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Understanding 6 Basic Financial Terms

Financial Terms

Not everyone grows up with an understanding of how to manage and grow a financial portfolio. Once you realize that financial independence can make or break your future, you will probably look for a variety of ways to manage your money. In the process, you’ll come across different financial terms that can seem intimidating and confusing. To help you get started, here are six basic financial terms with explanations.

  • Credit Union

The first term you should get comfortable with is “credit union”. It’s important to understand what a credit union is because it is an alternative option to a bank when it comes to saving and growing your money. Credit unions are different from banks in many ways, including the following:

  • Credit unions are not-for-profit organizations.
  • Credit unions have volunteer boards of directors.
  • Credit unions act in the best interest of members.
  • Credit unions return profits to the community.

You can find many of the same services at a credit union that you would at any national bank, including loans, checking accounts, savings accounts, and investment opportunities such as short-term CD certificates. To join a credit union, you usually have to fit certain criteria, such as your geographical location or your job.

  • Cryptocurrency

As soon as you set foot into the world of finance, you’re going to hear the term “cryptocurrency”, often in the shortened form “crypto”. Cryptocurrency is an alternative to national currencies that act as money in societies all over the world. Crypto is decentralized, which means there is no single bank or authority that controls this currency. To keep cryptocurrency transactions secure, people depend on blockchain technology.

The important thing to know about cryptocurrency is that it is not replacing traditional currency, at least not yet. It is also an unstable form of investment. While dabbling in the cryptocurrency market might seem fun, you have to seriously consider how much money you can put on the line for an investment that is not always secure.

  • Assets

As you grow your financial portfolio, you will need to understand what people in this sector mean when they refer to assets. This is actually a very simple term. Your assets are things you own that have value in the economy. If you own something that you can sell, then that is an asset. Your car, refrigerator, home, laptop, and more are all considered assets. The total amount of funds you have in your accounts also adds to your overall asset portfolio.

  • Cash Flow

The term “cash flow” usually refers to transfers of money in and out of bank accounts, especially for businesses and larger institutions. However, you’ll also hear this term in regard to personal finances as well. If you have good cash flow in your life, it means that you earn more than you spend. The cash flowing into your accounts outweighs the cash flowing out for things such as bills, mortgage payments, and incidentals.

  • Net Worth

Your “net worth” is the total value of everything you own and all the money in your accounts. You’ll hear this term when it relates to very wealthy individuals and corporations. However, you also have a net worth as an individual. Once you start building an investment portfolio, you will definitely want to take into account the net worth of any company or organization you invest in.

  • FICO Score

The term “FICO score” refers to your individual credit score. The acronym stands for Fair Isaac Corporation, referring to the organization that came up with the current credit scoring system. Your credit score is a critical component of financial independence. Every time you open a credit card or take out a loan on a car or appliance, it impacts your credit score, and the score follows you throughout life. That’s why it’s vital to have some idea about your score from the time you start making your own money.

When you’re just starting to dip your toes into the financial industry, keep these basic terms in mind as you explore and expand your knowledge.