Financial Independence - Understanding Financial Jargon

I was checking my emails the other day and I noticed that I had a couple from my bank. So, as you do, I was reading them, and after I had finished, I had to read them again due to the amount of terms in there that I just didn’t quite understand.

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This got me to thinking – how many people my age are actually aware and privy to what a lot of this financial jargon actually means? I am fairly clued up on my financial terms, but there were still a few in there that I had to Google to make sure I wasn’t being declared bankrupt or something.

I thought it would be a good idea to throw together a list of a few of the more common financial terms that can appear in everyday banking that we millennials may not be overly familiar with.

Compound Interest

This is one that will come up often if you have any kind of savings account or have borrowed money from your bank.

With your savings account, the way it works, or the way it is calculated is by adding together the amount of money that you have paid into the account, which is called ‘capital’, and the interest that is being paid on it.

With borrowed money it works much the same – it takes what you owe, adds on the interest, and the next year, adds on the interest the sum from the previous year.

Make sense? If not, you can have a look here for a more in depth look at compound interest.

Credit Rating

Another one that will surely come up if you are looking to borrow money or obtain credit.

Simply put, your credit rating is a summation of a person or persons ability to meet their financial obligations, taken from previous and similar dealings.

For example, if you apply for credit on a new living room suite, the sellers are not just going to look you in the eye and decided that you are in fact going to pay them the money that they are technically loaning you, are they? They will look at your credit rating which is made up from your previous dealings, if your previous dealings are good, then you will have a good credit rating, if your previous dealings are bad, then, well, you get the idea.

You can look up information on credit score on your provider’s website. Modern providers usually have information relating to your spending habits and your card transactions and how you can help improve these. These steps can always help towards improving your credit score.

Secure and Unsecured

These two will come up particularly if you’re looking to borrow a substantial amount of money from a bank.

A secured loan is a loan that is placed against your home or equity. Basically you are saying to the bank “I am good to pay this money back, so I am putting my house up as collateral. If I don’t pay back my loan, my home or value of my home is yours.”

Now, obviously only homeowners can take out a secured loan. The rest have to take out an unsecured loan. This is where the aforementioned credit rating will come into play. The bank decides whether you are worth loaning money to based on your credit rating. Simple.

If you didn’t find that simple, then you can read some more about the difference between secured loans and unsecured loans.

These are just some of the plethora of jargon that exists, but there are many, many more. So, make sure you are always reading the fine print for anything to do with your finances, and if there is a term that you are not sure of, the answer is just an internet search away.

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