Finance 101

Financial literacy is about more than just understanding financial concepts; it's about feeling confident and empowered to make informed decisions about your money.

We teach so many useless things in school, yet nothing about the most important financial decisions, that impact your everyday life!

We don’t teach anything about how mortgages and loans work, how to make your money work for you, how to look out for when deals may be a bit too good to be true…

I have a degree in Economics, worked in Finance, did an MBA, and even in these environments, surrounded by people who truly understood some of the most complex financial concepts, many of them didn’t fully understand basics that impacted their personal finances.

If even they don’t understand it, how can we expect everyone else to!

By arming yourself with knowledge, you're taking the first steps toward financial empowerment.

This blog talks about a lot of tactical specifics, that can help you out, but as a starting point, I thought helpful to put some basics in here… there are some terminologies that we will use throughout, so good for you to be armed with them so you can sound like a pro and truly understand some of the things you are signing up to when you make financial decisions.

Remember, financial independence is within reach, and by taking control of your finances today, you're investing in a brighter financial future for yourself and your loved ones. So, embrace the journey, continue to educate yourself, and watch your confidence grow as you navigate the world of personal finance with clarity and purpose.

Don't be afraid to ask questions, seek out resources, or consult with financial professionals if needed. There are plenty of educational resources available, from online courses to books to workshops, designed to help you build your financial knowledge and skills.

Principles of Investing

Navigating Risk and Return

Investing is another critical aspect of personal finance that can seem daunting at first. One of the fundamental principles of investing is the relationship between risk and return.

Generally, investments with higher potential returns also come with higher levels of risk.

If someone said to you, “if you roll a dice and get a 6, I will give you £6”, your chance of getting a 6 is 1 in 6, therefore if each dice roll cost £1, you would theoretically breakeven after rolling the dice enough times. However, if it was a special dice with 12 sides (1-12), your chance of rolling a 6, would be 1 in 12, so for the same £1 investment, you would want a return of at least £12, otherwise you would always take the 6 sided dice option.

Financial products follow a similar pricing. For instance, stocks have historically offered higher returns over the long term compared to more conservative investments like bonds or savings accounts. However, stocks also carry a higher risk of price volatility and potential losses.

On the other hand, while bonds and savings accounts may offer lower returns, they typically come with lower levels of risk, making them suitable for those with a lower risk tolerance or shorter investment horizon.

Understanding your risk tolerance and investment goals is key to building a diversified investment portfolio that aligns with your financial objectives.

Basics of Compounding

Compounding is a simple yet powerful concept in finance. Imagine you invest some money, and over time, it earns interest. Instead of taking the interest out, you leave it in your account so it can earn more interest. This means you start earning interest on your interest, not just on your original investment.

Here's an example: if you put $100 in a savings account with an interest rate of 5% per year, you'd earn $5 in the first year. If you leave that $5 in the account, the next year, you earn interest on $105, not just the original $100. This cycle continues, and over time, your money can grow significantly because each year's earnings add up and earn even more.

The key to making the most of compounding is to start investing early and let your money grow for a long time. The longer you leave your money invested, the more it can grow, thanks to the magic of compounding. This is why compounding is such an important strategy for building wealth over time.

Glossary of Key Terms

Top Tip: Use Ctrl + F to quickly find specific terms you are looking for

• Return:

  • What it is: The money you earn from an investment

  • Example: If you invest £100 and later have £110, your return is £10

• Breakeven:

  • What it is: The point at which your costs and earnings are equal, meaning you haven't made or lost money

  • Example: If you spend £200 to start a small business and you earn £200 from sales, you've reached breakeven

• APR (Annual Percentage Rate):

  • What it is: The yearly cost of borrowing money or the yearly earnings from an investment, including interest and fees

  • Example: If you borrow £100 with a 10% APR, you'll owe £110 after one year

• Capital:

  • What it is: Money or assets you can use to invest or start a business

  • Example: If you have £5,000 saved up to start a business, that £5,000 is your capital

• Bonds:

  • What they are: Loans you give to a company or government in exchange for periodic interest payments and the return of your money after a set period

  • Example: You buy a £1,000 bond that pays you £50 a year in interest. After 10 years, you get your £1,000 back