Understanding financial matters can be difficult if you don’t understand the jargon. Becoming familiar with these 7 financial terms may help make things clearer and also add to your financial literacy…..
1. Time value of money
The time value of money is the concept that money on hand today is worth more than the same amount of money in the future, because the money you have today could be invested to earn interest and increase in value.
Why is it important? Understanding that money today is worth more than the same amount in the future can help you evaluate investments that offer different potential rates of return.
Inflation reflects any overall upward movement in the price of consumer goods and services and is usually associated with the loss of purchasing power over time.
Why is it important? Because inflation generally pushes the cost of goods and services higher, any estimate of how much you’ll need in the future–for example, how much you’ll need to save for retirement–should take into account the potential impact of inflation.
Volatility is a measure of the rate at which the price of a security moves up and down. If the price of a security historically changes rapidly over a short period of time, its volatility is high. Conversely, if the price rarely changes, its volatility is low.
Why is it important? Understanding volatility can help you evaluate whether a particular investment is suited to your investing style and risk tolerance.
4. Net worth
Net worth is what your total holdings are worth after subtracting all of your financial obligations.
Why is it important? Your net worth may fund most of your retirement years. So the faster and higher your net worth grows, the more it may help you in retirement. For retirees, a typical goal is to preserve net worth to last through the retirement years.
5. Risk/return trade-off
This concept holds that you must be willing to accept greater risk in order to achieve a higher potential return.
Why is it important? When considering your investments, the goal is to get the greatest return for the level of risk you’re willing to take, or to minimize the risk involved in trying for a given return. All investing involves risk, including the loss of principal, and there can be no assurance that any investing strategy will be successful.
6. Compound Interest
Interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan. Compound interest can be thought of as “interest on interest,” and will make a deposit or loan grow at a faster rate than simple interest, which is interest calculated only on the principal amount. The rate at which compound interest accrues depends on the frequency of compounding; the higher the number of compounding periods, the greater the compound interest.
A generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy. Used as a medium of exchange for goods and services, currency is the basis for trade. Generally speaking, each country has its own currency. For example, South Africa’s official currency is ZAR(the Rand), USA’s official currency is the Dollar, and Japan’s official currency is the yen. Investors often trade currency on the foreign exchange market, which is one of the most heavily traded markets in the world.