Although it may appear obvious, it is worth noting that when discussing Fintech, people prefer to focus on the technology side of things rather than the commercial side of things. Although technology is incredibly important, bear in mind that it is used to support financial services, thus the finance journey is crucial. Understanding financial principles are necessary for understanding the big picture.
What are the top five finance skills you should have in order to better understand fintech if you were to pick just a few? Not only that but what are the most critical skills and principles for success in all facets of your personal and company finances?
1. Budgeting
Budgeting is a critical financial skill for both individuals and organizations, but it is also one of the hardest to learn! It is high on the list of the most critical finance skills to acquire in order to understand fintech better. It is critical to understand how much money comes in and how much money leaves. You will be unable to invest or acquire wealth as long as you do not understand this.
That is also true for businesses: keeping a tight grip on spending is critical to enhancing your bottom line. Set a timetable for yourself, collect your financial statements, and try to construct a budget. Even though it appears tough or tiresome, knowing how to budget and control your expenditure is quite important. It will help you avoid financial issues. You will be able to put the extra cash to good use.
Fin-techs have noticed this, and there is a range of tools available, such as personal finance management (PFM) embedded into current accounts or independent programs, or cashflow forecasting capabilities, that may make your work simpler and help you become more skilled at financial planning.
2. Avoiding bad debt
To begin with, why is it vital to differentiate between good and bad debt? Because taking on debt is not a terrible experience in and of itself. Using debt to enhance earnings is a positive thing from the standpoint of financial efficiency. This is known as financial leverage, and it is quite common in the commercial world.
Consider acquiring a mortgage with an appealing interest rate or a business loan with an interest rate that is lower than your internal rate of return as an example of great debt (IRR). So, just what is bad debt? As you might expect, everything with a high-interest rate fits into this category. Credit cards are an outstanding example.
You might be able to fast surpass your credit limit and then end up making only the bare minimum payments, which amounts to incurring interest for the rest of your life (literally for decades in some instances). You should aim to avoid bad debt as much as possible since it will hurt your chances of receiving good debt in the future and will limit your capacity to save and hence invest.
But, more significantly, why would you pay someone so much for their investment if you can't get the same return on your own? This does not appear to be logical. Fin-techs have targeted these use cases by inventing novel credit evaluation methodologies and providing clients with many lower-cost alternatives.
3. Building credit
You will be able to start building your creditworthiness if you keep to a budget and remain out of debt. Individuals will deal with their financial history and credit score through credit bureaus and credit scoring agencies. Customers help to build a company's credit while it is being created with rating agencies or lenders. It is more of a byproduct of the preceding two talents than talent in and of itself, but knowing why it is so important is critical.
Creditworthiness eventually leads to the ability to borrow money at a reduced interest rate. It is advantageous to have good credit. The former will indicate investing in products when it is impossible to come up with the cash upfront (a house, for example) or when it is not recommended (a car, for example).
Your credit profile improves as a result of your discipline, making it easier to make sound financial decisions. Furthermore, your personal or business finances will skyrocket, much like a boulder rolling down a hill (rock'n'roll).
4. Investing
What do you do with the extra money you've earned after a year of diligent planning and debt reduction? You're going to make excellent use of it. That is a critical skill to develop and perfect over time. And one of the most critical financial skills to acquire if you want to understand fintech better. Personal investments are made in order to grow one's wealth.
There are several approaches to take, as well as various asset classes to consider, ranging from real estate assets, which are the easiest to leverage with financial leverage, to equity stocks, or even cryptocurrency. Your investment horizon, as well as the quantity of money available to invest, will influence your decision. If you make more investments, compound interest will increase your investment over time.
The main reason to invest is that cash loses value over time due to the impacts of inflation (the time value of money). A million dollars now is not worth the same as it was 50 years ago, and it will not be worth the same in 20 years. That's exactly what it means. On a commercial level, you make investments to help your company grow. This might involve investing in equipment, acquiring another company, or building a production plant.
Even if you do not anticipate significant growth, you will need to invest in order to replace products that have become obsolete or have broken down in order to keep your business running. As a consequence, you make investments to either preserve or expand your organization's growth. If you don't, your firm will collapse in one way or another.
5. Building wealth
Last but not least, there is the issue of amassing wealth. It ranks final because it is incredibly difficult to amass wealth without the prior four. You must be conscious of how much you spend each month in order to invest as much as feasible. If you have a lot of debt and a low credit score, it will be tough for you to get money for investing. In the long term, this will limit your ability to save money.
Let us pause for a moment to explain what we mean by "wealth." The majority of the time, we are discussing "net worth," which is the difference between what you own (assets) and what you owe (loans/liabilities). In the above example, if you own a $100,000 flat and have a $50,000 mortgage with a bank, your net worth is $50,000. It is vital to understand that your wealth has nothing to do with your income.
Yes, earning a six-figure salary makes it simpler to save money; however, if your expenditure is likewise in the six figures, your net worth will be zero at the end of the year. You may obtain financial stability through improving your money, which involves controlling how much you spend in relation to how much you make, as well as investing. This is also true for corporations, where the shareholders' equity or capital may be seen as the company's wealth.
If the bottom line is zero or negative, no matter how much revenue is made, the company's value will not improve. Businesses, as opposed to humans, are more concerned with raising their own worth than with increasing their own. This is due to the fact that outside shareholders usually require that you do so.
It doesn't matter that you want to become strong! There's no need to compare yourself to them! The others are themselves and you are yourself! The answer to your life are all within you!!
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