10 Finance Terms You Should Know In Your 20s

1. 10 Finance Terms You Should Know In Your 20s Highlights:- Financial planning should start early in your career, maybe in your 20s. To do so, there are a few basic financial terms you must know. These are net worth, employee stock ownership program, compound interest, capital gains, premium, term insurance, savings insurance, asset allocation, rebalancing, and defined benefit and contribution plans. These terms include terms related to banking, salaries, investment, insurance, and retirement plans and could help anyone in their 20s understand the financial world better and start their journey towards being financially independent and stable. When it comes to financial planning, it is always better if you start early. If you have ever come across the stock market terms or have watched a video that mentions the term “Compound interest” you would know that the earlier you start to save money, the better will be your returns. Similarly, it is also important for you to plan your expenses and budget your month carefully to avoid splurging. To get started with your journey of being financially educated, the first step is to understand a few terms that are frequently used.

2. Here are 10 financial terms you must know:- Net Worth Your net worth is what you get when you subtract your liabilities from your assets. Your assets are defined as everything you own- your house, your vehicles, the gold, silver, or capital assets you have invested, are in your account, and cash. When you calculate your assets, you must calculate the prevailing value and not the value you paid when you bought it. Liabilities are defined as all the money you owe the banks, your friends or relatives, loans, credit cards, etc. To calculate your net worth, you subtract the value of your liabilities from the value of your assets. This number can be a positive or a negative value. Employee Stock Ownership Program An ESOP (Employee stock ownership plan) refers to an employee benefit plan which offers employees an ownership interest in the organization. Employee stock ownership plans are issued as direct stock, profit-sharing plans, or bonuses, and the employer has the sole discretion in deciding who could avail of these options. Each employee’s shares are held in the company’s ESOP trust until the employee leaves or retires. At that point, employees can sell the shares either on the open market or back to the company. Employees are not taxed until they sell their shares. Compound Interest As mentioned above, compound interest is one of the most important financial terms you need to know. Let’s take a simple example to understand this- Let’s say you have invested a certain amount of money in Fixed Deposits which is giving you a return. The return it gives you is accrued along with the money you had invested and now, you will be getting a return on a sum of the two which will give you even more interest. This is why it is always encouraged to start investing at an early age, no matter how small the amount may be. The power of compounding will give you a massive return in the long term. When you owe the bank ₹100 and the interest and you fail to pay the same, the next month, you will be paying the interest on the ₹100 plus the interest of the previous month.

3. Capital Gains Capital gain is what you profit from selling your assets. Let’s understand this with an example- you bought a piece of land in a certain area of the city 10 years ago. You are now selling this piece of land at 3 times the price because of an increase in demand for the area. The profit that you earn after selling this is your capital gain and this is also taxable. Although, capital gains are exempted if the same is reinvested as per the provisions listed down in Income tax laws. Premium Premiums are the amount of money that you pay to an insurance company when you buy an insurance policy to provide you with a life cover. Be it any type of a life insurance policy viz. whole life, endowment, term, money back, etc., premiums are to be paid in all. Premiums can either be paid monthly, quarterly, half-yearly, or yearly depending upon the premium payment mode provided under the policy. The premiums to be paid can also vary according to different payment terms. For instance, if you buy an insurance policy at 20 years of age, the premium paid is lower than for the one you buy at the age of 35. Term Insurance Term insurance is a type of life insurance policy that provides you cover over a specific term of life. This may vary depending on policy provisions. In the event of your unfortunate death during the policy term, it provides financial protection to your family. However, if you survive beyond the policy term, it expires without any payouts. Savings Insurance There are many life insurance policies that allow you to not just get a life cover but also save money and get a return. A savings insurance policy may be a great financial investment for your retirement plan too. Asset Allocation

4. Asset allocation means where you allocate your money at. These can either be bonds, stocks or cash, government security. Mutual funds, PMS, Insurance Saving Scheme, or other investment instruments. Your allocations can vary according to your needs. But it is always advised to have a diversified portfolio. This enables you to be at minimal risk and be able to analyze where best you can relocate your assets for maximum profits. Rebalancing Rebalancing is the act of shifting your assets within stocks, bonds, and cash- wherever deemed more profitable. For example, you may find stocks to be less profitable at a certain time and decide to sell some of them and invest the money obtained in bonds that are more profitable. This is an act of rebalancing your portfolio. Defined Benefit and Contribution Plan Defined benefit and contribution plans retirement plans are provided by employers for their employees. The defined benefit plan is an employer-sponsored retirement plan which may or may not require the employee to contribute. The contribution plan, as the name suggests, lets the employees contribute some money to their retirement plan. The amount can be altered by the employee too.