Control Personal Finances

11 Personal Finance Terms To Know Financial Literacy

by Vlastimil Cícha - Pat V.C.

October 8, 2020

After a while, you’re going to uncover 11 personal finance terms that they never teach you at school. 

The question is,

why don’t they teach these finance terms? 

Also, did your parents talk to you about finance at an early age?

The truth is,

money topic has always been sensitive in my family.

And I heard the only conversation about it when there wasn’t enough or dozens of money myths

Whether you are a teenager watching this video or a financial expert, you may agree with me on two things. 

Firstly, knowing fundamental personal finance terms and concepts is the first action towards financial literacy. 

And secondly, financial literacy affects your financial health, which is a crucial part of 7 Wealth Stages.

7 Wealth Stages

That means, applying these basic personal finance terms in your life will help you move toward your financial goals. 

And later on, exploring even more sophisticated personal finance key terms will help you build and control your wealth.   

So no more excuses

Introduction to 11 Personal Finance Terms To Know

Generally, let me test you with two basic questions.

  • Could you clearly define what’s an emergency fund or diversification?

It might sound for some of you like a foreign language, but these terms are important to learn. 

In the first place, the best place to get started is a book called How Money Works.

But for now, I’m going to talk about 11 essential personal finance terms you must know to dominate your financial literacy.

With this in mind, ready to get started? 

1. Income

Personal Finance Terms - Income

I know Doers, it might sound outrageous to start with income. 

But listen: 

“Society only teaches you at school how to earn income through jobs and trading your time for money.”

Sounds this familiar to you?

But income isn’t just trading your valuable time for money. 

It may come from many sources such as:

Meanwhile, I recommend studying all sources of income in-depth at your young age and build as many as possible one by one. 

2. Current Or Checking Account

Personal Finance Terms - Checking Account

When you get income, you don’t want to stuff it under a mattress, do you?

For that reason, you need to open a checking account which is simply a deposit account in your local bank. 

“The advantage of a current or checking account is that you have very easy access to cash, because it is a liquid account.”

On the other hand, the disadvantage is, it doesn’t earn usually any interest. 

Also, you can open a checking account online but for better financial practice, I’d recommend going directly to the bank and understand the language they use. 

And who knows, you might love that and end up working later as a banker or real estate investor buying the entire building and rent it to the bank. 

3. Savings Account

Personal Finance Terms - Savings Account

Besides your checking account, the second step is usually to open a savings account. 

It’s coming with better benefits which are the interest rates. 

After all, it means, when you deposit money into a savings account, you earn a small amount of interest on your balance.

But this interest is very low and you should compare savings account across your country where you live as it varies significantly. 

“The purpose of a savings account is for short-term savings, not long-term investment plans.”

So I recommend accumulating an emergency fund in your savings account, which I will discuss later in this article.

4. Simple Interest

Personal Finance Terms - Simple Interest

In terms of saving, you can encounter interest in your savings account or time deposits account. 

In terms of lending, you might be paying interest on a loan principle while borrowing money from lenders such as banks. 

But let’s talk about simple interest in your savings account. 

“Simple Interest means the extra amount you will earn for having your money in a bank account or time deposits account.”

In other words, it means that your bank is paying you for settling your money in the bank.

On the other hand, you can also earn interest when you lend money to someone else such as a private company, government, or individuals. 

5. Compound Interest

Personal Finance Terms - Compound Interest

To emphasize,

Compound interest is a very powerful investor’s tool and it’s like a snowball.”

Because it simply means you earn “interest on interest” on your initial balance. 

The best part? 

It grows and grows year after year as long as you keep the money in your account.

6. Pay Yourself First

Personal Finance Terms - Pay Yourself First

Look,

I can’t emphasize more how important is to establish a PYF habit or pay yourself first

Simply said,

PYF is a strategy in which you prioritize to make payment first to yourself.

Such as building an emergency fund, budgeting, investment before all your expenses. 

And I want to mention here very important takeaway:

“Poor people pay themselves LAST. Wealthy people pay themselves FIRST.

Does it make sense?

7. Emergency Fund

Personal Finance Terms - Emergency Fund

Speaking of an emergency fund, this is a specific amount of money you need to put aside to sleep well. 

I heard terms such as SWAN account which means Sleep Well At Night.

And when you think about it intensely, you realize that…

“Having at least a 3-month emergency fund at your immediate disposal will make you sleep well.”

Because anytime unexpected occasions happen in our lives and to have an emergency fund is true peace of mind. 

8. Budget

Personal Finance Terms - Budget

When you were young, you were planning the budget to buy some candies or ice hockey team cards of your favorite hockey club. 

Am I right? 

But no one has taught you at school to budget efficiently once you get into the rat race and start earning income. 

They didn’t teach you budgeting for your monthly necessary expenses such as:

  • Rent or mortgage,
  • food,
  • utilities,
  • and transportation.

And especially they didn’t teach you that…

“The purpose of budgeting is to achieve your financial commitments or goals.”

Speaking of financial commitment it might be a very urgent budget such as forthcoming expected medical expenses or paying taxes.

And speaking of financial goals, it might be budgeting your down payment for your first or other investment property

The big lesson here: 

“You want to plan a budget first to accumulate assets, not liabilities.”

I hope this makes a lot more sense for you why is important to accumulate assets first.

Because it leads me to the ninth out of eleven personal finance terms…

9. Investment 

Personal Finance Terms - Investment

Here is the truth:

“The sooner you start investing, the more massive your nest egg will be.”

To point out, what do I mean by nest egg? 

At this point, it’s about to accumulate a certain amount of money to live off of your savings and investments.

And after you reach this amount, you won’t need to work anymore.

I know it sounds simple, but this is a deep topic to speak about.

So how do you achieve to build such a nest egg?

The answer is – investing

But one thing must be remembered…

Make sure to scrutinize these 7 critical steps before you invest.

And after that, you can choose from diverse types of investments such as:

  • Short-term,
  • long-term,
  • liquid,
  • illiquid, and so on. 

However, to speed up the process, the best is an investment that provides monthly cash flow which can then replace your trading time for money. 

10. Asset

Personal Finance Terms - Asset

Undoubtedly,

“As soon as you begin exploring the investment field, you will discover many types of assets in many forms such as tangible or intangible that carry market value.”

Put it simply,

these assets allow you to convert into cash.

But how fast it depends if the asset is liquid or illiquid

To give you quick basic examples of assets to invest in: 

  • Liquid assets such as individual stocks.
  • Next, applying a dollar-cost averaging strategy with low-cost index fund S&P 500 or other ETF index funds. 
  • For the long term assets such as real estate.
  • Or illiquid assets may be investing in the private market such as startups. 
  • Furthermore, it could be commodities such as gold or silver and a piece of art.
  • Another type of asset can be intellectual properties which are patents, copyrights, or any form of creativity. 

You see, there are many options to choose from.

And finally…

11. Diversification

Personal Finance Terms - Diversification

When I read a book by Tony Robbins called MONEY: Master The Game, in my mind has been always the paragraph which I’m going to quote:

"There are only three tools for reducing your risk and increasing your potential for financial success:

1. Security selection

2. Market timing

3. Asset allocation

Overwhelmingly the most important of the three is asset allocation”

And this is a core principle of investing.

“Diversification diversification diversification. It means to spread your assets to reduce risks.”

So I recommend learning from the best people such as Ray Dalio which runs the largest hedge fund in the world.

After all, you will understand how ultra-rich wealthy people invest their money.

With this purpose in mind, learn from the master and reduce overall risks. 

Time To Take Massive Action

To conclude this blog post,

I discussed the basic information within 11 personal finance terms.

Because understanding financial vocabulary is an essential part of financial literacy and developing practical money skills.

And sometimes I’m shocked when I talk to people and they don’t know what asset allocation is.

My question is,

  • What have you learned today? 
  • Has this video provided value for you? 

Because you know the purpose of this channel…

I want you to become a Doer. 

Put in a comment below the word “Diversification” to confirm you are a loyal Doer

I’m looking forward to your comments and I’ll see you in the next video or on our website. 

Vlastimil Cícha - Pat V.C. has been intensely mentored in digital investing within the larger financial service organization and investment bank while leading Elite-SEO strategies.
Besides that, he’s been obsessed with creating wealth-building and well-being strategies. And he found out that in our life there are only seven stages. He calls them the 7 Wealth Stages framework.
That’s the reason why he talks and writes about topics related to the 7 Wealth Stages that guide you toward Prosperity and Holistic Wealth. It is personal & professional development about a mindset, elite-income skills potential, personal finance, investment, personal growth, scalability, and abundant life. Vlastimil advocates the statement that elite-income skills are the entryway into financial abundance through well-organized wealth-building strategies.

Pat VC

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