Key finance terms everyone should know
What's the story
Entering the world of finance can prove overwhelming for first-timers. However, comprehending key concepts is extremely important to make informed decisions and managing one's finances well. In this article, we will familiarize you with some basic financial concepts everyone must know. Understanding these basics can help you lay a strong foundation for your financial journey and make more confident choices in your personal and professional spheres.
Interest rates
Understanding interest rates
Essentially, interest rates are the cost of borrowing money or the reward for saving it. They are a major factor in loans, mortgages, and savings accounts. When you borrow money, you pay interest to the lender; when you save money, you earn interest from the bank. Understanding how interest rates work helps you compare different loan offers and pick savings accounts with better returns.
Budgeting basics
The importance of budgeting
Budgeting is all about planning to manage your income and expenses. It helps keep a tab on what you spend, differentiate between needs and wants, and ensure you meet your financial goals. A good budget can save you from overspending and allow you to save for later needs or emergencies by distributing funds wisely across various categories.
Credit scores
Credit scores explained
A credit score is a number that reflects a person's creditworthiness depending on their credit history. Lenders utilize this number to evaluate the risk associated with lending money or providing credit lines. A higher credit score reflects responsible financial behavior, which can result in favorable loan terms and lesser interest rates on money borrowed.
Investment diversification
Diversification in investments
Diversification is an investment strategy wherein an investor puts money in various asset classes to mitigate risk. It protects you from huge losses if one of the investments doesn't perform, while also increasing your overall returns by exposing you to various markets. Essentially, by not putting all your eggs in one basket, diversification helps you out.