If you've just started paying careful attention to how you can make your finance better, new financial terms can make the process feel hard or confusing. We have previously discussed what personal finance means and the different aspects of personal finance and the components of personal finance apps. However, in a bid to improve personal finance skills, it is necessary to know and understand the meaning of some other terms that reoccur in personal finance dealings.
Knowing enough related vocabulary can help achieve a better interpretation of how to take charge of your financial future. Below are some personal finance terms you will come across and need to understand:
1. Asset - An asset is any available property owned by a person or business entity that has value enough to pay off debts or serve as a commitment or legacy. It can also be described as seen or unseen investment instruments bought and held for a short or long period to eventually be sold for a higher value or to generate additional income.
2. Cryptocurrency - this is a form of money that only exists digitally but has value and purchasing power like physical cash. It is not yet a legal tender in Nigeria but Nigerians can buy portions as assets. Some popular cryptocurrencies include Bitcoin, Tron, Ethereum, and Dogecoin.
3. Investment - an investment is any asset or item acquired to generate income or appreciation. Appreciation refers to an increase in the value of an asset over time. Cryptocurrency is digital assets, precious stones like gold, diamond or silver are assets, and stock, and plots of land, are other forms of investments.
4. Capital - Capital is the amount that is used to acquire an investment asset. In some cases capital may not be in form of money, it could be a tangible asset that is used in starting a business for profit making.
5. Interest Rate - For investments, the interest rate is the percentage that is used to determine how much gain you earn on capital invested (also called Return on Investment ). While the interest rate for loans determines how much to repay a lender for using their money. The higher the interest rate in investments, the more profit you make. And, the higher the interest rate on a loan, the more money you have to repay at the end of the period.
6. Loan - An amount borrowed from creditors (lenders). A loan is not free and it usually attracts interest (additional amount asides from the amount borrowed).
7. Credit - With loans, credit is a form of finance where a customer can access money or goods and services through financial service providers, with an understanding to repay the agreed amount later.
8. Credit score - A credit score is a number that reveals a consumer’s ability to pay back loans. A credit score is based on the individual’s credit history and it determines if you will receive a loan or not. In Nigeria, the number is usually between 300 and 850. A credit score below 550 indicates a poor credit score and higher numbers toward 650 and above indicate a good credit score.
9. Stock - stock is an asset that is represented by the ownership of a fraction of a company. Units of stock are called "shares". If you own shares in a company, you have ownership of the company stock. When the value of the company increases, you earn a profit on your shares.
10. Investment Portfolio - an investment portfolio is a collection of financial investments owned by an individual or entity. It is a combination of different assets like stocks, crypto, etc.
11. Risk diversification - this is a risk management strategy in investment that involves spreading your capital across different assets in your investment portfolio.
12. Savings Target - This is the total amount of savings you aim to have to put together at the end of a period.
13. Financial goals - Financial goals are the items or things to save towards. They can also be described as the purpose behind your savings target.
14. Budget - A Budget is a financial plan that dictates how money is used. Budgets will always include the portion of income to spend or save for certain financial goals.
15. Capital gains - This is the amount of profit made from the sale of assets.
16. Insurance - Insurance is a form of risk management where you buy protection against expected financial losses. The individual pays for an insurance policy to guard against loss of property, incurring debt, or loss of life. For which every policy is bought, the insurance company compensates for damages to the authorized party if the expected event happens.
17. Mutual fund - A form of investment that pools money from many investors with a common interest to achieve the same objective. The money is usually managed by a professional Fund Manager.
18. Tax Evasion - Evading tax is an intentional act of underpaying or refusing to pay tax at all. Since tax is a compulsory levy imposed by the government, tax evasion is illegal.
19. Cashback - This is an incentive used mostly by loan apps or credit providers to reward customers. When you repay your loan in good time or settle clear credit card debt, a small percentage goes back to your account.
20. Guarantor/cosigner - A guarantor is a credible individual related (directly or indirectly) to loan applicants, whose contact details and or/and signature are needed before a loan is granted.
21. Dividend - This is the interest or profit received from the sale of stock, bond, shares, or other assets...
22. Repayment policy - This is the rule that states the permitted period for a loan applicant to owe. Loan providers expect to receive repayment before or when that time frame elapses.
23. Unbanked - The population of people that have no bank accounts or access to financial services.
24. Collateral - Collateral means any item of high value that loan providers can hold temporarily, in exchange for loans. It can also be defined as a specific property pledged to a lender that secures the repayment of a loan. Commonly accepted collateral includes A house, a piece of Land, or a car.
25. Inflation - This is an economic situation that describes when the overall price of goods is high and it in turn reduces the purchasing power of money. Where there is inflation, the cost of living for the average minimum wage earners is high.
You don't need to be a financial professional to improve your vocabulary on finance, even beyond all that has been listed above. Financial literacy can certainly be boosted by having a good knowledge of personal finance.