9 essential financial terms you need to know

Financial literacy is a critical life skill that can significantly impact an individual’s financial well-being and overall quality of life. It is important for individuals to continually educate themselves about financial terms and concepts in order to make informed decisions and achieve their financial goals.

Financial literacy is important for several reasons:

  • Make informed financial decisions: Those who are financially literate are able to make wise financial decisions that are in line with their goals and values. It’s about choices about how much you spend, save, invest and borrow.
  • Avoiding Financial Pitfalls: Financial literacy can help people avoid typical financial risks, such as high-interest debt, excessive spending, and investment fraud.
  • Long-term wealth creation: By knowing how to save and invest efficiently, people with financial literacy can help generate wealth over the long term. Understanding ideas like compound interest and diversification is part of that.
  • Improving quality of life: Financial literacy can improve your quality of life by reducing stress caused by financial uncertainty and giving people the skills and information they need to achieve their financial goals.
  • Contributing to the economy: Financial literacy can also contribute to the overall health of the economy by promoting responsible financial behavior and reducing the risk of financial crises.

Here are nine essential financial terms that everyone should be familiar with.


A budget is a plan that outlines expected income and expenses over a period of time. To keep track of expenses and ensure that money is spent responsibly, a budget is necessary. For example, a monthly budget might include income from a job and expenses for things like rent, utilities, and groceries. A budget can help people better manage their money and avoid overspending.


Interest is the cost of borrowing money, usually expressed as a percentage. Depending on the type of loan or credit instrument, the interest rate may change. For example, a credit card may impose an interest rate of 18% on outstanding balances. To avoid taking on debt with high interest rates and to make wise borrowing decisions, it is critical to understand interest rates.

Related: How To Earn Interest With Crypto Savings Accounts?

In the context of cryptocurrencies, “interest” can refer to two different things, including interest earned on crypto investments via staking and interest earned by lenders on their crypto holdings by lending them to borrowers.


Based on variables such as payment history, credit usage, and length of credit history, a credit score is a numerical indication of a person’s creditworthiness. A high credit score can lead to better terms for loans, credit cards and other financial items. For example, a Fair, Isaac and Company (FICO) score of 700 or higher is generally considered favorable.

Since cryptocurrencies are decentralized and unrelated to established credit systems, there is no exact analog of a credit score when it comes to cryptocurrencies. Still, some cryptocurrency borrowers and lenders can determine creditworthiness using alternative credit scoring models based on blockchain technology.

For example, a cryptocurrency lender can assess a borrower’s creditworthiness based on their blockchain transaction history, taking into account details such as their payment history, the volume and size of their transactions, and how long they’ve had their crypto assets. In addition, some cryptocurrency lending services may require cryptocurrency as collateral from borrowers, which could reduce the likelihood of default and provide lenders with greater protection.


Cryptocurrency refers to a digital or virtual currency that uses cryptography for security and operates on a decentralized blockchain-based system. Cryptocurrencies such as Bitcoin (BTC) offer an alternative to traditional fiat currencies by enabling peer-to-peer transactions without the need for a central authority and can be used for a variety of financial transactions such as buying goods and services , investing and sending and receiving money across borders.


An asset is a resource with economic value that can be owned or controlled. A digital asset, such as BTC or any other cryptocurrency, that can be bought or traded on a platform built on a blockchain is called an asset in the context of cryptocurrencies.

Similar to conventional assets such as stocks, bonds or real estate, these digital assets are often viewed as a store of value. However, cryptocurrencies are a high risk investment as they are often quite volatile and can experience large price swings.


A liability is a financial obligation or debt that a person or organization owes to another party. A liability in the context of cryptocurrencies refers to any obligation an individual or organization has to pay back or return cryptocurrency.

For example, if someone borrows cryptocurrency from a lender, they are responsible for paying back the borrowed cryptocurrency plus interest to the lender. Likewise, until the customer gets their money back, any funds held by a cryptocurrency exchange will be considered a liability.

Net value

Net worth is the total value of a person’s assets minus their liabilities. A positive net worth indicates that a person’s assets exceed his liabilities, while a negative net worth indicates the opposite. Understanding assets is important for assessing financial health and planning long-term financial goals.


Inflation is the rate at which the general price level of goods and services rises. Inflation can eventually reduce the purchasing power of money and have a substantial impact on savings and investments. For example, if inflation is 2%, a $100 purchase made today will cost $102 a year from now. To make informed financial decisions and prepare for the future, understanding inflation is crucial.

Related: How to preserve capital during inflation using cryptocurrencies


Diversification is a risk management strategy in which investments are spread across different assets or asset classes. Over time, diversification can help lower risk and increase profits. To reduce the risk of losses in a particular sector, an investor can diversify their portfolio by investing in stocks, bonds, cryptocurrencies, and real estate. To reduce investment risk and accumulate wealth over the long term, it is crucial to understand diversification.