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Essential Financial Terms for Financial Literacy Month
Douglas Schorpp

April is Financial Literacy Month

April marks Financial Literacy Month, an opportunity to deepen your understanding of important financial terms that empower you to make smarter money decisions. With the right knowledge, you can take control of your financial future and pave the way toward financial independence.

Lending Terms

Collateral

Collateral refers to an asset that a borrower offers to a lender to secure a loan. Common examples include using a home or car as security for a loan. If you default on the loan, you could lose the collateral, making it essential to understand the terms fully before agreeing to them.

Equity

Equity is the portion of your property that you truly own. When it comes to homeownership, equity increases as you pay down the mortgage or if the property's value appreciates. Equity can be used to access home equity loans, providing funds for other financial needs.

Credit Terms

Annual Percentage Rate (APR)

The Annual Percentage Rate (APR) represents the true cost of borrowing money, including interest and other fees. Understanding APR is essential for comparing different loans or credit card offers, helping you choose the most cost-effective option.

Annual Fee

An Annual Fee is a yearly charge by credit cards or other financial products. Sometimes paying an annual fee might be worth it if the service offers specific benefits, such as rewards or premium perks that can offset the cost.

Savings Terms

Compound Interest

Compound Interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. For example, a savings account with compound interest will grow faster over time compared to one with simple interest. Consider a $1,000 savings with an annual compound interest rate of 5%; in 10 years, it could grow to over $1,628.

Pay Yourself First (PYF)

Pay Yourself First is a budgeting strategy that involves prioritizing savings by setting aside a portion of your income before paying other expenses. It's a simple yet powerful tool for building financial security over time.

Understanding these terms is a vital step toward financial independence and making informed decisions. Every little step, like acquiring this knowledge, can have a profound impact on your financial journey over time.

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