Important Financial Terms for Beginners

Financial terminology can be a lot to understand. It can seem like a whole other language, especially when you are just starting out on your financial journey.

Net worth is everything you own (known as assets) minus all the things you owe (known as liabilities). This includes things like car payments, student loans, and credit card debt.


A budget is a financial plan that estimates income and expenses over a specific period of time. It is used by governments, businesses, and individuals/households at every income level to stay on track and achieve financial goals.

It can be hard for beginners to get started with budgeting, especially if they believe that it will take the fun out of spending and limit their ability to afford the things they want. However, budgeting doesn’t have to be restrictive or boring, and it can actually be very exciting when you see the results of your efforts!

Creating a budget begins with compiling all your expenses, both fixed and variable. Some of these expenses may remain the same month after month, such as rent or mortgage payments. Others may change up, such as groceries or gasoline. Using the information from these categories, beginners can then begin to compare them against their net income and establish priorities for their spending. They can also start to set short-term goals for saving and investing, which can be particularly exciting when they see their progress!

Credit Score

A credit score is a three-digit number, usually on a scale of 300 to 850, that lenders use to evaluate your ability to pay back loans. A high credit score can make it easier to qualify for loans and get lower interest rates on mortgages and auto loans. It can also help you rent an apartment or even land a job. There are a few things that go into calculating your credit score: payment history, amount owed and your credit utilization rate (the percentage of available credit you’re using on revolving accounts like credit cards). The longer your credit history and the greater the mix of types of credit you have can also help boost your score.

If you want to learn more about building and maintaining a healthy credit score, check out Investopedia’s Credit Score 101 guide. We’ve got you covered from start to finish. Click the button below to download your free copy now!


Investing is an important part of saving for long-term financial goals. It allows you to make your money work for you by earning returns, which can be used to pay for things like education and retirement. Investing also helps combat inflation, which erodes the value of your money over time.

There are a number of ways to start investing, including employer-sponsored accounts such as 401k and 403b plans. Other options include individual retirement arrangements (IRAs) and mutual funds. Beginners can also use robo-advisors, which streamline the investing process and offer lower costs than traditional brokers.

The key to successful investing is consistency. It’s important to start investing as soon as you can, and to continue to invest regularly over the long term. However, before you begin investing, it’s a good idea to pay off any debt that you have and build an emergency fund. This will give you more financial breathing room and help you take advantage of the power of compounding. If your employer offers a matching contribution to your investment account, be sure to take advantage of it!

Compound Interest

Compound interest is a powerful tool that can help you achieve your financial goals. It allows the principal of a savings or investment account to grow faster and more significantly over time. It can also make the amount of debt you owe increase more rapidly, especially when the interest is compounded on a regular basis.

Compounding is based on the concept of exponential growth, which means that a small initial investment can grow exponentially as the rate of return or interest accrues each period. The frequency with which compounding occurs–daily, monthly, quarterly, semiannually, or annually–can also make a big difference in how fast your savings or debt grows.

The Rule of 72 is a simple calculation that can be used to determine the approximate number of years it takes for an investment to double at a given annual rate of interest or compounding frequency. You can use this formula to estimate how much you will have in retirement, for example, or how much it will take to pay off a debt.

Asset Allocation

In the world of investing, seasoned financial professionals will often say some variation of the phrase, “don’t put all your eggs in one basket.” This concept, called asset allocation, is a cornerstone of building a sound investment portfolio.

Asset allocation refers to the way you distribute your money among different asset classes, such as stocks or equities, bonds and cash or cash equivalents like money market funds. Each of these has a different level of risk and potential return.

Stocks tend to offer the highest potential for growth, while bonds and cash have lower returns but are considered less risky. The goal is to find a balance between the growth you’re seeking and how much risk you’re comfortable with taking. Young investors may be more likely to emphasize stocks, while older investors may prefer more bond or cash exposure. You can also diversify within each asset class, dividing shares by industry, geography and market capitalization or choosing bonds that are short or long-term, based on creditworthiness and maturity date.


The financial principle of diversification is summed up by the old saying, “don’t put all your eggs in one basket.” It involves spreading your investment dollars among different stocks, bonds and other assets. By doing this, you reduce your risk of losing money in a bad market and increase the chances of a profitable return.

Diversification is an important concept for beginners to understand because it can help protect their investments from market fluctuations. By investing in a variety of industries, areas and types of financial instruments, it is less likely that all of your investments will drop in value at the same time.

You can also diversify within an industry by choosing to invest in companies that are at different stages of growth. For example, if the price of oil falls, energy companies will likely see a decrease in their profits. To offset this, you can invest in companies that make other products, like digital streaming services. This will help to offset any losses incurred by the energy industry and provide a better overall return on your investment.

Retirement Savings

Retirement planning can seem like a daunting task to someone just starting out. After all, many young workers have student loan payments, rising housing costs, and other debt to pay off. In addition, they are probably not earning a huge salary right away. But if you make saving for retirement one of your top priorities, you can help ensure that you have enough to live comfortably in retirement.

The key is to develop a savings plan and stick with it over time. To do this, start by determining how much you will need to spend in retirement and then save accordingly. You should also consider when you want to retire and how long you would like to work, as this will impact how much you need to save.

To get started, find out if your employer offers a workplace retirement plan. If it does, take advantage of it. Generally, these plans will have higher contribution limits than an individual retirement account (IRA), such as a 401(k). They may also offer you more investment options.


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