We all want to be financially savvy and learn how to make the most out of our salaries. That´s the best way to start saving money. However, it’s tough to become the next business tycoon when there are so many financial terms and concepts to keep up with. However, they’re still very important to understand.
But don’t worry, we all have to start somewhere. Today, we’re breaking down a list of the 15 basic financial terms everyone should know (some of the most important words in finance) to help you master the art of personal finance in no time and to plan your way to financial independence.
Let’s get learning.
A List of Financial Terms Everyone Should Know:
1. Asset: an item or property you possess that can be used to pay for debts or other commitments. This could be a house, art, a boat, or jewelry.
2. Capital: this term is used to describe money or other assets owned by a person or company that can be used for investing.
3. Bankruptcy: this term is used in court to declare a company or an individual unable to pay for their debts. This state can also be referred to as insolvency or destitution.
4. Credit: if you own a credit card, you may be familiar with this basic financial term. Credit refers to money you don’t have but can use thanks to a loan or pool of funds made available to you. In the case of a credit card, a bank is loaning you the money expecting it to be returned at the end of the month.
5. Credit score: to help banks and other institutions determine if a customer is responsible, they can consult their credit score. This number is based on an analysis of a customer’s credit files, taking into consideration how long he or she takes to pay off loans and whether or not they’re consistent with their payments. Lenders use this information to decide if they should grant a loan or to set a credit limit. For this reason, it is very important to understand how to build credit.
6. Emergency fund: a sum of money in savings destined to be used in case of an emergency.
7. Interest: the sum of money charged for providing a loan, usually paid as an added percentage. In other words, if you take out a $10,000 loan for house repairs, a bank may charge you an extra 5% for lending you the money upfront, bringing your total up to $10,500.
8. Compound interest: Interest can also be acquired through a savings account. For example, if you agree to leave $2,000 in a savings account, the bank could offer you a 0.5% interest for keeping your money in the account. Compound interest is what happens when the constant increase in the base money builds up. If the first year you put in $10,000 and gained 0.5% in interest, the next year you will have $10,050 and earn another 0.5%. The third year? $10,100.25. This number can go up even higher if you add in more savings every year.
9. Need vs. want: this term refers, as the name implies, to the difference between things you need and things you want. You might want a big house but only need a small apartment or want a Lexus when you just need a functional Toyota.
10. ROI: this acronym stands for “return on investment,” which refers to the profit you gain from having invested in something. This is used primarily in the business world to justify expenses, but it can also be valuable for our personal lives. Have you ever wondered what the ROI of your new TV is? Entertainment and relaxation are valid returns if those are qualities you need or value highly.
11. Defined contribution plan: a type of retirement plan in which both the employee and the employer make recurrent contributions.
12. Collateral: an asset or capital promised to a lender, such as a bank, in case the borrower cannot complete their payments.
13. Equity: this basic financial term means what a property or business is worth once all debts are subtracted.
14. Annual interest rate: also called the base rate, is the standard percentage of interest to be paid every year. Be mindful that this rate will not reflect compound interest or fees.
15. Debt-to-income ratio: this ratio refers to the percentage of your monthly salary that is used to pay off debts.
We hope you’ve had a couple of aha moments while digesting these 15 financial terms and concepts. Let us know in the comments below if there are any other personal finance questions you’d like us to answer!