AllLife helps you learn the language of money, so you can make better financial choices.

Making the right financial choices starts with understanding the language of money. Here are 10 of the most important money-related terms you need to understand:

1. Budget: Breaking down your income (that’s the money you earn!) and your expenditure (that’s the money you spend!) to assess your financial situation is important. Setting an annual, monthly, or daily, budget helps you figure out where you can cut back on expenses, eliminate debt more quickly, and save appropriately.

2. Compound Interest: Compound interest is your best friend in savings, and your mortal enemy in debt. Compound interest is calculated in terms of the total amount of money you’ve loaned, or calculated in terms of the total amount of money you’ve saved so far. Compound interest is a cumulative amount of money, so it directly affects the amount of money you save or have to pay off, in the long run.

3. Financial Literacy: Just as you learn how to read, you need to learn how to read your finances too. Financial literacy is the skill of knowing how to: manage your money, plan your financial future, predict your income, forecast your expenditure, calculate interest rates, and understand the effects of interest on both your investments and your debts.

4. Interest Rate: An interest rate is calculated in terms of the amount of money you borrow or save, and the period of time you have attached to that loan or investment. Interest rates are calculated as a percentage.

5. Good Debt: Your financial advisor may have used this term before. Good Debt is the type of debt you get, to accumulate assets that increase in value, over time. For example, your home loan or mortgage could be considered a “good” debt, because it helps you to purchase a home that you will – hopefully – sell at a later stage, and earn a profit on. “Good” debt is most often associated with being able to purchase an asset that gives you financial boost in the future.

6. Bad Debt: Those clothing accounts, credit accounts, and groceries bought on credit, are considered “Bad Debt”. Often used to fulfill short term desires, bad debt often comes with high interest rates, and effectively depletes your disposable income. Bad Debt is lent to you in the form of credit agreements and unsecured loans. The amount of money you are loaned, or the amount of credit extended for you, is closely linked to your income, not your assets.

7. Overdraft: If there’s too much month for your money, the idea of getting (or extending) an overdraft for your bank account could be tempting. Most financial institutions make it relatively simple to obtain, or extend, your overdraft, allowing you to borrow money that then gets immediately repaid into your bank account. An overdraft should be used wisely, and responsibly. If you’re unsure about initiating or extending your overdraft, rather don’t.

8. Credit: The phrase “giving someone credit” means you’re giving them something they didn’t have before. Credit, in terms of financial literacy, means the same thing. When you “get credit” you enjoy the ability to buy goods or services, before you can pay for them upfront. Credit agreements are given based on some level of assurance that payment will be made in the future. Most credit agreements include some level of regular payments, like monthly instalments or similar payment arrangements.

9. Credit Life Insurance: When you sign a credit agreement, you are often asked to take out insurance to cover that agreement. This is called Credit Life Insurance, and it means you’ll pay a small monthly fee to your credit provider every month. If you are ever unable to pay your credit instalments, or you lose your job, become disabled, or die, your Credit Life Insurance will cover your payments or the amount you borrowed. Simply put, Credit Life Insurance is a good idea, in case of anything.

10. Life Insurance: Life Insurance is one of the most important financial tools you can get. By signing up for Life Insurance, you’re ensuring that your, and your family’s, financial future is secured. Life Insurance policies usually pay out when you lose your job, become disabled, or die. Different Life Insurance policies offer you different things, options, and payouts.

Sources:

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Corporate Finance Institute. 2021. Bank account overdraft. Web page online. Available at: https://corporatefinanceinstitute.com/resources/knowledge/finance/bank-account-overdraft/ [Accessed 21 January 2021].

Fay, B. 2021. Good debt vs. bad debt. Debt.org. Web page online. Available at: https://www.debt.org/advice/good-vs-bad/ [Accessed 21 January 2021].

Fernando, J. 2021. Compound interest. Investopedia. Web page online. Updated 13 January. Available at: https://www.investopedia.com/terms/c/compoundinterest.asp [Accessed 21 January 2021].

Ganti, A. 2020. Budget. Investopedia. Web page online. Updated 3 August. Available at: https://www.investopedia.com/terms/b/budget.asp [Accessed 21 January 2021].

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Old Mutual Finance. 2017. Everything you need to know about credit life insurance. Web page online. Available at: https://www.oldmutualfinance.co.za/blog/personal-loans/everything-you-need-to-know-about-credit-life-insurance [Accessed 21 January 2021].

Old Mutual Finance. 2017. Good debt vs. bad debt. Web page online. Available at: http://oldmutualfinance.co.za/good-debt-bad-debt [Accessed 21 January 2021].

Randolph, KK. 2020. The 5 key components of financial literacy. Article online. 31 August. Available at: https://www.fastweb.com/student-life/articles/the-5-key-components-of-financial-literacy [Accessed 21 January 2021].

Roos, D. 2021. How debt works. Howstuffworks. Web page online. Available at: https://money.howstuffworks.com/personal-finance/debt-management/debt1.htm [Accessed 21 January 2021].