Some Financial Terms That Everyone Should Know
One of the commonest and most pivotal management systems of all is financial management. I believe that not a single person could be of a different mind at this remark. Every person has to deal with finances at some stage of their life. If you are under the impression that there are people available to manage your finances then I am sorry to put forward that you are on the wrong side. Financial advisors’ job is to advise you and to manage your finances but how one can comprehend his recommendations if he doesn’t know a bit about finances.
It’s astonishing that people chase money throughout their life and remain ignorant about financial management. The irony is that this high priority skill is failed to create a niche in elemental studies. Though economical ups and downs are not subjected to the knowledge of people, still awareness about finances can somewhere help them to plan the finances better in the time of crisis.
At this point, one may think that finances are a vast area, and it may take eternities to be acquainted with its management. I do concur that it’s an arduous task to know about it in depth. But we can easily grab the knowledge about few essential terms used in financial management.
Common Financial Terms and Their Meaning
1. Compound Interest
Every year we get interest on the loan taken from the bank or the amount we deposit. This interest increases every year according to the principal amount and the total interest of the previous years. This interest on the amount is called compound interest.
In simple words, we can say that compound interest is the interest that is based on the initial principal amount and the previous year’s interest.
As the amount increases every year, the interest on it also increases and thus, whether it is a loan or savings, both increase under the compound interest.
This is a very good way to grow your deposit rapidly as the amount grows exponentially.
2. CIBIL Score
CIBIL stands for Credit Information Bureau India Limited.
The CIBIL score determines the limit for availing of your credit. The higher your CIBIL score, the more chances you have of getting a good credit limit. This 3 digit score ranges from 300 to 900. The closer it is to 900, the better it will be considered.
Summary of credit history and records make up your CIBIL score. You can know your CIBIL score online and through the bank as well.
Large companies distribute some part of their profits to their shareholders, this is called the dividend. This dividend gets credited to the account of the people who have taken the shares of those companies.
These policies are run by big companies and are decided by the Board of Directors of the companies.
4. Term Life Insurance
Term life insurance is an insurance policy that provides financial protection to your family in case of any mishappening and life uncertainties. Under this policy, there is an agreement between the person and the insurance company, in which the person pays the premium for the sum assured every month to the insurance company. In case of some mishappening with him, the insurance company pays the amount to the family according to the face value of the policy. Term policy is for a stipulated period.
Rising prices of goods and services reduce the purchasing power of our money, this is called inflation. This means that we will have to spend more than this year to buy the same goods next year due to inflation. It shows that the purchasing power of money will be reduced next year, and we’ll have to add more money to buy the same thing.
We should keep inflation in mind while going for savings in the bank as well. If we are getting less percentage of interest on the amount deposited than the percentage of inflation, then it is a loss for us.
A Bond is a type of debt instrument. It is issued by both government and private limited companies. This is with a fixed interest rate for a fixed period. It is suitable for those who have fixed-income.
7. Capital Gain and Loss
Any asset such as bonds, stocks, real estate, when we buy them, their valuation either decreases or increases over time. If this valuation increases, then we make a profit i.e. when we sell it, we get more than the invested amount. On the contrary, if the valuation is less then we suffer loss i.e. we get less than the amount invested. This gain and loss from assets are called capital gain and capital loss.
8. Asset Allocation
It is also necessary to decide and allocate money for different assets. Based on the risk capacity and the money you have, it can be decided that how much should be invested and into which particular asset should be invested.
Based on these factors we can invest in equity, mutual funds, real estate, bonds and many other forms of assets.
9. Net Worth
Net worth is the amount that is left after subtracting liabilities from assets. The savings, properties, valuables, investments etc represents our assets while the loans, credits and any other debts signify liabilities. If you have more assets than liabilities then you possess a valuable net worth. In other words, income that is not spent represents the net worth and net worth is the wealth that we own.
Allocating the assets and fixing them in the portfolio is trending these days. Rebalancing is a process of restoring the portfolio to the desired percentages of assets.
Knowledge of these basic fundamental terms can play a crucial role in your finance management. Understanding and implementing this knowledge in your financial planning can prove to be a turning point in your life. So be aware and make the best out of your financial management.