April's Financial Literacy Month: Key Terms Explained

April marks Financial Literacy Month, a time dedicated to enhancing our understanding of financial concepts which are essential for making informed money decisions. Becoming financially literate is a crucial step toward taking control of your financial future. This blog delves into six essential financial terms across three categories: lending, credit, and savings, to empower you with the knowledge needed for financial independence.

Lending Terms

Collateral: Collateral is an asset that a borrower offers as a way for a lender to secure the loan. If the borrower defaults, the lender can seize the collateral. Common examples include using your home or car to secure a loan. Understanding the risks involved, such as the potential loss of your asset, is crucial when considering loans that require collateral.

Equity: Equity represents the value of an ownership interest, most commonly in a home. As you pay down your mortgage, your equity in your home increases. This increased equity can potentially be used to access home equity loans, providing funds for renovations or other needs, effectively leveraging your home's value.

Credit Terms

Annual Percentage Rate (APR): APR is the annual rate charged for borrowing, expressed as a single percentage that represents the actual yearly cost over the term of a loan. It's a vital figure to consider when comparing loan or credit card offers, as it provides a truer cost of borrowing than just the interest rate alone.

Annual Fee: An annual fee is a yearly charge by a credit card company to a cardholder. While this fee might seem like an added cost, it can be worth paying if you're receiving valuable benefits in return, such as rewards, cash back, or premium perks.

Savings Terms

Compound Interest: This is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. Simply put, it's how your money makes money. For example, if you invest $1,000 with a 5% annual interest rate, you would earn $50 after the first year. In the second year, you’d earn interest on $1,050, and so on. This compounding effect accelerates the growth of your savings over time.

Pay Yourself First (PYF): PYF is a budgeting strategy that prioritizes savings before other expenses. By setting aside a certain percentage of your income as soon as you receive it, you ensure that you're consistently building your financial security, making savings a non-negotiable part of your monthly expenses.

By familiarizing yourself with these financial terms, you're making a commendable step toward financial independence and smarter decision-making. Remember, understanding even these basic concepts can have a significant positive impact on your financial journey over time.