Do you know what compound interest means, or how to calculate it? Can you identify the causes and effects of inflation to an economy? If you have no idea what these terms mean and what their relevancy is, then you belong to a large portion of Americans who are financially illiterate.
A 2015 study by S&P Global FinLit survey, the first of its kind, which analysed financial literacy globally found that just 57 percent of American adults are financially literate, which means they know what needs to be known to make smart financial decisions. This means that 47 percent of Americans do not have the required skills and knowledge to effectively manage their financial resources. And if you answered no the above questions, chances are you’re among the 47 percent.
The study, through assessment of more than 150,000 adults in over 140 countries, also found that just 33 percent of adults are financially literate worldwide. Women, at 30 percent, were reported to have lower rate of financial literacy than men, whose rate stood at 35 percent.
Countries like US, Australia, Canada, Great Britain, France and some other European countries were found to be most financially literate, while developing countries like India, Brazil and China were the least literate. The most widely understood concepts in all countries were “inflation” and “numeracy”, while “risk diversification” was found to be the least understood.
With just 33 percent of adults worldwide understanding concepts and possessing skills to make informed decisions when it comes to money, it’s no surprise that financial inclusion is still so low. It is this illiteracy that prevents people from accessing various financial and banking services.
Basic financial jargons everyone should know
More tech-driven financial platforms and banking services are coming up year by year, making it critical for people to be educated on financial concepts. To truly adopt financial inclusion that will lead to economic empowerment of a country, it is important that you know and understand enough to make strategic decisions at least for basic financial and banking services.
While you can’t become a Wall Street expert overnight, here are some of the most important financial terms every functioning adult should know and understand.
1. Asset-Any resource owned by an individual or a business that has an economic value. For example, properties, money, vehicles, etc.
2. APR-Stands for Annual Percentage Rate. It refers to how much a loan costs (including interest and fees) annually. APR is expressed in percentage.
3. Bankruptcy-A legal status where either an individual or business cannot repay their debts to creditors. Assets are usually sold(liquidated) to cover the debts.
4. Capital Gain-When the selling price of an investment is more than its purchase price, thus creating a gain.
5. Compound Interest-Interest which is not only from the initial principal, but also including all previously accumulated interests.
6. Diversification-Spreading financial risk through investments in various tools like real estate, securities, commodities and more, as opposed to concentrating it only on one investment tool, thereby increasing your risk.
7. Inflation-Gradual increase or rise in the general prices of goods and services over a period of time. One of the key factors that determine the smooth running of an economy, central banks aim to limit inflation, and at the same time, avoid deflation (decrease in prices).
8. Liability-It means an obligation a debtor has to repay his/her debts to the creditors.
9. Liquidity-An asset’s ability to be quickly converted to cash without compromising on its value.
10. Mutual fund-An investment where multiple investors create a pool of funds to invest in various securities like bonds, stocks, etc.