the economy is in a good state, and the level of unemployment is low.
7. Bear market
Just the opposite of a bull market, when stocks are down 20% from a high, it’s called a bear market. Share prices are decreasing, the economy is in a downfall, and unemployment levels are rising.
It sounds like a bad thing (and it certainly isn’t good), but Storjohann says the most important thing to keep in mind is that the stock market is a “roller coaster,” meaning it’s bound to go up and down and people shouldn’t panic every time the market takes a turn. “Millennials have time on their side,” she explains, “and over time, money has the ability to grow.”
8. Risk tolerance
If the stock market is a “roller coaster,” according to Storjohann, your risk tolerance is how comfortable you are weathering the ups and downs.
“It’s about whether you understand the cycle or stress out about it,” she says. If you have a high risk tolerance, you may get excited during a market downturn and choose to be more aggressive with your investments. If you’re risk-averse, however, you’ll tend to be less aggressive, or perhaps steer clear of the market all together.
Risk tolerance isn’t just emotional, though. Ultimately, it depends on how much time you have to invest (your age), your future earning potential, and the assets you have that are not invested, such as your home or inheritance. Major banks such as Wells Fargo, Merrill Lynch, and Vanguard provide online tools to help determine your own risk tolerance.
9. Asset allocation and diversification
Asset allocation is the balance of risk and reward and the basis of diversification, which allows you to effectively spread your wealth.
Take a low-cost target date fund, for example. It’s a diversified retirement account that invests your money into a combination of stocks, bonds, and alternative assets and automatically adjusts your asset allocation and risk exposure based on your age and retirement horizon.
If you keep your eggs “all in one basket,” as Storjohann describes it, what happens to your wealth if the basket falls and breaks? You’re going to want money stored elsewhere. “Diversification allows for balancing,” Storjohann says. “You give up some upsides, but you lower some downsides.”
Original reporting by Sarah Schmalbruch.
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