Key Financial Terms to Know: Celebrate Financial Literacy Month
April: Financial Literacy Month—Empower Your Financial Future
April is marked as Financial Literacy Month, a time dedicated to improving our understanding of critical financial concepts. Mastering financial terminology is key to making smart money decisions that empower us to take control of our financial futures. In this blog, we'll cover six essential terms broken into three fundamental categories: savings, credit, and lending.
Lending Terms
Collateral: When you take out a loan, lenders often require collateral as a security in case you're unable to repay the loan. Collateral could be something like your car or home, which the lender can claim if you default on the loan. While collateral can help secure a loan or lower interest rates, remember that the asset can be seized if you fail to meet repayment obligations.
Equity: In reference to homeownership, equity represents the portion of your home that you truly own outright. As you pay down your mortgage or as your property value increases, your equity grows. This growing equity can be a financial asset, allowing you to access home equity loans or home equity lines of credit for funding other needs, such as home renovations or education expenses. However, borrowing against your home's equity carries risk, including potentially losing your home if you're unable to repay the borrowed funds.
Credit Terms
Annual Percentage Rate (APR): This is a crucial term to understand when it comes to borrowing. The APR is the annual cost of borrowing money, including interest and fees. It provides a comprehensive measure, allowing you to compare different loan offers or credit card deals. A lower APR means you'll pay less over time, so it’s vital to look at the APR, not just the interest rate, when deciding on loans or credit cards.
Annual Fee: Some credit cards come with an annual fee, which is a flat fee that cardholders must pay for the privilege of using that card. Sometimes, paying an annual fee can be worthwhile if the card offers sufficient rewards or benefits, such as travel miles or cash back. It's important to weigh these benefits uniquely against the costs to determine if it aligns with your financial goals.
Savings Terms
Compound Interest: Understanding compound interest is your gateway to growing your savings over time. Unlike simple interest, which is calculated on the principal amount, compound interest accrues on the initial deposit and on the accumulated interest over time. For example, if you deposit $1,000 at an interest rate of 5% per annum, over 10 years, with interest compounded annually, your savings would grow significantly more compared to simple interest.
Pay Yourself First (PYF): This budgeting strategy encourages setting aside a portion of your income for savings before spending on other expenses. By prioritizing yourself, you create a buffer that builds financial security over time, ensuring you have savings for future needs or emergencies. Consider automating the process to ensure consistency and remove the temptation of spending that money elsewhere.
Understanding these fundamental financial terms takes you one step closer to achieving financial independence. Each small step, like learning and applying these terms, contributes significantly to navigating your financial journey with confidence. Remember, building a secure financial future is within your reach.