10 Personal Finance Words from A to Z That You Should Know About
When it comes to personal finance, most of us struggle with financial jargon that can sound like a foreign language. It can be daunting to understand financial terms, from APR to Z-bonds, but knowing these words can prove to be invaluable in making good financial decisions. Here are ten personal finance terms from A to Z that you should know about.
A is for Annual Percentage Rate (APR)
Annual Percentage Rate (APR) is the interest rate you’ll pay on the total balance of your loans, credit card debts, and other financial products yearly. The APR includes all upfront charges and fees, reducing the chances of being hoodwinked into paying more than you need to. It will help you understand the cost of credit, and the lower the APR, the better it is for you.
B is for Budget
Budgeting is a crucial financial tool to help you save money and stay on track with your finances. A budget acts as a guide that can help you track your spending and evaluate your priorities. Use a budget to set financial goals, plan your monthly expenses, and avoid overspending, allowing you to save money for emergencies, investments or future plans.
C is for Compound Interest
Compound interest allows you to earn interest on your interest. This means that if you save $1,000 at 5% annual interest, you’ll earn $50 in interest the first year. The second year, you’ll not only earn interest on your initial $1,000, but also on your initial interest of $50. Compound interest is like a snowball effect on your savings, and allows it to grow exponentially over time.
D is for Debt-to-Income (DTI) Ratio
Your debt-to-income (DTI) ratio is the total amount of your monthly debt payments divided by your gross monthly income. Lenders use DTI ratios to determine your ability to pay back loans, including mortgages, car loans, or personal loans. A high DTI ratio can make it harder to qualify for a loan, but aiming for a lower ratio can keep you financially stable.
E is for Equifax
Equifax is one of the three major credit bureaus that compile your credit history and score. It’s important to keep track of credit reports to ensure their accuracy and avoid identity theft.
F is for FICO Score
A FICO score is a three-digit number that reflects your creditworthiness. It ranges between 300 to 850, with higher scores indicating better credit. Lenders use this score to assess your credit risk and determine loan interest rates.
G is for Grace Period
Grace periods are the time between when a billing cycle ends, and the due date to pay. It’s crucial to understand grace periods as some credit card issuers may charge interest from the date of purchase if a balance isn’t paid in full by the due date.
H is for HSA
A Health Savings Account (HSA) is a tax-advantaged account designed to pay for medical expenses. HSAs are available to those with high-deductible health insurance plans and allow account owners to contribute tax-deductible contributions, that can grow and be withdrawn tax-free when used for qualified medical expenses.
I is for Inflation
Inflation is the general increase in prices of goods and services over time. Inflation decreases the buying power of your money, meaning that what you can buy with $100 today may not be the same as what you could buy with $100 in 10 years.
J is for Jumbo Loan
A Jumbo Loan is a type of mortgage loan that exceeds the conforming loan limits. It’s essential to understand Jumbo Loans, particularly if you live in areas with high home prices, as they usually come with higher interest rates and stricter approval requirements.
K is for KYC
KYC, or Know Your Customer, is a regulatory requirement for financial institutions to verify the identity and suitability of their clients. KYC is the first line of defense in protecting against financial crimes such as money laundering and terrorism financing.
Conclusion
Understanding personal finance terminologies can improve your financial literacy and help you make better financial decisions. Whether it’s budgeting, understanding credit scores, or compound interest, familiarizing yourself with these ten finance terms from A to Z can be beneficial in improving your financial well-being.
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