No matter where you are on your personal finance journey, it is never a bad idea to brush up on basic personal finance terms. With the right knowledge base in your back pocket, you’ll be better prepared to build a bright financial future.
One way to dramatically transform your financial future for the better is to try your hand at house hacking. With the power of house hacking, you can completely eliminate your housing expenses. Imagine how you could redirect those funds to change your life. I recommend checking out our free House Hacking Quick Start Guide to learn more about this life-changing strategy today.
Today, we will take a look at some basic personal finance terms that you need to know.
5 basic personal finance terms to know
Ready to take a closer look at the basic financial terms you should know? Let’s dive in.
Understanding your net worth can change your entire outlook on your finances. With this simple number, you will find a snapshot of your finances that can help you see where you stand quickly.
Tawnya Redding, from Money Saved is Money Earned, says, “net worth is a number many people are never aware of, but it's critically important to know where you stand financially and relatively simple to calculate.”
Redding continues, “Your net worth is simply your assets minus your liabilities, or what you own minus what you owe. If the difference between your assets and liabilities is positive, then you're doing better than most Americans. However, if it is negative, then you owe more than you own and should work on paying off debt.”
The power of compounding can completely transform your life. With compound interest, you can grow your money dramatically over time.
Chuck Jaffe, syndicated financial columnist and the host of the Money Life podcast, says, “Only when someone understands the power of compounding can they truly appreciate the importance of starting early, the value of getting “an extra double” by starting small and having their money grow is essential. It's how someone gets rich slowly.”
Since compound interest can help you reach your financial goals, it is a good idea to familiarize yourself with this term. Importantly, compound interest is very different from simple interest. Learn more about the distinction in our full post.
Index funds can be a powerful wealth-building tool. With an index fund, you aren’t attempting to beat the market with individual stocks. Instead, you invest in a wide swath of the market in order to keep pace with the overall growth.
R.J. Weiss, a Certified Financial Planner and founder of The Ways to Wealth, shares his story, “In my early 20s, I thought investing meant picking individual stocks. So, that's exactly what I did, and unfortunately, without a lot of success. I would have been much better off investing in index funds instead of picking stocks.”
Curious to learn more about how index funds work? Take advantage of our complete guide to investing in index funds.
Life insurance can be a useful tool to protect your dependents from financial distress in the worst-case scenario.
Even if you are pursuing FIRE, life insurance could deserve a spot in your financial picture. Jimmy McMillan, from Heart Life Insurance, says, “basically, if we plan correctly the client should be self-insured with assets by the time they retire. Life insurance fits in as a safety net until those assets are built up.”
McMillan continues, “Life insurance is critical to your family before you reach financial independence and it should be a key part of any FIRE strategy.”
A budget is the most important tool to use while working towards your financial goals. Sarah Sharkey, creator of Adventurous Adulting, says, “although many people very budgeting as a constricting exercise, I think the opposite is true. Building a budget that meets your needs allows you to align your spending with your values. With that in mind, a budget doesn’t necessarily need to be limiting. Instead, it should help you achieve your financial goals. ”
Sharkey continues, “For example, you might decide to prioritize saving for financial independence or paying off your debt early. Both lead to more financial freedom in the future, which can be worth the sacrifice. But you shouldn’t give up everything enjoyable when setting a budget. You can still enjoy fancy meals out or vacations with family – just include these in your budget to understand where your money is going.”
House hacking is my favorite financial term. In fact, I’ve even created an entire podcast – The House Hacking Podcast – dedicated to helping people achieve their house hacking dreams.
House hacking is an important term in personal finance because it could allow you to eliminate your housing expense completely. Imagine how you could transform your finances by redirecting the money you spend on rent or mortgage payments towards your financial goals.
Want to learn more? Take advantage of our free House Hacking Quick Start Guide to learn more about this life-changing strategy today.
The bottom line
With these basic financial terms, you are better prepared to build the personal finance foundation you need. Take action and move forward more confidently towards the financial future of your dreams.