April is Financial Literacy Month—a perfect excuse to talk about money (as if we don’t do that all year). Understanding key financial terms is essential for making smart money choices. Financial literacy helps us take charge of our financial future, laying the groundwork for achieving our goals. In this blog, we’ll review six crucial financial terms, categorized into three groups: savings, credit, and lending.

 

Savings Terms

Compound Interest

Imagine your interest earning interest—this is what compound interest does, and it allows your savings to grow exponentially over time. For instance, if you save $1,000 at an annual interest rate of 5%, you’ll earn $50 in the first year. The next year, that 5% interest is applied to $1,050, giving you even more. This snowball effect, with time, can significantly boost your savings.

 

Pay Yourself First (PYF)

This is more than a personal finance buzzword. A powerful budgeting strategy, PYF involves setting aside a portion of your income for savings before you pay your bills or spend on anything else. Turning savings into a top priority transforms it from an afterthought into a key focus of your budgeting practice.

 

Credit Terms

Annual Percentage Rate (APR)

APR is the yearly cost of borrowing money, including interest and other fees. It is crucial to understand APR when comparing loan offers or credit cards because a lower APR means less cost over time.

 

Annual Fee

Some credit cards charge an annual fee. For some, this might seem like an unnecessary expense. For others, it can be worth the rewards or premium services that are offered with the card. Thoroughly evaluating the benefits and understanding your goals can help you decide if paying an annual fee adds value beyond what a standard card offers.

 

Lending Terms

Collateral

Collateral refers to an asset, like a car or a house, used to secure a loan. If you default on the loan. The lender can seize the collateral to cover the debt. Understanding this risk is essential for assessing the security of taking out a loan.

 

Equity

Equity is the value of what you own, minus any money you owe on it. For example, if you own a car worth $10,000 and still owe $4,000 on the loan, your equity in the car is $6,000. If your home is worth $250,000 and you paid off your mortgage (hooray) then you have $250,000 in equity in your home!

 

Taking the time to learn these terms not only improves your financial literacy but also paves the way for making wiser financial decisions and chasing a brighter economic future.