Income

Some people seem born to study finance, and every day seems to drive them closer to a job in the field. You might recognize the type; from a young age they’ve paid attention to the stock market, read the financial news, and always seemed to be knowledgeable about the differences between stock, bonds, and mutual funds. When fellow classmates were reading about the news of the weird for mere throw away entertainment value, these people were quietly absorbing headlines that could impact the market value of particular companies.

Starting to sound familiar? Perhaps you witness a particular student frequently reading the Wall Street journal, when everyone else seems to be going on about the next upcoming party. Perhaps you are that student! Life can seem a lot different to the person who spends time learning about the time value of money concept from a young age. For starters, they simply don’t like to waste time, because they believe that it has an actual monetary value. And for anyone who is making monetary investments, that’s true.

That’s because the principle of compound interest is always at play for these people. Compound interest is a concept in which money that has been earned – for example, in the form of interest – with money, can actually earn you more money. Sounds pretty amazing, right? No less a person than Ben Franklin called it the eighth wonder of the world when he learned about the concept. So take his lead, and try to either find, or become, that person who studies financial concepts!

To Leverage, or not to Leverage

One of the most fundamental questions that one will face if they head towards the world of finance and investments, is whether or not to incur debt to make larger trades. Known as leverage inside the field, taking on debt can help one to land outsized returns on their invested funds. This idea grows more vital to anyone who knows about the time value of money. This notion outlines the point that a small amount of money invested can yield a decent amount of profit if one earns ten percent upon it. However, that initial amount of money, coupled with half of the base, can suddenly yield a 50% greater profit for the exact same amount of work.

That last part is where it all gets interesting. That’s also why a lot of people in the realm of finance chose to take on debt. They realize that they can vastly improve their profits by taking on larger positions. But larger investments, funded with debt, come with much greater risks. If a position moves against the leveraged investor, they can lose large amounts of money. In fact, they can suddenly lose more money than they originally had, since they’ve got borrowed money riding on the outcome of their investment choices.

Unfortunately, when many people start investing with borrowed money, it has historically led to speculation, rather than any sort of reasoned approach. This has led to market bubbles and resultant catastrophe. It is to avoid this devastation that a conservative investor would choose to avoid any sort of leverage or debt.

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To Leverage, or not to Leverage

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