Personal finance is full of concepts that can intimidate newcomers. In reality, being smart with money doesn't require being a mathlete or earning an MBA.
Many complex-sounding financial concepts are actually quite simple, and understanding how they apply to your finances can pay huge dividends.
Here are six financial concepts explained in a straightforward way.
1. Compound interest
The mathematical magic happens when your principal balance earns interest — which then becomes part of your principal, allowing it to earn interest itself, and the cycle repeats.
Why it matters: A single $1,000 investment earning 6 percent compounded annually will become roughly $4,300 in 25 years. Commit to adding an extra $100 a month in savings and, thanks to compound interest, the balance will swell to more than $70,000.
2. Opportunity cost
Opportunity cost is the value of the choice you did not make compared with the option you did chose. For example, the opportunity cost of your morning Danish is the $2 you could have spent on anything else.
Why it matters: Measuring the bottom-line opportunity cost can help you make better financial decisions. For example, which is the better investment: leaving money in a bank account earning 1 percent or less annually in interest, or using the funds to pay off a credit card balance with a 14 percent interest rate?
Sometimes the true cost of the opportunity not taken is apparent only over time, such as choosing the "safe" investment of cash vs. investing money in the stock market. Over the short term, you avoid the sometimes harrowing ups and downs of the market. But over the long term, cash diminishes in value because of inflation.