April Financial Literacy: Key Terms You Should Know

April is celebrated as Financial Literacy Month, a perfect time to enhance your understanding of crucial financial terms. Grasping these concepts can empower you to make smarter money decisions and take control of your financial future. In this blog, we'll explore six essential terms divided into three categories: savings, credit, and lending.

Lending Terms

Collateral: In lending, collateral refers to an asset that a borrower offers to a lender to secure a loan. Common examples include using a home or car. While collateral can help you secure a better loan term, it also poses risks; if you default, the lender can seize the asset.

Equity: Equity represents the ownership value of an asset like a home, after deducting any liabilities. As you continue to pay your mortgage, your equity increases. Equity can be tapped into through home equity loans, providing resources for investments or emergencies.

Credit Terms

Annual Percentage Rate (APR): APR reflects the true cost of borrowing, comprised of interest rate and additional fees. It's an important metric for comparing loans or credit card offers, as it gives a more comprehensive view of the total cost.

Annual Fee: This is a yearly fee charged by credit card issuers, sometimes worth paying if the card offers specific benefits like rewards or premium perks that outweigh the cost.

Savings Terms

Compound Interest: This term refers to the process where the interest earned on an amount of money is reinvested to earn additional interest. For example, if you save $1,000 with a 5% annual compound interest rate, over time, your savings will grow substantially as interest builds upon itself.

Pay Yourself First (PYF): PYF is a budgeting strategy where you prioritize saving from your income. By setting aside a portion of your earnings each month, you build a financial cushion that secures your future stability.

Understanding these financial terms is a critical step toward achieving financial independence and making informed decisions. Each small step, like learning these terms, can have a significant impact on your long-term financial journey.