Introduction to Financial Literacy
Expert-defined terms from the Professional Certificate in Financial Literacy for Teens course at London School of Business and Administration. Free to read, free to share, paired with a globally recognised certification pathway.
Introduction to Financial Literacy #
Introduction to Financial Literacy
Financial literacy is the ability to understand and effectively manage one's fin… #
It involves knowing how to budget, save, invest, borrow responsibly, and make informed financial decisions. Developing financial literacy is essential for teens as they transition into adulthood and begin to make financial decisions that will impact their future. This glossary provides an overview of key terms and concepts related to financial literacy that will help teenagers build a strong foundation for their financial future.
Annual Percentage Rate (APR) #
Annual Percentage Rate (APR)
The Annual Percentage Rate (APR) is the annual rate charged for borrowing or ear… #
It is expressed as a percentage and includes not only the interest rate on the loan or investment but also any additional fees or charges associated with the transaction. The APR provides a standardized way to compare the cost of borrowing or the return on an investment.
Example #
If you borrow $1,000 at an APR of 5% with no additional fees, you will pay $50 in interest over the course of a year.
Budget #
Budget
A budget is a financial plan that outlines an individual's income and expenses o… #
It helps individuals track their spending, identify areas where they can save money, and plan for future financial goals. A budget can be created using a spreadsheet, budgeting app, or pen and paper.
Example #
Sarah creates a monthly budget to track her income and expenses. She allocates a portion of her income to savings and sets aside money for groceries, rent, and transportation.
Compound Interest #
Compound Interest
Compound interest is the interest calculated on the initial principal and on the… #
It allows your money to grow exponentially over time, as the interest earned in each period is added to the principal for the next period. Compound interest is often used in savings accounts, investments, and loans.
Example #
If you invest $1,000 in a savings account with a 5% annual interest rate compounded annually, your investment will grow to $1,276.28 after five years.
Credit Score #
Credit Score
A credit score is a numerical representation of an individual's creditworthiness… #
It is used by lenders to evaluate the risk of lending money to a borrower and determines the interest rate and terms of a loan. A higher credit score indicates a lower risk borrower and may result in better loan terms.
Example #
John checks his credit score and finds that he has a score of 750, which is considered excellent. He is likely to qualify for loans with lower interest rates and better terms.
Debt #
Debt
Debt is money that is owed to another party, typically a lender or creditor #
It can take the form of credit card balances, student loans, mortgages, or personal loans. Managing debt responsibly is essential for maintaining good financial health and avoiding financial difficulties.
Example #
Maria has $10,000 in student loan debt that she is working to pay off. She makes monthly payments to reduce the amount she owes and avoid accruing additional interest.
Emergency Fund #
Emergency Fund
An emergency fund is a savings account that is set aside to cover unexpected exp… #
It is recommended to have three to six months' worth of living expenses saved in an emergency fund to provide a financial cushion in times of need.
Example #
Tom sets aside $200 from each paycheck into his emergency fund to build a financial safety net in case of unexpected expenses.
Financial Goal #
Financial Goal
A financial goal is a specific objective that an individual sets to achieve with… #
It can be short-term, such as saving for a vacation, or long-term, such as buying a home or retiring comfortably. Setting clear financial goals helps individuals stay motivated and focused on their financial priorities.
Example #
Emily's financial goal is to save $10,000 for a down payment on a car within the next year. She creates a budget and sets aside a portion of her income each month to reach her goal.
Interest #
Interest
Interest is the cost of borrowing money or the return earned on an investment #
It is expressed as a percentage of the principal amount and is typically calculated on an annual basis. Understanding how interest works is essential for making informed financial decisions about borrowing and investing.
Example #
Jane takes out a $5,000 loan with an annual interest rate of 10%. She will pay $500 in interest over the course of a year in addition to repaying the principal.
Investment #
Investment
An investment is an asset purchased with the expectation of generating income or… #
Investments can take many forms, including stocks, bonds, real estate, and mutual funds. Investing is a way to grow wealth and achieve long-term financial goals.
Example #
Mark invests $1,000 in a diversified portfolio of stocks and bonds to generate income and build wealth over time.
Net Worth #
Net Worth
Net worth is the difference between an individual's assets (what they own) and l… #
It is a measure of an individual's overall financial health and provides insight into their financial standing. Calculating net worth regularly can help track progress towards financial goals.
Example #
Sarah's assets include her car, savings account, and retirement account, totaling $50,000. Her liabilities, including student loans and credit card debt, amount to $20,000. Her net worth is $30,000.
Principal #
Principal
Principal is the initial amount of money invested or borrowed #
In the case of a loan, the principal is the amount borrowed from a lender that must be repaid, along with interest, over time. Understanding the principal amount is crucial for calculating interest and managing debt.
Example #
Tom borrows $10,000 from a bank to purchase a car. The principal amount of the loan is $10,000, and he will repay this amount plus interest over the term of the loan.
Retirement Planning #
Retirement Planning
Retirement planning is the process of setting financial goals and creating a pla… #
It involves estimating future expenses, determining sources of income, and developing a strategy to ensure a comfortable retirement. Starting retirement planning early is essential to build a sufficient nest egg.
Example #
Lisa meets with a financial advisor to create a retirement plan that includes contributing to a 401(k) account, investing in mutual funds, and maximizing employer matches.
Savings Account #
Savings Account
A savings account is a bank account that allows individuals to deposit money, ea… #
Savings accounts are a safe way to store money and build an emergency fund or save for short-term financial goals.
Example #
Jack opens a savings account with a 1% interest rate to save money for a vacation. He deposits a portion of his paycheck into the account each month.
Taxes #
Taxes
Taxes are compulsory financial charges imposed by the government on individuals… #
Common types of taxes include income tax, sales tax, property tax, and payroll tax. Understanding tax laws and regulations is essential for managing personal finances effectively.
Example #
Sarah calculates her income tax owed based on her taxable income and tax bracket. She files a tax return each year to report her income and claim any deductions or credits.
Understanding Risk #
Understanding Risk
Understanding risk is essential for making informed financial decisions and eval… #
Risk refers to the possibility of losing money or failing to achieve a desired financial goal. Different types of risk, such as market risk, inflation risk, and interest rate risk, can impact investment returns and financial stability.
Example #
Jake assesses the risk associated with investing in stocks and bonds by considering his risk tolerance, investment goals, and time horizon. He diversifies his portfolio to manage risk.
Variable Expenses #
Variable Expenses
Variable expenses are costs that fluctuate from month to month and are not fixed #
These expenses can include groceries, entertainment, clothing, and dining out. Tracking variable expenses is essential for creating a budget and managing spending effectively.
Example #
Mary tracks her variable expenses, such as dining out and entertainment, to identify areas where she can cut back and save money each month.
Wealth Management #
Wealth Management
Wealth management is a comprehensive approach to managing an individual's financ… #
It involves financial planning, investment management, tax planning, retirement planning, and estate planning. Wealth management aims to grow and protect assets over the long term.
Example #
The Smith family works with a wealth manager to create a customized financial plan that includes investing in stocks, bonds, and real estate to build wealth and secure their financial future.
**P** #
**P**
Payday Loan #
A payday loan is a small, short #
term loan that borrowers typically use to cover expenses until their next payday. These loans usually come with high fees and interest rates, making them a costly borrowing option. Borrowers often find themselves trapped in a cycle of debt due to the high costs associated with payday loans.
Personal Finance #
Personal finance refers to the management of an individual's financial resources #
It involves creating budgets, setting financial goals, saving money, investing, and planning for retirement. Understanding personal finance is essential for making informed financial decisions and achieving financial stability.
Principal #
The principal is the initial amount of money borrowed or invested #
When it comes to loans, the principal is the amount that borrowers receive from the lender. Interest is calculated based on the principal amount. In investments, the principal is the initial amount of money that is invested, and any returns or gains are calculated based on this amount.
Profit Margin #
Profit margin is a financial metric that measures a company's profitability #
It is calculated by dividing the company's net profit by its revenue and expressing the result as a percentage. A higher profit margin indicates that a company is more efficient at generating profits from its revenue. Profit margin is an important indicator of a company's financial health and performance.
Property Tax #
Property tax is a tax levied on real estate by local governments #
The amount of property tax owed is based on the assessed value of the property. Property taxes are used to fund local government services, such as schools, roads, and public safety. Property owners are required to pay property taxes annually or semi-annually, depending on local regulations.
**Q** #
**Q**
Qualified Dividend #
A qualified dividend is a type of dividend that is taxed at the capital gains ta… #
To be considered qualified, a dividend must meet certain criteria set by the Internal Revenue Service (IRS). Qualified dividends are usually paid by U.S. corporations and certain foreign corporations.
Qualified Retirement Plan #
A qualified retirement plan is a type of retirement account that meets specific… #
These plans offer tax advantages to individuals who contribute to them, such as tax-deferred growth or tax-deductible contributions. Examples of qualified retirement plans include 401(k) plans, IRAs, and pension plans.
**R** #
**R**
Rate of Return #
The rate of return is a measure of the profit or loss on an investment over a sp… #
It is calculated by dividing the investment's final value by its initial value and subtracting 1. A higher rate of return indicates a more profitable investment, while a negative rate of return signifies a loss.
Real Estate #
Real estate refers to land, buildings, and other structures, as well as the righ… #
Real estate can be residential (such as houses and apartments) or commercial (such as office buildings and retail spaces). Real estate can also be an investment, with investors buying properties to rent out or sell for a profit.
Retirement #
Retirement is the period in a person's life when they stop working and rely on t… #
Saving for retirement is crucial to ensure financial security in old age. There are various retirement accounts and plans, such as 401(k)s and IRAs, that individuals can use to save for retirement.
Return on Investment (ROI) #
Return on investment (ROI) is a financial metric that measures the profitability… #
It is calculated by dividing the net profit of an investment by the initial cost of the investment and expressing the result as a percentage. A higher ROI indicates a more profitable investment, while a negative ROI signifies a loss.
**S** #
**S**
Sales Tax #
Sales tax is a tax imposed by governments on the sale of goods and services #
The tax is usually a percentage of the purchase price and is collected by the seller at the point of sale. Sales tax revenue is used to fund government programs and services. The rate of sales tax varies by jurisdiction and can apply to different types of goods and services.
Saving #
Saving is the act of setting aside money for future use instead of spending it i… #
Saving allows individuals to build an emergency fund, save for major expenses, and plan for retirement. There are various saving strategies, such as automating savings, setting specific savings goals, and using high-interest savings accounts.
Simple Interest #
Simple interest is a method of calculating interest on a loan or investment base… #
The interest is calculated as a percentage of the principal and is not compounded, meaning it does not earn interest on interest. Simple interest is commonly used for short-term loans and investments with a fixed interest rate.
Stock Market #
**T** #
**T**
Tax Deduction #
A tax deduction is an expense that taxpayers can subtract from their taxable inc… #
Common tax deductions include mortgage interest, charitable donations, and certain medical expenses. Tax deductions can lower a taxpayer's overall tax liability and result in a lower tax bill.
Tax Evasion #
Tax evasion is the illegal act of intentionally underreporting income, inflating… #
Tax evasion is a criminal offense and can result in severe penalties, including fines, imprisonment, and asset forfeiture. Taxpayers are required by law to report all income and pay the appropriate amount of taxes owed.
Tax Return #
A tax return is a form that taxpayers file with the government to report their i… #
Tax returns are used by the government to calculate the amount of tax owed or refund due to the taxpayer. Tax returns must be filed annually by individuals and businesses by the tax filing deadline.
Time Value of Money #
The time value of money is a financial concept that states that a dollar today i… #
This concept is based on the premise that money can earn interest or other returns over time. Understanding the time value of money is essential for making financial decisions, such as investing or borrowing.
**U** #
**U**
Unemployment #
Unemployment refers to the state of being without a job and actively seeking emp… #
The unemployment rate is a key economic indicator that measures the percentage of the labor force that is unemployed. High unemployment rates can indicate economic downturns, while low unemployment rates can signal a strong economy. Unemployed individuals may be eligible for unemployment benefits provided by the government.
Universal Life Insurance #
Universal life insurance is a type of permanent life insurance that offers flexi… #
Universal life insurance policies also have a cash value component that earns interest over time. Policyholders can use the cash value to pay premiums, borrow against the policy, or surrender the policy for a cash payout.
**V** #
**V**
Variable Interest Rate #
A variable interest rate is an interest rate that can change over time based on… #
Loans, mortgages, and credit cards with variable interest rates can have payments that vary from month to month. Variable interest rates are typically lower than fixed interest rates but come with the risk of increasing over time.
Vesting #
Vesting is the process by which an employee earns the right to receive benefits… #
Vesting schedules determine when employees become entitled to employer contributions or stock awards. Fully vested employees have full ownership of their benefits and can access them without restrictions.
**W** #
**W**
Wages #
Wages are payments made to employees in exchange for their labor or services #
Wages are typically paid on an hourly, weekly, or monthly basis and can vary based on factors such as job skills, industry, and location. Employers are required to pay employees at least the minimum wage set by federal, state, or local laws.
Wealth Management #
Wealth management is a specialized form of financial planning that focuses on ma… #
Wealth managers provide comprehensive financial services, such as investment management, estate planning, tax planning, and risk management. Wealth management aims to help individuals preserve and grow their wealth over time.
Will #
A will is a legal document that outlines a person's wishes regarding the distrib… #
A will allows individuals to specify beneficiaries, designate guardians for minor children, and name an executor to carry out their wishes. Creating a will is an essential part of estate planning to ensure assets are distributed according to the deceased's wishes.
Withdrawal #
A withdrawal is the act of taking money out of a bank account, investment accoun… #
Withdrawals can be made in person at a bank branch, through an ATM, or electronically. Withdrawals from retirement accounts before a certain age may be subject to penalties, while withdrawals from savings or investment accounts can impact overall financial goals.