Personal Finance Glossary: Terms You Should Know

Nov 27 , 2022 8 min

 

Understanding the terminology is essential when it comes to managing your money and making plans to achieve long-term financial goals. Learn the lingo that you're likely to run into along the way with the help of this glossary covering money management, saving, investing, retirement planning, loans, and other aspects of personal finance.

 

Asset: What you own, such as cash, money in the bank, stocks, bonds, real estate, and personal possessions. 

Budget: Income vs. Expenses  -  An estimation of your income and expenses. It allows you to track and plan how you will spend your money, which can help you make financial decisions around paying off debt and saving for retirement.

Cash Flow: Movement of the money you receive versus the money you spend (money in vs. money out)

Credit: What's given when a lender grants a borrower money in exchange for later payment. Common forms of credit include loans and credit cards.

Credit score: A number between 300 and 850 that represents creditworthiness, derived by taking into account factors like payment history, credit mix, and the total amount owed.

Cryptocurrency: Digital assets that rely on blockchain technology to allow for decentralised transactions between multiple parties.

Debit card: Unlike a credit card, a debit card immediately withdraws funds from the user’s bank account. Debit cards are less likely to contribute to excessive debt than credit cards, but users face fees if they overdraw their accounts.

Debt: Money that's borrowed and needs to be paid back. 

Emergency fund: Money that's set aside for use in case of an emergency. Depending on how much you have saved, an emergency fund could cover long-term expenses if you lose your job or with short-term unexpected events such as a car repair.

Expense: What you spend money on to buy something or do something, including common household bills, credit card payments, groceries, and anything else that costs.

Financial literacy: Basic financial knowledge, including an understanding of banks and the banking system, financial markets, credit and credit cards, and tax laws, as well as the ability to apply this knowledge in making decisions on how to spend, earn, or save money today to build wealth for tomorrow.

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Grant: A type of financial aid that doesn't need to be repaid.

Income: The money you bring in on a regular basis through your job, investments, or other sources. There are two ways to measure income: gross income and net income. Gross income is the total amount that’s earned before expenses, taxes, and other costs. Net income is what remains after these expenses are deducted.

Inflation: The increase in the prices of goods and services in an economy over time.

Interest: The amount you pay a lender for the privilege of using its money or that a bank pays you on your deposits that is calculated as a percentage of the balance. 

Investment: An asset or item acquired with the goal of future income, benefit, or profit to meet long-term goals.

Liability: What you owe such as unpaid bills, credit card charges, personal loans, and taxes.

Life insurance: A tool that can help protect your family financially in the event of your passing. For a life insurance policy, you'll select the amount and type of coverage you need and then pay a premium over a certain time period.

Loan: an amount of money that is borrowed, often from a bank, and has to be paid back, usually together with an extra amount of money that you have to pay as a charge for borrowing.

Mortgage: A type of secured loan that is used to purchase a home.

Need vs. Want: One of the most basic concepts of personal finance is being able to differentiate between needs and wants. A “need” is defined as an essential expense, such as food or housing. A “want” is an expense that would be nice to have but isn't essential, such as designer clothing.

Net worth = Assets – Liabilities (or debts)  :  The total value of what you own minus what you owe. 

Non-fungible token (NFT):  A unique digital asset that represents ownership of real-world items like art, video clips, music, and more.

Personal Finance: The management and planning of your own financial activities, including earning, spending, and saving money, making investments, and purchasing insurance. The process of managing your own finances can be outlined in a budget or financial plan. 

Savings account: An account at a bank or financial institution where you can deposit and accumulate funds and earn a small amount of interest at the same time.

Stock: An equity security that represents partial ownership of a company.

Stock market: A place where stocks are bought and sold.

Time value of money: Time value of money, or TVM, is the concept that money available now is worth more than an identical amount in the future. This is because the money that’s invested has the potential to grow, and the longer that it’s invested, the more it will appreciate. Money that’s acquired later has less time to grow through investments and is thus considered less valuable.

Will: A document that spells out how you would like your estate to be handled after your death. It ensures that your money and assets are left to the heirs you designate.

50/30/20 rule: A popular rule of thumb in personal budgeting that allocates income into three categories: 50% to "needs," 30% to "wants," and 20% to "savings or debt payment."

 

As you start your journey into personal finance when it comes to managing your money and planning to reach long-term financial goals, understanding the language is key. 

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