Financial Equations Explained with Simple Animations

The fundamental equation in accounting states that Assets equal Liabilities plus Equity.Let's see how buying a house affects our financial equation. Consider a house worth three hundred thousand dollars.When we buy the house, we take out a mortgage of two hundred forty thousand dollars from the bank.We also contribute a down payment of sixty thousand dollars from our equity.Our total assets increase by the full value of the house.Let's look at our complete balance sheet after the house purchase.Notice how our equation remains balanced: Assets still equal Liabilities plus Equity.Money has a time value - a dollar today is worth more than a dollar in the future.This concept is captured by the future value formula.Let's take one thousand dollars today and see how it grows over time with compound interest.Different interest rates can dramatically affect how money grows over time.With a five percent interest rate, our thousand dollars grows steadily but slowly.A ten percent rate shows more dramatic growth due to compound interest.And at fifteen percent, the growth becomes even more pronounced.Let's look at a detailed breakdown of how compound interest works year by year at ten percent.Return on Investment, or ROI, measures how much profit you make relative to your investment cost.Let's look at an example. If you invest ten thousand dollars and it grows to twelve thousand dollars...Your ROI would be twenty percent. We calculate this by taking the two thousand dollar profit, dividing by the ten thousand dollar investment, and multiplying by one hundred.Different types of investments offer different potential returns and come with varying levels of risk.Generally, higher potential returns come with higher risks. Let's look at some common risk levels.A well-diversified investment portfolio can help balance risk and return. Here's an example of a balanced portfolio allocation.As market conditions change, you may need to rebalance your portfolio to maintain your desired risk level.