Boost your Financial Literacy Vocabulary with these Terms
Financial Literacy is one of the most important ‘Core Life Skills’ for participating in modern society. Gen Z and Gen Alpha are growing in an increasingly complex world where they will need to take charge of their own financial future. Starting early in the world of Finances will give them an edge and help them succeed in their career and future.
In essence, Financial Literacy refers to the ability of understanding and manage financial resources effectively for lifelong financial stability.
The major components include:
- Understanding the language of finance
Start your Financial Literacy Journey by learning important and most frequently used terms in the world of finance. These words will help you in kick-starting your journey in this exciting world and help you in your future endeavors.
“I want kids to understand the importance of savings and investing. It’s crucial that people understand the importance of financial literacy, because it’s actually life-saving.” – Mellody Hobson.
Need vs Want
This is one of the most basic concepts of personal finance which is the ability to differentiate between needs and wants. A ‘need’ is something which is essential and necessary to live and function such as food, clothing or housing. A ‘want’ is something which is good to have, but not essential for survival.
In simple terms, an asset is the thing that you own and can be sold to get money. It is a ‘resource that holds value.’ This may be tangible, intangible, owned or controlled. It is anything that can be converted into cash. An individual, company or country can own or control assets. e.g. cash, car, real estate, investment, gold etc.
It means that you ‘owe something to somebody’ else. This is an opposite word of an Asset. E.g loans.
It is a plan for how much money will be spent and earned during a certain period of time. It is a plan for ‘managing money’. It is an estimation of your income and expenses usually over the month or a year.
Income is the money that someone gets for business activities. Some of the common types of income are- Salary, Wages in return of work, Business profits, Tangible Assets, Capital Gains, Dividends, Interest, Rent etc.
Credit is much more than Credit Cards. It is generally an ‘agreement between lender and borrower where the borrower agrees to pay back the money at a later date.’ This is generally at an interest rate. It allows borrowers to purchase big ticket items by spreading the cost over time. Some of the examples are Home Loans, Car Loans, Credit Cards.
Debt is anything ‘owed by one person to another.’ It is something borrowed by one party from another. Some of the common forms of debt are loans, auto loans, personal loans etc.
Debt vs Credit: Debt is the money you owe, while credit is money you can borrow. Debt is money you’ve already borrowed but haven’t yet paid back. Credit is merely the ability to acquire debt.
It is the sum or ‘amount of money borrowed.’ This is the amount before interest.
It is the ‘cost of boring money.’ Interest is the amount, usually expressed as a percentage, that the lender charges a borrower to use the assets. It is the price paid by the borrower for the use of credit or money borrowed from the lender.
Annual Percentage Rate
The cost you pay each year to borrow money, including fees. It is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan or income earned on an investment.
In simple terms, Credit Rating is a judgment about whether the borrower will be able to pay back a loan based on their past history. It is a way of ‘assessing creditworthiness.’ It is a measurement of a person or business entity’s ability to repay a financial obligation based on income and past repayment histories.
It is a number lenders use to help them decide how likely it is that they will be repaid on time if they give a person a loan or credit card. It is built on your past credit history and repayments. It is known as CIBIL Transunion score in India and ranges from 300 – 900. The closer you are to 900, the better your credit rating is.
Creditworthiness helps lenders determine whether or not to extend new credit to you—it’s a measure of how likely you’ll repay your debt.
It is a type of credit facility provided by banks or NBFCs (basis RBI approval) that allows customers to borrow funds within a pre-approved credit limit. It enables customers to make purchase transactions on goods and services. It is issued as a plastic card.
A Debit Card is a plastic Card that is used as a payment method to cash when buying products or services or withdrawing cash from a bank account. Debit Card is linked to your bank account.
It is a legal process which happens when a person or an organisation does not have enough money and is unable to pay all of its debts. In legal terms they become ‘insolvent.’ When a person becomes insolvent, he can’t pay his creditors.
Default in Debt occurs when one or more terms of a loan agreement are violated by a borrower.
It is an investment strategy to manage your investment risks by spreading your money across a variety of assets. Through diversification individuals can reduce risk and diversify their investments.
This is the fund that is reserved for emergencies. It is meant to address unforeseen financial challenges. It is a source of ready cash in case of an unplanned expense, an illness or loss of a job.
Time Value of Money
It is a concept that a ‘sum of money is worth more now’ than the same sum of money in future. This is because of the interest earning potential.
It is the practice of comparing prices, features, benefits, risks, and other characteristics of two or more similar products or services. It may help you make more informed buying decisions and help you stay within your budget.
In simple terms it is ‘Interest you earn on Interest.’ The more compounding, the better. In Compound interest, the interest is added to the new account balance each year. Take for example you make a Rs.1,00,000 investment at 8% compound interest. After 5 years:
- if the interest is compounded annually, your total account balance is Rs. 1,46,933
- If it’s compounded monthly, the total account balance becomes Rs. 1,48,985.
“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it”. – Albert Einstein:
While some people question whether the quote was in fact from Einstein, the power of compound interest is unquestionable.
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