The last couple of years proved to be incredibly challenging for any sort of effective personal finance management. The global economy still finds itself in the turmoil caused by the effects of COVID-19. The labor market fails to bridge the gap between the record-breaking number of vacancies and people who are looking for employment. Inflation, although easing, still presents countless uncertainties.
With the thing as they are, the people who want to get a good grasp on personal finances need to understand how the economy works and possess basic financial literacy.
Unfortunately, recent surveys say that only 57% of US citizens consider themselves financially literate and only 12 states require students to take personal finance courses before graduation.
Let’s see if we can solve some of these issues with this short introduction to modern man’s financial literacy.
Budgeting essentials
Effective budgeting makes the core of any sensible financial management strategy. Therefore, if you want to bring your personal finances back to order, you should start by cracking this duty as well as some of the basic budgeting terms like after-tax income, fixed cost, utility costs, surplus, financial planning, and similar. As for the strategy you should base your efforts around, you can start with a simple budgeting model that allocates your income into three categories:
- Needs (50%) – The money you will use to cover utilities and other necessary expenses
- Wants (30%) – Expenses you find enjoyable but are not necessary for your life
- Savings (20%) – The funds you are going to put aside or use for some sort of investment
Investing terms
The current financial hardships make setting up a savings account and putting money aside all but necessary. Ideally, though, a portion of your money should be invested into some side ventures that should diversify your income and build you a safety net in case you are temporarily cut from your main income. That is why you should get to know some of the basic investment terms like:
- Diversification – The process of investing money across numerous assets for greater safety
- Portfolio – An entire collection of investments
- Risk tolerance – The amount of risk you feel comfortable engaging in compared to the portfolio’s risk capacity
- Share – A piece of ownership of some company
- Stock – General term describing equity investments
Insurance terms
Insurance plays an incredibly important part in our lives allowing us to build contingencies and quickly bounce back from financial hardships. However, there are a lot of companies that use this fact to sell their clients’ policies or items that have no real value, can’t be claimed, or are added to the contract without the users’ explicit consent. This practice is considered highly unethical so the users are legally allowed to ask the legal help and refund junk insurance if they suspect any misconduct. However, in order to do that, the users need to have a good knowledge of legal terms and common insurance lingo.
Savings options
In one of the previous sections, we have suggested that some portion of the money you would otherwise be put aside, should be used to expand your investment portfolio. That, however, doesn’t change the fact that you should keep the majority of these funds safely deposited in some of your accounts. That being said, the options for saving money are just as diverse as the investment options so, to allocate the funds better, it should be very good to take some time to go through some of the most common options like fixed-term saving, retirement saving, regular deposits, money market, CDs, and emergency funds.
General economy terms
The global or national economy often seems inaccessible to a complete newcomer. Be that as it may, these grander developments and trends have a very tangible impact on our lives and can prove to be a critical factor guiding our financial decisions ranging from the choice of investments to budgeting and savings. So, as impregnable as these terms may sound mastering the indicators like GDP (Gross Domestic Product), macroeconomic performance, inflation, interest rates, industrial production, and interest rates should give you the tools for more serious long-term planning and leveraging market difficulties to your benefit.
Latest economic trends
Last but not least, we would like to point out that the understanding of global finances and the present-day market will largely depend on the understanding of contemporary economic terms like the green economy, sustainability, fair trade, Machine Learning, automation, and similar. All of the buzzwords we have listed have tremendous sway over the global economy so keeping up with these trends and learning how they influence the economy will allow you to make much more prudent and beneficial financial decisions. The more these factors you take into account before budgeting and investing, the better.
We hope this short breakdown gave you a general idea about the basic terms you should master to improve your financial literacy and become more capable of making beneficial financial decisions. The global economy is becoming increasingly unpredictable and fast-paced. Even though these topics may seem foreign and distant, they have a very tangible influence on our lives. Getting to know these things may help you navigate the tricky financial waters as effortlessly as possible. You will have a lot of things to learn, but now you have a good place to start.
