Managing your personal finances can feel overwhelming at times. There are many terms, definitions, and responsibilities to understand that it’s easy to feel lost.
We’ve covered the top financial terms everyone should know and understand to help you stay on top of your personal finances below.
Interest is the fee lenders charge you to borrow money. You typically pay interest on any money borrowed including credit cards, personal loans, mortgages, or car loans. Pay attention to the fee, but also look at the bottom line to see a loan’s total cost.
The APR is the annual percentage rate, and it differs from your interest rate. The APR is the annualized rate for the loan’s total cost including any loan fees or closing costs. It’s the percentage you’ll pay for a loan over the course of a year. Comparing the APRs of two loans can be a better way to tell which loan is right for you.
Compound interest is what you pay on credit cards and some loans. If interest compounds it means that the interest your loan accrued is your new balance which then accrues more interest.
It’s best to avoid carrying credit card balances to avoid this from happening and to only take out loans that charge simple interest (interest that doesn’t compound).
The principal is the amount of money you borrow, typically on a loan. For example, if you take out a personal loan for $1,000, your principal balance is $1,000. You’ll pay interest on that amount, but the amount you borrowed is the principal.
An emergency fund is money everyone should have on hand should an emergency occur. By emergency, we mean job loss, falling ill, or something else outside of your control that makes you unable to earn income.
Aim to have three to six months of expenses set aside to cover any size emergency while you get back on your feet.
Your net worth is the difference between your total assets and liabilities. Assets include anything with value such as your house, car, bank accounts, and investment accounts. Liabilities are any debts you have such as your mortgage, car loan, credit card debt, or any other loans.
Your credit score is a numerical evaluation of your credit history. The higher your credit score is, the lower the risk you pose to lenders. This usually means you’ll get better interest rates and pay fewer fees.
Your credit history is a listing of all your past financial accounts. It keeps record of how well you paid them (did you make your payments on time), as well as any financial issues you’ve had. It goes back 10 – 20 years, but most lenders look at the most current information to make lending decisions.
Understanding these basic financial terms can help you know how to manage your finances. An informed borrower usually gets better interest rates and fees on loans because they know what to ask for and how to compare their loan options. If you need help understanding these terms and what they mean for you, contact us for a free consultation.