Knowledge is Power
Understanding financial terminology is an important first step on the way to financial wellness. In this post, I'll explore seven key finance terms that every woman should know to confidently navigate the world of personal finance.
1. Cash Flow: Cash flow refers to the movement of money in and out of your accounts. Managing your cash flow is fundamental to financial well-being. It involves monitoring the inflow and outflow of money in your daily life, ensuring that you have enough money to cover both essential expenses and financial goals. Staying on top of your cash flow will help you avoid things like overdraft fees and unnecessary interest payments.
2. Credit Score: Your credit score is a numerical representation of your creditworthiness. It's the main factor lenders use in deciding whether or not to give you a loan, a credit card, and in determining what interest rate you'll get on your loan. The higher your credit score, the lower the interest rate you're likely to get (which is a good thing!). Understanding how your credit score is calculated and actively working to maintain or improve it will put you in the best position possible when you're considering borrowing and managing debt. There are several services in Canada that allow you to check your credit score for free (and doing so won't affect your credit score). Check out Credit Karma or ClearScore. Your banking app may also allow you to check your credit score within the app. I recommend checking your credit score every month to ensure your score isn't falling, and to take the steps you need to take to increase your credit score if you have a low credit score.
3. Asset Allocation: Asset allocation is the strategic distribution of your investments across different asset classes (think stocks, bonds, cash) based on your financial goals, your risk tolerance, and your stage in life. If you're younger, for example, you can take on more risk in your investment portfolio in order to maximize returns. This is because you still have a long time to recover from any losses. But as you near retirement, you'll want to reduce that level of risk, so you may want less stocks in your portfolio, and more bonds and cash. By tailoring your asset allocation to your unique financial situation you can build a resilient and well-performing investment portfolio, while optimizing returns and managing risk effectively.
4. Emergency Fund: An emergency fund is a financial safety net designed to cover unexpected expenses. Keep your emergency fund in a high interest (or high yield) savings account, and have enough to cover 3-6 months of basic living expenses. Be sure to use your emergency fund only for true emergencies! And be sure to replenish it once you make a withdrawal. An emergency fund provides peace of mind and prevents the need to dip into long-term savings or incur high-interest debt during emergencies.
5. Passive Income: Passive income refers to earnings generated with minimal effort, such as dividends from investments or rental income. Unlike active income, which comes from direct labour or time spent working, passive income allows you to earn money with less hands-on involvement. Passive income can help provide financial stability, create additional revenue streams, and contribute to long-term wealth building.
6. Compound Interest: Compound interest is the interest earned not just on the initial investment but also on the accumulated interest over time. Think of it like a snowball. As interest compounds (i.e. the snowball grows), the total amount of interest grows exponentially. Compound interest can work for or against you. If you have debt, compound interest can substantially increase the total amount of that debt over time. On the other hand, it's what makes your investments grow so much over time as well. Take the time to understand how compound interest works so you can ensure you make it work for you instead of against you!
7. Net Worth: Your net worth is the difference between your assets and liabilities. Calculating and tracking your net worth provides a holistic view of your financial wellness, and I like to do this at least once a year to see how I'm progressing on my financial goals. To calculate your net worth, add up the total value of all of your assets, then subtract from that number the total value of all of your debts (Net worth = Total Assets - Total Liabilities). You may have a negative net worth at times in your life, but you should be working towards steadily growing your net worth. Regularly assessing and understanding your net worth empowers you to build a solid financial foundation for the future.
You need to be able to talk the talk if you want to walk the walk! Financial literacy is a key component of financial empowerment for women. Ensure you understand these basic finance terms so that you can make informed decisions about your finances, build wealth, and achieve the financial independence you deserve.
