Your Definitive Guide: 20 Financial Terms Every Student Must Master
The world of finance has its own language, full of words that can sometimes sound complicated and overwhelming. If you've ever felt left out of a conversation about money or that an investment article was written in a different language, don't worry! It's a common barrier, but today we're going to tear it down together.
This post is your pocket glossary to get "up to speed" on the topic. Here are 20 essential financial terms, explained simply and with practical examples, so you can stop being a spectator and start being a protagonist in your own economy.
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Fundamental Concepts
Budget:
- What it is: A plan that helps you know how much money is coming in (income) and how much is going out (expenses) over a period of time.
- Example: "This month, my budget is $300. $100 for food, $50 for transportation, and $150 for savings."
Emergency Fund:
- What it is: An amount of money you set aside in an easily accessible account, for unexpected events only.
- Example: "My laptop broke, and I was able to fix it with my emergency fund, so I didn't have to use my credit card."
Active Income:
- What it is: The money you earn in exchange for your time and work, such as a salary.
- Example: "My monthly salary from my part-time job is my active income."
Passive Income:
- What it is: Money you earn without having to work actively, such as rent from a property or dividends from an investment.
- Example: "The money I earn from selling an online course I created a year ago is passive income."
Compound Interest:
- What it is: The interest you earn not only on your initial investment but also on the accumulated interest.
- Example: "If I invest $100 and earn $10 in interest the first year, the second year I'll earn interest on the entire $110, not just the original $100. It's the secret to making your money grow exponentially."
Investment and Growth
Asset:
- What it is: Something you own that has the potential to generate income in the future.
- Example: "A house you rent out is an asset. A stock you buy is an asset."
Liability:
- What it is: A financial obligation that takes money out of your pocket.
- Example: "A car loan is a liability because you have to make a monthly payment for it."
Diversification:
- What it is: The strategy of not putting all your eggs in one basket. Investing in different types of assets to reduce risk.
- Example: "Instead of investing all my money in Bitcoin, I decide to diversify and also invest in an ETF, shares of a tech company, and some gold."
ETF (Exchange Traded Fund):
- What it is: An investment fund that is traded on the stock exchange like a stock. It's one of the best ways to start investing, as you invest in a basket of many companies.
- Example: "I bought one unit of an ETF that invests in the 500 largest U.S. companies."
Cryptocurrency:
- What it is: A digital or virtual currency that uses cryptography for its security. It operates on a decentralized network (blockchain).
- Example: "Bitcoin and Ethereum are the most well-known cryptocurrencies."
Stocks:
- What it is: Small portions of ownership in a company. By buying them, you become a shareholder.
- Example: "I bought 5 shares of Apple, so I own a small part of that company."
Stock Market:
- What it is: The place where company stocks are bought and sold, like the New York Stock Exchange.
- Example: "My online broker gives me access to buy and sell stocks on the stock market."
Capital Gain:
- What it is: The profit you make when you sell an asset for more money than it cost you.
- Example: "I bought Bitcoin for $10,000 and sold it for $15,000. I had a capital gain of $5,000."
Debt and Loans
Credit:
- What it is: A lender's trust in your ability to repay a debt. Your credit history (or credit score) is a number that reflects this trust.
- Example: "I used my credit card responsibly and paid it on time, so my credit score is good."
Interest Rate:
- What it is: The cost of borrowing money. It's a percentage you pay on the loan amount.
- Example: "My student loan has a 5% annual interest rate, which means the bank charges me 5% extra each year for lending me the money."
Good Debt:
- What it is: Debt you take on to buy something that has the potential to generate income or increase in value, such as a loan for education or a mortgage.
- Example: "My student loan is 'good debt' because it allowed me to get a career where I will earn more money in the future."
Bad Debt:
- What it is: Debt you take on to buy something that loses value quickly and doesn't generate income, such as a loan for a TV or a credit card with a high interest rate for unnecessary expenses.
- Example: "My credit card debts from impulse purchases are 'bad debt'."
Installment:
- What it is: The fixed amount you must pay regularly to settle a loan.
- Example: "My loan payment plan is $100 a month."
Revolving Credit:
- What it is: A type of credit where you can use a line of credit over and over, up to a pre-approved limit, like credit cards.
- Example: "My credit card has a $1,000 limit. I can use it, pay it off, and use it again."
Capital:
- What it is: The amount of money or assets you have to invest or start a business.
- Example: "My initial capital to start investing was $100."
Congratulations! You now have the basics to understand the language of money. Use this guide as your personal reference and don't be afraid to use these terms in your conversations. The first step to mastering your finances is to speak their language.
What other financial term do you think is important for a beginner? Share it in the comments!