It feels like only yesterday you were a teenager, enjoying life without a worry in the world, and *WHAM* you are an adult! Now suddenly, you need to get loans for college, pay rent for your new place, create a budget, save money, maintain a good credit score, compare and buy the insurance, and top it all off, not spend all the money on all your favorite things.
How come nobody thought to teach the important things in school? Well, fret not! By the end of this article, you will ace adulthood completely (or at least you will manage your money better).
Without further ado, let’s talk about personal finance.
Personal Finance Definition
You may have heard of this term often but may not know what it means. So, what is personal finance?
Simply put, personal finance refers to all your money matters. Whether it’s buying a car, getting insurance, applying for a loan, saving money, creating a budget, purchasing a house, and the list continues. Basically, every time you spend or borrow money for yourself or your household, you are dealing with personal finances.
If you think from a broader perspective, personal finance is a massive umbrella that covers different aspects of your money. As the term suggests, this money is not related to your businesses and only concerns your “personal” matters. Some elements that make up personal finances are:
- Budgeting
- Saving
- Investing
- Borrowing (loans)
- Managing Mortgages
- Banking
- Planning retirement
- Insurance
Yes, it is that simple. So, now that you know personal finance let’s move on to understand some key terms that you will see as you move along in this financing journey.
Key Terms in Personal Finance
Personal finance can be overwhelming for a beginner. It is natural to be confused and wonder what some unfamiliar terms mean.
Here is a guide to knowing the meaning of such terms:
Budgeting
Budgeting is the term used for managing money. This is the most basic part of personal finance, and everyone should learn how to do it. It is practically a life skill, and you can never fully understand how to manage money unless you start budgeting and make it a regular practice.
Furthermore, budgeting helps you keep track of the money coming in (income), the money going out (spending), and what you are left with after deducting your spending from your income. The amount you are left with is your savings, and you can use these for investing, planning retirement, buying insurance, or starting an emergency fund.
Investing
The easiest meaning of investing is putting your money in something that gives you value and will help you make more money when you eventually decide to sell it. Whatever we invest in is our asset, and it helps grow our money. It is an efficient way to use your money wisely and can help you earn some extra money.
Many people are actively involved in investing in stocks, cryptocurrency, and even estate and for most of these people, investing is their primary source of income. However, it is important to note that you must always seek an expert’s advice before investing money in anything. Investing has plenty of risks which is why it is essential to never dive head first into it and research well before deciding what you are investing in.
Interest Rate
Interest rate refers to the percentage charged over the primary amount you have borrowed (loan). You can think of this as the cost of your loan. Interest is charged on all kinds of loans, including student loans, personal loans, and even credit cards.
In fact, failing to make your payment regularly raises your interest rate each time you miss it. This is why it is crucial that you look at the interest rate when searching for lenders to borrow from. Additionally, keep in mind that the interest rate varies for every loan and lender.
Insurance
In simple terms, insurance is your financial protection. Insurance agencies offer to cover you against the premium you regularly pay for this service when risk is involved. The insurer compensates you for loss and ensures you get coverage according to your policy.
There are different kinds of insurance. However, the ones you need essentially are; health/medical insurance, car insurance, life insurance, home insurance, and travel insurance. You might be familiar with car or auto insurance if you have a personal vehicle.
Insurance is really important because it helps you from going into a financial crunch when you need a large sum of money for a loss or suffering you have experienced in life. Personal finance planning requires you to be wise and buy the necessary insurance that you think you may need.
Credit Score
You may have heard of the term credit score if you are considering applying for a student loan. A credit score determines how good you are at paying off your loans. Lenders ask for your credit score to ensure that you are reliable enough to lend money. Of course, they must make sure that you will be able to return the money you are borrowing.
It is important to maintain a good credit score by regularly paying off your loan on time. If you fail to do so, not only will your interest increase, but you will also face difficulty in getting loans next time you need them.
Wrapping it Up
These are some terms that regularly come up as you graduate from high school. It is important to understand how personal finance planning works so that you can live your life without stress, and just the thought of money in your bank account does not stress you out.
Take the time to understand these terms and research managing money. There are plenty of tips on budgeting and managing money on the internet to help you become more financially independent. Use them wisely and start this exciting chapter of your life without stressing over money management.
