Do you remember when you were learning how to read? When you were just starting, you probably didn’t like to practice very much. However, when you had an understanding of the words and became literate, reading probably became more fun! Just like when you learned to read, learning to be financially literate takes some practice. However, you will be thankful when you have an understanding of how to wisely manage your money. In order to become financial literate, you must understand some principles of financial literacy. We will talk about four foundational principles in today’s blog.
The Difference between an Asset and a Liability
An asset is anything that puts money in your pocket. A liability is anything that takes money out of your pocket. To illustrate the difference, we will use your home as an example. Many people think of their house as an asset. This isn’t really true because your home takes money out of your pocket each month in the form of taxes, maintenance, etc. But if you own rental properties, tenants pay rent, maintenance costs, taxes, and more. This is money going into your pocket each month, making these properties an asset.
Cash Flow versus Capital Gains
When investing for capital gains, you invest your money and hope that the price will go up. The problem with this is that you don’t have any control over whether or not the price goes up. Investing for cash flow gives you more control over your income. For instance, you could buy investment real estate, have tenants to pay the expenses, and collect rent each month. This makes it an asset. If there are capital gains in the end, that is a bonus.
Using Debt to get Richer
Debt isn’t typically viewed as a money maker. However, it can be used to create wealth. There are two kinds of debt – good and bad. Bad debt comes from borrowing money for liabilities such as using credit cards to buy big TVs or borrowing a line of credit on your home. This is the debt you want to stay away from. Good debt is used to purchase assets. Think of our previous example of purchasing rental property. When you purchase that property using the bank’s money, you can collect money from your tenant to pay off debt and then pocket the profit.
Learn How to Make Your Own Financial Decisions
If you aren’t confident in your financial knowledge, ask experts for help. They will help you learn how to make financially intelligent decisions that can give you the confidence to think for yourself. The wisdom needed to be financially literate only comes from the desire to learn about what courses of action are best.
April is Financial Literacy Month and Alpine Bank wants to help all of our customers gain a fuller understanding of wise financial decisions. If you have any questions, please feel free to contact us.