Investing is a long game that requires a continuous commitment to knowledge acquisition. Some of the most successful entrepreneurs in the United States and across our world, like Samuel Ramey, know the power and maturity of constant learning, and they leverage this commitment to creating an ever-growing portfolio of wealth.
Learning to leverage investments is one part of the equation for creating profits, but in order to really find success in the markets, you should begin to understand the metrics and common industry terms that make financial products tick.
Times Interest Earned Ratio
A times interest earned ratio is a fairly straightforward calculation, but the TIE ratio is one of the most important metrics for calculating a business‚Äô cash flow and debt expenses. Essentially, the TIE ratio measures a business‚Äô capital intake on income statements in relation to its debt obligations. The ability to pay back debts in the event of a closure of business sales for a period of time is a mark of stability and proves that the business isn’t a credit risk. This can be hedged against future uncertainty.
While a business is unlikely to ever have to pay back all of its debt in a single lump sum, the cash flow to do so signals a long term player that will continue to thrive over the long term. In particular, with the continued economic pressure of coronavirus lockdown measures in place, a higher ratio when calculating the time’s interest earned ratio and low-interest expenses is a sign of long term viability, even in an uncertain market that is poised for an eventual recovery. Interest expenses can eat away at a borrower’s solvency over the long term, so looking into interest obligations and other financial records that a borrower puts out about their corporate finances is a great way to find great investment opportunities. The devil is in the details, so always do your research into all the financial terms before taking on any additional interest expenses.
Mortgage Rates
A mortgage is a pretty simple investment-related concept that applies to real estate purchasing. This is a loan that homeowners take out in order to make a real estate purchase, either for their own home or to buy an investment property. The benefit of a lender’s cash is that this often is extended to borrowers at a favorable interest rate—far lower than credit card issuer rates, and a mortgage is often paid back over 20 to 30 years at a fixed or variable interest rate.
Mortgages give investors access to investment strategies for mortgage-backed securities as well. This was a huge section of the marketplace in the pre-housing crash trading environment and is making a resurgence in the modern trading pool. While investors should be careful not to allow their investments to fall into the same pattern of disrepair that mortgage-backed securities found themselves in during the early stages of the 2007-2008 housing crisis, mortgage-backed securities still offer a uniquely productive means of growing your nest egg.
Interest Rate
An interest rate is simply the value by which an investment grows. However, keeping track of two sets of competing interest rates is critical to finding financial success in the long term. Interest rates associated with mortgages and other accounts with creditors (personal loans, credit cards, student debt, and the like) accrue interest, whereas interest payments from a savings account or stockholding add to your underlying assets. Typically the interest that you owe runs a higher percentage than on the accounts where you act as the collector—or technically the lender. You see, a savings account pays out an interest rate because the bank is technically borrowing your money in order to fund their own ventures, like issuing mortgages or credit card accounts. For this service, they pay back a small percentage into your account each month. However the financial institution makes far more with your capital than they pay back to you, so balancing debts to savings is an important step for everyone to keep a close eye on.
Financial freedom is closely linked to financial acumen. Learning to handle your accounts and make sense of each aspect of your cash flow and overall financial picture is the most important thing when it comes to creating long term financial health.