One of my favorite tips I give to people when they ask about managing their money is to read, read, and read some more. Unfortunately for the novice when you first begin reading about your money many may feel the need to sit there with a dictionary trying to understand what in the world these money experts are all talking about. It can be overwhelming. So for Financial Literacy Month this year I thought it would be a great idea to get back to the basics and explain the terms that I think are important to know to help you get your finances and money on track.
24 Financial Terms to Know
1. Interest Rate
The rate charged or paid for the use of money.
***Interest rates can affect the actual cost of items purchased.
2. Compounding (Interest)
Simply put these are earnings made from other earnings. For example if you invest $100 and you make 10% the first year. The second year you make interest off not only the $100, but also the $10 in interest that you made the previous year. It’s also known as compounding interest.
***Compounding Interest can be one of your most powerful tools when it comes to making interest off of your loans or in understanding your debt.
3. Effective Annual Interest
The rate of interest when compounding occurs.
***Like compounding interest, understanding effective annual interest can help you determine the actual cost of purchases made on credit or the actual worth of investments you might make.
The amount of money owed or borrowed from one party to another.
Cash or goods used to generate income, the amount of assets exceeded by its liabilities, or the money, property, or values which represent the wealth of an individual.
Items of ownership that can be converted into cash.
***To manage your money effectively you need to understand your debt and how your assets can be affected by this debt level.
7. Time Value of Money (TVM)
The theory that money that is available now is worth more than money received at a future date because of its earning potential.
8. Present Value of Money
The amount of money today that is equal in value to a payment or a stream of payments to be received in the future.
9. Future Value of Money
The amount to which an investment will grow at a future time if it earns a specified interest that is compounded annually.
***Understanding the time value, present value, and future value of money can often act as a deterrent for unnecessary spending and can help you make important decisions when it comes to managing your debt.
10. Debt Consolidation
Taking out one loan to pay off many other loans. It is usually taken out at a lower interest rate.
***Understanding this powerful tool, debt consolidation, can help you make the most of your money by lowering the lifetime debt accrued through interest.
The ability to receive goods or service before payment or a journal entry recording an increase in assets.
The debt of financial obligation in which one is responsible.
13. Amortized Loan
A loan with scheduled payments of both principal and interest.
A loan to purchase a property
The amount of the loan yet to be paid back excluding interest.
The period or duration which the creditor is committed to extending the loan.
***Understanding how credit, amortized loans, and mortgages can affect your net worth long term can help you make wise decisions when you are deciding whether or not to use credit to make purchases.
Fixed sum of money paid to a person each year.
18. Compound Annuity
Equal sums of money are deposited at the end of each year for a certain number of years and are allowed to grow.
19. Nominal Return
The rate of a return on an investment without adjusting for inflation or taxes.
20. Real Return
The rate of a return on an investment which is adjusted for inflation and taxes.
Putting the profit back on an investment back into the same place.
Expenses that can reduce your total income.
23. Return on Investment (ROI)
The amount of money gained or lost in regards to the amount of money invested.
Stock or any other security representing ownership interest.
***You need to understand the terms “Annuity, Compound Annuity, Nominal Return, Real Return, Reinvesting, Tax-Adjusted, ROI, and Equity” so that you can make smart decisions about your investments whether you invest in a CD, Money Market Account, 401(K), Mutual Fund, etc.
Phew! That’s a lot to learn isn’t it? Trust me knowing these terms can really help you understand all of what you are reading as you are learning your way through your personal finances. But is you would still like to know more, Kiplinger has an excellent glossary of financial terms that you can use that goes into a lot more details. Enjoy!
Any other terms you’d like clarified or explained? Need further explanation about these terms? Leave a comment, and I’ll be happy to explain.