Personal Finance Vocab Words

Understanding personal finance requires learning a specific vocabulary. Here’s a breakdown of some essential terms:

Income & Expenses

* **Income:** Money received regularly, often from employment, investments, or other sources. Think of your paycheck, interest earned on savings, or rental income. * **Gross Income:** Total income before any deductions like taxes or insurance. * **Net Income:** Income after deductions. This is your take-home pay. * **Expenses:** Money spent on goods and services. * **Fixed Expenses:** Expenses that remain relatively constant month-to-month, like rent, mortgage payments, or loan payments. * **Variable Expenses:** Expenses that fluctuate month-to-month, like groceries, entertainment, or gas. * **Budget:** A plan for how to spend your money. It helps you track income, expenses, and savings. * **Surplus:** When your income exceeds your expenses. * **Deficit:** When your expenses exceed your income.

Saving & Investing

* **Savings:** Money set aside for future use, usually in a safe, easily accessible account. * **Emergency Fund:** Savings specifically designated for unexpected expenses, such as medical bills or car repairs. Aim for 3-6 months’ worth of living expenses. * **Investing:** Using money to purchase assets with the expectation of generating future income or appreciation. This involves more risk than savings. * **Stocks:** Ownership shares in a company. * **Bonds:** A debt instrument issued by a corporation or government. You’re essentially lending money to the issuer. * **Mutual Funds:** A collection of stocks, bonds, or other assets managed by a professional. * **Diversification:** Spreading investments across different asset classes to reduce risk. Don’t put all your eggs in one basket! * **Return on Investment (ROI):** The profit or loss generated by an investment, expressed as a percentage of the original investment. * **Compound Interest:** Interest earned not only on the principal amount but also on the accumulated interest. It’s interest earning interest.

Debt & Credit

* **Debt:** Money owed to another party. * **Credit:** The ability to borrow money or access goods and services with the understanding that you’ll pay later. * **Interest Rate:** The percentage charged for borrowing money. * **Annual Percentage Rate (APR):** The yearly cost of borrowing money, including interest and fees. * **Credit Score:** A numerical representation of your creditworthiness, based on your credit history. * **Credit Report:** A detailed history of your credit activity. * **Principal:** The original amount of money borrowed. * **Collateral:** An asset pledged as security for a loan. If you fail to repay the loan, the lender can seize the collateral. * **Mortgage:** A loan used to purchase real estate.

Other Important Terms

* **Net Worth:** The value of your assets minus your liabilities (debts). It’s a snapshot of your financial health. * **Assets:** What you own, such as cash, investments, real estate, and personal property. * **Liabilities:** What you owe, such as loans, credit card debt, and mortgages. * **Inflation:** The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. * **Taxes:** Mandatory payments made to government entities.

Understanding these terms is crucial for making informed financial decisions and building a solid financial future.