10 Financial Terms Young Professionals Should Know: Part 1

I was recently watching BloombergTV, and the panel was talking about inflation and what would happen if the Federal Reserve acted too late. One woman said, “We saw the data coming in since a year ago last year, was the Fed not looking at the same data we were?” When she mentioned the “data coming in” she was referring to the CPI numbers. CPI is a financial term that stands for the Consumer Price Index. The Consumer Price Index is a measure of inflation. Inflation is the rate at which prices for goods and services rise. The CPI measures how much consumers need to spend to maintain their standard of living. CPI is used by businesses and governments to make decisions about price changes, wages, and economic policy.

I remember when I began to hear financial terms that I never heard of before. I wrote some down and began to learn what the terms meant and how it will affect me and my family. As young professionals its important for us to have a general understanding of what these terms mean. I’ve come up with a list of some financial terms that we should know. Investing in ourselves also includes us improving our financial literacy so that we can be aware of what’s taking place and be able to make any changes necessary. 

10 Financial Terms Young Professionals Should Know

1. Asset

An asset as a financial term is anything that has value. In the business world, assets are often physical things like buildings, machinery, or inventory. But intangible things can also be assets, like patents, copyrights, or goodwill. The purpose of classifying something as an asset is to track its value over time. This is important for both tax and accounting purposes. When an asset is sold, its sale price is compared to its original cost to determine whether there was a gain or loss.

There are different types of assets, including:

• Current Assets: These are assets that are expected to be turned into cash within one year. Examples include cash, inventory, and accounts receivable.
• Fixed Assets: These are assets that are not expected to be turned into cash within one year. Examples include buildings, land, and equipment.
• Intangible Assets: These are assets that have no physical form. Examples include patents, copyrights, and goodwill.

Assets can also be classified as either personal or business assets. Personal assets are owned by individuals, while business assets are owned by companies.

2. Liability

A liability as a financial term is any debt or financial obligation owed by an individual or organization. Liabilities can be in the form of money, goods, or services. Common examples of liabilities include credit card debt, mortgages, loans, and leases. In accounting, liability refers to the portion of a company’s debt that is owed to creditors. This includes short-term and long-term debt, as well as any interest that is accrued on the outstanding balance. Liability also refers to anything that could potentially cause financial loss or damage, such as an individual’s health or property. 

For businesses, liability insurance protects against claims arising from injuries or damages caused by the company’s products or services. Individuals can purchase liability insurance to protect themselves from lawsuits resulting from their actions.

3. Income

Income as a financial term is the money that a person or household earns in a year. This can come from employment, investments, or other sources. Incomes can be either high or low, and they can fluctuate over time. Incomes can vary greatly from one person to the next. Some people may have a high income but low expenses, while others may have a low income and high expenses. The amount of money that someone needs to live comfortably depends on many factors, including their lifestyle and where they live. 

Some examples of income are: 

• Wages and salaries: This is income that people earn from working. It is usually paid in the form of an hourly wage or a salary.
• Investment income: This is income that is earned from investing money in things like stocks, bonds, and real estate. It can be earned in the form of interest, dividends, or capital gains.
• Business income: This is income that is earned from owning and operating a business. It can come in the form of profit, revenue, or commissions.
• Inherited income: This is income that is inherited from someone else, such as a parent or grandparent. It can come in the form of money, property, or other assets.
• Government benefits: This is income that is provided by the government, such as Social Security or unemployment benefits.

What is Earned Income?

Earned income is income that is received by an individual or household in exchange for goods or services. income can come from a variety of sources, including employment, investments, pensions, and government benefits.

4. Expense

An expense as a financial term is an outflow of money from a person or organization to another person or organization. This can be in the form of payments for goods and services, or transfer of funds to another party. There are many different types of expenses, but they all involve some form of payment or transfer of funds. An expense can be considered a cost, but not all costs are expenses. For example, the cost of goods sold is not an expense because it is offset by revenue. Only when a cost is incurred and paid for does it become an expense.

Some common examples of expenses include:

• Purchases made with cash or credit
• Payments for services rendered
• Rent or mortgage payments
• Utility bills
• Taxes
• Insurance premiums
• Wages and salaries
• Interest expense

How can we keep track of expenses? 

There are many ways to track and manage expenses. Some people or organizations may use budgeting systems, while others may simply keep track of their spending in a ledger. No matter what tracking system is used expense management is important to keep track of where money is being spent and to ensure that spending stays within budget. 

5. Debt 

Debt as a financial term is an obligation that requires one party to pay another party a sum of money or other asset. The debt may be owed by an individual, a company, or a country. debt may be secured by collateral, or it may be unsecured. A debt may be payable immediately, or it may be payable in the future.

There are many types of debt, including:

• Credit card debt
• Student loan debt
• Mortgage debt
• Business debt
• Government debt

What are some ways that debt can affect consumers? 

Debt can have several negative effects on consumers. It can cause financial stress, lead to missed payments, and damage credit scores. Debt can also make it difficult to save money or make large purchases.

Are there pro’s to having debt? 

If you have good debt, then the answer is yes. Good debt is debt that is used to purchase something that will grow in value over time. In that instance debt can be a useful tool to help individuals and businesses finance purchases or expand operations. However, leveraging debt can be a two-edged sword. If not managed properly the debt can become a burden. When debt becomes unmanageable, it can lead to financial problems and even bankruptcy.

6. Interest

Interest as a financial term is a charge that accrues on an outstanding debt. It is the cost of borrowing money, and it is typically expressed as a percentage of the total amount borrowed. Interest can also be earned on deposits and other investments. 

What is an Interest Rate? 

Interest rate is the percentage of interest charged on a loan or other debt. The interest rate can be fixed or variable, and it is determined by several factors, including inflation, the Federal Reserve’s actions, and the borrower’s credit score. 

What is Compound Interest? 

Compound interest is interest that is earned not only on the original principal but also on the accumulated interest from previous periods. Compound interest can be earned on deposits and other investments, as well as on loans and other debts. 

What is Simple Interest? 

Simple interest is interest that is earned only on the original principal. It does not accrue on any accumulated interest from previous periods. 

Interest can be a helpful tool in managing finances, but it can also become a burden if it isn’t managed properly. It’s important to understand how interest works and how it can impact your finances before making any decisions.

7.Credit

Credit is a type of financial agreement that allows you to borrow money from a lender and then repay it over time. There are many different types of credit, including credit cards, loans, and lines of credit. With credit, you can buy the things you need now and pay for them later. Just be sure to make your payments on time and in full to avoid costly fees and interest charges. Credit can be a great tool when used responsibly, but it can also get you into financial trouble if you’re not careful.

What are some examples of credit? 

Credit cards

Credit cards allow you to borrow money up to a certain limit to purchase items or withdraw cash. You will then need to repay this debt, plus interest and any fees, over time.

Loans

 Loans are credit products that allow you to borrow a larger sum of money than a credit card. They typically have a fixed interest rate and repayment period, so you will know exactly how much you need to repay each month.

Lines of credit 

A line of credit, as a financial term, is a credit product that allows you to borrow money up to a certain limit. Unlike a loan, you only need to repay the amount that you have borrowed, plus interest and any fees.

Mortgages

A mortgage is a type of loan that is used to finance the purchase of a property. The loan is typically repaid over a period of years, and the interest rate can either be fixed or variable.

Leases

A lease is a credit product that allows you to borrow money to lease a property, such as an apartment or a car. You will then need to make regular payments to the lender, plus any fees and interest, over the term of the lease.

Why is credit important? 

Credit is important for several reasons. First, it is one of the key factors that lenders look at when considering a loan. A high credit score indicates to lenders that you are a responsible borrower and are more likely to repay your debts. Secondly, credit can also impact the interest rate you pay on a loan. A higher credit score will usually get you a lower interest rate, which can save you money over the life of the loan. Finally, credit can also affect your ability to rent an apartment or get insurance. A bad credit score may make it difficult to find a place to live or get insurance at a reasonable rate. So, it’s important that we work on our credit and be responsible.  

8. Savings

Savings, as a financial term, is the act of setting money aside for future use. This can be done in several ways, including through a savings account, by investing in a certificate of deposit, or by purchasing bonds. Savings can also refer to the funds that have been set aside, which can then be used for emergencies, or retirement. With the rise of inflation some online banks have increased the APY on their savings accounts. 

What is APY?

APY stands for annual percentage yield. It’s the amount of interest you earn on a savings account or investment over the course of a year, expressed as a percentage of your account balance.

There are many benefits to saving money in a APY account. Savings can help you become financially independent, providing you with a safety net in case of unexpected expenses or income shocks. They can also help you reach your long-term financial goals, such as buying a house or retiring comfortably.

What is certificate of deposit? 

A certificate of deposit (CD), as a financial term, is a savings account with a fixed interest rate and a set term of investment. CDs are insured by the FDIC, making them a safe and secure way to save money. 

The interest rate on a CD is usually higher than the interest rate on a savings account, but the money must be left in the account for the entire term to earn the interest. CDs typically have terms ranging from six months to five years. 

When the CD matures, the money can be withdrawn, including the interest that has been earned. CDs can be a good option for people who want to earn a higher interest rate on their savings and who are not planning on using the money soon.

What is a bond? 

A bond as a financial term is a savings product that pays interest on your savings. The money you save is invested for a set period, typically between one and five years. When the investment period ends, you get your original savings back plus any interest that has been earned. 

Bonds are a safe way to save money because they are backed by the government. This means that if the issuer of the bond defaults on their payments, you are still guaranteed to get your money back. 

Bonds typically offer higher interest rates than savings accounts, which means you can earn more money on your savings. However, bonds also carry some risk. If interest rates rise during the investment period, your bond will be worth less than what you paid for it.

What are some benefits to saving? 

There are many benefits to savings, including being prepared for unexpected expenses, having a nest egg for retirement, and earning interest on the money that has been set aside. Savings can also help us reach our financial goals.

9. Principal

Principal as a financial term refers to the original sum of money that is invested or borrowed. In other words, it is the initial amount of money on which interest is calculated. For example, if you take out a loan for $100,000, the principal is $100,000. The interest rate is applied to the principal, so if the interest rate is 3%, you would owe $3,000 in interest for that year. The principal is important because it is the basis on which interest is calculated. The higher the principal, the more interest you will owe (or earn, if you are earning interest on an investment). Therefore, it is important to understand what the principal is when you are taking out a loan or investing your money.

What does principal mean when investing in bonds? 

The principal also refers to the face value of a bond. For example, if you buy a $1,000 bond with a 5% coupon, the principal is $1,000 and the interest payments (coupons) are $50 per year. 

10. Equity

Equity has many meanings. As a financial term it refers to the value of a company or enterprise that is attributable to the ownership interests of its shareholders. Equity represents the residual value of a company that is not accounted for by debts or other liabilities. A way to assess how much equity is in a business is to find the value of a property or business after all liabilities are paid.  It also means being fair and impartial. Equity is an important concept for individuals to understand, as it can impact many aspects of their lives. It is often used in reference to property ownership and business ventures but can also be relevant in other areas such as law and finance. 

What are some examples of Equity? 

• Owning shares in a company
• Having a stake in a business
• Holding property or assets
• Possessing valuable items
• Having expertise or experience in a particular field

Equity is often thought of as a financial term, but it can also apply to non-financial assets. For example, someone with equity in their home has an asset that can be used as collateral for a loan. Similarly, someone with equity in their knowledge or experience can use it to negotiate better terms for themselves in a job or business venture. Equity can also be used to create social or economic opportunities for others, such as through scholarships or microloans.

Conclusion

With the current economic climate its important for us as young professionals to have a basic understanding of what the above terms mean. We have all heard about assets, liabilities, and equity a lot more now that there’s a new interest in these areas. However, there are some other terms out there that aren’t being talked about as often and can come up when you’re looking to buy a home, take out a loan, buy a car, read your credit card statement or statement from the bank. For the most part we gloss over certain things because we may not feel that it’s really that important…until it does become important.

 This will be a 4-part series so if you found this useful, please let us know down below. Also please share with your family and friends. As they say knowledge is power, especially when it comes to money! Do you have a term that you would like us to cover in a future article? Let us know in the comments below! check out my other elated blog Financial Strategies for Young Professionals