Introduction
Investing for financial growth 2025. This beginner’s guide from LoppZ simplifies key investment concepts like net worth and liquidity.
$ 0.13 You earned in your savings account last year, which you are not getting close to your money goals. Investing continuously for a long time is the only proven way to meet your financial goals and create money.
But learning to invest as a beginning can be difficult as learning to speak a new language. The most clever way to deal with this is to work to expand your knowledge.
In this post, you will learn some most important investment concepts that you have to know to invest your money wisely. So, take a deep breath, relax, and start!
Net Worth
Also known as shareholder’s equity, this is the measure of everything a company owns minus everything it owes. In other words, net worth is the value of the assets a company or person has, minus the liabilities they owe.
Assets and liabilities are critical components of every company, and they are just as important to the individual investor. While an asset is anything owned that carry’s a monetary value, liabilities are items that drain the resources.
Assets can be things like buildings that increase in value over time or provide rental income month to month; whereas liabilities are things like loans, company trucks, or office supplies, things that you consume.
In the words of Robert Kiyosaki, “The property puts money in your pocket, whether you work or not, and the liabilities take money from your pocket.” If a company owns more assets than liabilities, it is said that it is a positive net value.
And this is one of the signs of good financial health and wealth of a company. On the flip side, if the liabilities are more, it shows a negative net worth.
While we are looking at these concepts from an investor’s perspective toward a company, know that net worth is also a great financial number for any individual to track their own fiscal health.
- Your personal net worth can also tell you how well or bad you’re doing financially and show you where you need improvement.
Inflation
Another useful piece of information you need is the rate of inflation. Most people associate inflation with just an increase in the price of groceries and gas or the depreciation of the dollar in their wallet.
In reality, inflation also takes a bit out of your Return On Investment, or your ROI. Inflation which is a sustained trend of increase in prices from year to year also represents the rate at which the real value of an investment is erased over time.
Inflation tells you exactly how much of a return your investments need to make for you to sustain your current standard of living. This is why the $0.13 you earned from your savings account isn’t doing you any good.
To illustrate this suppose you can buy a can of organic chocolate milk for $20 per hundred pounds this year and the yearly inflation rate is 10%.
Hypothetically, next year the same milk will cost 10% more at $22. So, if your investments don’t increase by at least the same 10%, you’re losing money.
That’s why as an investor, it’s preferable to buy investment products with returns equal to or greater than the rate of inflation. For instance, if your company stock returned 9% and inflation was 10%, then our real return on investment would be negative 1%.
Meaning that we’re losing 1% of our money in the investment. This is why well-diversified investment portfolios are often suggested. With equities, bonds, real estate, gold, etc in a portfolio, you try and hedge against inflation with different investment types so that even if one type suffers a bad inflationary year, the hope is that some of your other investments would counteract and have better returns.
Liquidity
This means how quickly and easily you can get your hands on your money whenever you need it. In a more sophisticated investing context, liquidity refers to how easily or efficiently an asset or security can be converted into cash without impacting its market value.
For instance, cash is highly liquid, you could use it immediately to go buy whatever you need. A house, is a bit more illiquid. You’d have to first sell it before you could use funds to then buy something else.
Liquidity allows you to seize other great investment opportunities since you have the ready cash and easy access to funds. Liquidity in an everyday life could be your emergency savings account or cash on hand that you can access in an unexpected event or investment opportunity.
Having said that, as much as you might want to have cash in your savings account, it’s also necessary to invest as much as you can in investments that compound interest over time.
- This is a delicate balance, but you want to protect against inflation subverting your liquid assets, particularly your cash.
Compound Interest
When the interest you earn from an investment is reinvested, earning you more interest is often referred to as compounding interest. Think of it as money making money.
And the money that money makes, makes more money. If that blew your mind, well, it should. Because that’s why Albert Einstein calls it the eighth wonder of the World.
To help you understand how this wonder works in action, here are Diana and Jackson – two colleagues who became serious about investing for retirement at age 22 and 31 respectively.
They chose a good growth mutual fund that tracks the S&P 500 with an annual return of 11%. Diana invests $2,500 every year and stops contributing money at 31 with a total amount around $22,000 contributed in that time.
Jackson also invested the same $2,500 every year, but he invests for a full 38 years for a total contribution amount around $95,000. At the time of their retirement age at 69, Diana’s investment has grown to over $2.3 million and Jackson’s has grown around $1.5 million! Nine years’ start difference made a near 1-million-dollar difference in portfolios.
If you haven’t figured it out by now, the power behind compounding interest is Time and Interest Rate. This is why starting investments early and getting a good interest rate matters a lot.
The longer your investments stays, the more money your money makes you make due to compounding interest.
Market Crashes
This describes a sharp market decline over a sustained period of time. Market crashes are drastic, typically unforeseen drops in prices. This could be due to catastrophic events, speculative elements, or general economic conditions sweeping through the market.
Historically there are many examples of situations including dotcom bubble crash: in 2000-2002, the global financial crisis of 2008–2009, Kovid-19 epidemic of 2020 and market downtime in 2022.
While accidents can result in damage, the market essentially jump back. This is why having a long-term approach to investing is the most profitable position.
But to hold a long-term position, would require you to create a strong portfolio that can hold in the downtimes. This kind of portfolio provides a healthy mix of security in good and in lean times.
To do this successfully, you have to invest carefully to reduce your risk to tolerate as many dives as possible.
Risk Tolerance
Your ability and willingness to withstand a decline in market price is your risk tolerance. And your level of risk tolerance depends on your financial goals and the speed at which you would like to grow your investment.
To determine the risk tolerance that’s right for you, ask yourself “will I be comfortable maintaining this position when the market experiences large dives?” The answer to this question will not only help you in maintaining a proper risk tolerance level but will also empower you in deciding whether to eat well or sleep well.
On Wall Street, “Eat well” means holding a higher-risk asset that brings in a significant return. But not without the downside of higher volatility and higher risk of losing money that causes an investor to lose sleep.
As an investor, you can choose to go for higher returns with increased stress or a considerable return and sleep well. However, when your portfolio causes you stress, it may indicate that you have a high -risk investment as much as you can handle.
To reduce such stress, you can consider reducing the risk on your portfolio. But understand that you can never completely eliminate risk as every investment carries some form of it.
Opportunity Cost
Since every investment carries some form of risk, you might want to choose one over the other. This is where you need to understand the opportunity cost of such a choice.
Opportunity cost is the value of what you let go of when choosing between two or more options. As an investor, you have to understand that your investment choices will always have future and immediate gains or losses.
That’s why you have to always ask yourself “Am I properly allotting my money?” For a legendary investor like Warren Buffet, the true cost of any investment is not the amount he paid at the time of purchase.
Rather, it’s the value of the investment he didn’t make as a result of buying the current investment – opportunity cost. Opportunity cost is like the proverbial fork in the road, with something to gain and lose in each direction.
- To make an informed decision on this road, you have to estimate the losses and gains for each decision and then stick to one.
Time Value Of Money
The time value of money is the concept that the current money is more than the same amount in the future.
This is true because your current cash can be invested and earned returns, which can generate a large amount in the future.
But why is this valuable? Well, when you consider things like inflation and opportunity costs, it could help you evaluate if it’s a better idea to spend money now or save and invest for later, based on the prices of goods and commodities.
That’s it for today’s post. We hope you learned a little bit of some of the investor concepts you should know when considering investing your money, particularly in the stock market.
