Some cool financial concepts to ponder

Some cool financial concepts to ponder

Over the next few blog posts I’ll be sharing a couple of cool financial concepts, principles, rules and guidelines I came across during my research.  And as we dig deeper – on our journey to financial independence (fi) – more detailed concepts will be discussed.

Some Cool Concepts

But a good start is Kristia van Heerden’s ( as discussed over at https://justonelap.com/podcast-five-concepts-will-make-rich/ ) 5 fundamental concepts that will make you rich.  Understanding these concepts at a fundamental level will really make you see how the wealth-building process functions:

Interest

Interest is a fee you pay for the privilege of using someone else’s money (think bank loan, credit card debt, or bond on your home), or the fee you earn from someone else for the privilege of using your money (think investment into stock market, buying government bonds, money in the bank, investment into real estate)Interest Rates

Inflation

The buying power of your money diminishes over time.  One year from now, you’ll not be able to buy the same “stuff” with say R100 as you’ll be able to today.  Things become more expensive over time.  This is called inflation and is a concept you need to understand very well, since your investments will need to grow faster than inflation, if you want your money to have more buying power later in your life than it has now.Inflation

Compounding

Called “the eighth wonder of the world” by Albert Einstein, compounding is really at the heart of wealth creation.  If you have for example R100 invested in some form of investment that gives you 5% growth per year, after one year you’ll have R105 in your investment.  But what happens now in year two?  The 5% growth isn’t on the initial R100, it is on the R105! So after year two you’ll have R110.25, instead of R110.  That extra 25 cents is from compounding.  Doesn’t sound like much, but leave it for enough years and it will really astound you how much your investment can grow!Compounding Interest

Assets & Liabilities

Assets are “things” that has the potential to earn you money, or to grow in value.  For example stocks in the stock market, a good education, etc

Liabilities are “things” that cost you money.  Your fancy new car, your fancy new cell phone, your short-term debt (on your credit card, for example) are all liabilities.  They lose value over time and they cost you money to own them.Assets Liabilities

Low-Cost Index Tracking Products (ETFs)

An index tracking product is a very good place to invest your surplus money so that it can grow over time. An example of an index tracking product is what we call an ETF (Exchange Traded Fund).

ETFs are basically baskets of shares, for example a JSE Top 40 ETF that tracks the top 40 companies on the JSE (for example ETFs from SATRIX: https://www.satrix.co.za/products ) and invest in their underlying shares.  We’ll be talking a lot more about ETFs in future posts.  They’re very cool!Exchange Traded Fund

I hope these concepts are clear in your mind, they’re really powerful concepts that will aid us on our way to FI!

Cheers!

Hamster

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