Personal Finance Terms You Must Know

If you are a beginner in personal finance or you’re an expert who is just looking to refresh your knowledge, this post is for you. I’ve listed down some key personal finance terms that I believe everyone must know and understand, along with a brief description.

Hope this would be useful for you. Let’s get rolling!

Asset

Any instrument that holds a financial value and has a capability to generate returns. For example – stocks, mutual funds, real estate, gold etc.

Asset Allocation

Asset allocation is the approach of selecting correct asset classes based on your goals, risk profile and time horizon for investment.

Bonds

A bond is a debt instrument used by corporates or governments to raise funds in form of loans from investors. The investor or bond holder is entitled to receive a fixed interest income and the borrower or bond issuer has an obligation to pay back the principal capital on a pre specified date.

Compounded Annual Growth Rate (CAGR)

Compounded Annual Growth Rate (CAGR) is the overall rate of return on an investment over a period assuming that the annual gains are reinvested every year. It can be simply stated as gain over gains throughout the investment duration.

Capital Gain and Loss

Capital gain is the profit earned after selling an asset like stocks, bonds, mutual funds, gold or real estate. If the selling price of asset is more than purchase price, it results in capital gain whereas if the former is less than later, it results in capital loss.

Credit Score

A numerical score assigned to you which tells the banks how good you are in paying loans or debts. There are three credit bureaus which compile credit scores in India – CIBIL, Experian and CRIF Highmark. A good credit score means easy loan offerings from banks.

Debt Investments

Debt investments are the investments in securities like bonds, treasury bills i.e. loans given to corporates or government, which provide a fixed rate of interest as return with a payback obligation.

Diversification

Diversification is an investment strategy to reduce risk which encourages use of different and mixed investments within a portfolio. If some of the investments perform badly, other investments which are doing well tend to average it out giving overall stability to the portfolio.

DIY-Do It Yourself

DIY in Personal Finance management is the approach which encourages identifying correct financial products for yourself and buying them directly from provider. It involves building your own portfolio and constantly reviewing it for any changes required.

Equity Investments

Equity investments refers to buying securities like stocks of a company, which gives investor an equity or share in the company, its assets and earnings. The return on investment can be made via capital gains and dividends and is proportional to the performance of company. There is no obligation of part of company to payback the initial invested capital.

Financial Independence

Financial independence is a stage where your passive income can cover all your expenses for life and you no longer need to work for earning money.

Inflation

Inflation is a rate at which the prices of goods and services increase in a country. Due to inflation, same amount of money is able to buy lesser goods and services over a period which means that purchasing power of currency decreases.

Liability

Any loans that are required to be repaid or any unnecessary recurring expenses. For example – credit card bills, home or car loans etc.

Liquidity

Liquidity is a measure of how easily and quickly an asset can be bought or sold without affecting its price. Highly liquid assets can be converted to money very quickly. For example, stocks and mutual funds are highly liquid as compared to real estate.

Mutual Fund

A mutual fund is a pool of money collected from various investors where a professional fund manager invests that money in a pool of well researched stocks, bonds and other securities and tries to maximize the returns. Mutual funds provide two benefits – diversification and professional management.

Net Worth

Assets minus liabilities.

Passive Income

Passive income is the income earned from assets like real estate, content assets etc. where an individual needs least active involvement.

Portfolio

Portfolio is the combination of all financial assets and securities held by an investor.

Risk Averse

Investors who are conservative in nature and want to avoid taking risks in investments.

Securities

Securities are financial instruments that hold some monetary value. It’s a general term used for financial instruments like stocks, mutual funds, bonds etc.

Stocks

Stock is a financial instrument or security issued by companies listed in stock market, which provides the investor an equity or share in the issuing company. Shareholders can earn profits by selling the stock at higher price i.e. capital gain or dividends.

Term Insurance

Term insurance is a life insurance product which provides extensive financial cover to the insured for a specific period, where benefits are paid to the nominee in event of death of life insured. If the life insured survives the policy period, there is no maturity benefit. Term insurances tend to provide a very high financial cover in very low cost.

Your feedback, comments and questions are most welcome!