Financial Terms Every Young Adult Should Know
If there's anything that global issues such as the COVID-19 pandemic and the ongoing supply chain shortage taught us, it's that a major financial crisis could happen at any moment. For this reason, remaining on top of your financial situation by growing your savings and budgeting wisely is a priority, especially since the next financial challenge may be lurking around the corner. In order to help you stay on top of your finances and build toward a prosperous future, here are some financial terms that every young adult should know.
Interest
This is the additional amount of money that borrowers must pay when repaying a loan. Some examples could include interest payments on your credit card or a loan that you took out from the bank in order to pay for your car or your home. If you have a bank account, then you'll actually be the one earning interest as you're the one who is lending funds to the bank. Often, as is the case with investments and bank accounts, the type of interest that is applied is compound interest, whereby interest rates are calculated according to the initial amount of the debt as well as the interest that has been accumulated. In the case of simple interest, however, interest is only paid on the initial amount.
Annual percentage rate (APR)
Oftentimes, interest rates are expressed as a yearly rate, as is the case when you get a credit card. This interest rate amount is expressed as an annual percentage rate and gives you an indication of how much money you'll owe should you fail to pay your credit card bill on time.
FICO score
More commonly known as a credit score, FICO stands for Fair Isaac Corp., the company that came up with the method for calculating a credit score. With scores ranging from 300 to 850, your FICO score indicates how likely you are to pay back a loan on time. This score is calculated on a variety of factors, including the length of your credit history, your payment history, and the total amount of your outstanding debts. Usually, scores of 620 and above make it easier to get approved for a loan with the best terms.
Asset allocation
This is the process where you decide where to invest your money. The three major asset classes are stocks, bonds, and cash. Each one of these experiences different growth rates and reacts differently to market conditions. For example, stocks are known for offering high growth rates but are also known for being volatile. Cash and cash equivalents, on the other hand, don't offer much growth but also won't get depleted in the face of unfavorable market conditions. This means that the proportion of money that you invest in each asset class will largely depend on your financial strategy. Still, the golden rule of investing is to diversify your portfolio to some extent so that you provide yourself with some protection from risk.