Whether you’re starting your financial journey or already on the path to financial independence, knowing basic money terms can help you make better decisions.

Here, we dive into 21 essential financial terms you should be familiar with. Let’s explore each term and its significance, especially from an Indian context. By the end, assess your financial IQ to see if you're making the most of your money.

1. Asset

Definition: Anything you own that has monetary value.

Example: In India, common assets include gold, real estate, and mutual funds. If you own property in Delhi or stocks in Tata, these are considered assets.

2. Liability

Definition: A financial obligation or debt you owe.

Example: Liabilities in India could include home loans, personal loans, or credit card debts. If you have a housing loan from SBI, it’s a liability.

3. Net Worth

Definition: The total value of your assets minus your liabilities.

Example: If you own property worth ₹50 lakh and owe ₹10 lakh in loans, your net worth is ₹40 lakh.

4. Index Fund

Definition: A fund designed to match the performance of a market index.

Example: In India, Nifty 50 index funds are popular as they mirror the performance of the top 50 companies on the National Stock Exchange (NSE).

5. Portfolio

Definition: A collection of investments.

Example: Your portfolio might include mutual funds, fixed deposits, and shares in companies like Infosys or Reliance.

6. Dividends

Definition: Profits shared with investors.

Example: If you own shares in Infosys, you might receive annual dividends based on the company’s profit.

7. Stock

Definition: Share of ownership in a company.

Example: Buying a stock in TCS or Maruti Suzuki means you own a part of the company and can benefit from its growth.

8. Income

Definition: Money received from work, investments, or other sources.

Example: Your monthly salary, rental income from property, or interest from fixed deposits are all forms of income.

9. Budget

Definition: Tracks your income and expenses.

Example: Setting a monthly budget to monitor your ₹60,000 salary and expenses of ₹35,000 can help with saving and planning.

10. Credit

Definition: Borrowed money that must be repaid.

Example: Using a credit card for online shopping, where you’re expected to repay the bank within a certain period.

11. Credit Score

Definition: Score for paying back reliability.

Example: A CIBIL score above 750 in India improves your chances of getting loans at favorable rates.

12. Bond

Definition: Loan made to a corporation or government.

Example: Government bonds, like the RBI Floating Rate Savings Bond, offer stable returns and are popular in India.

13. Appreciating Asset

Definition: An asset that increases in value over time.

Example: Real estate in metro cities like Mumbai or Bengaluru often appreciates in value due to demand.

14. Depreciating Asset

Definition: An asset that decreases in value over time.

Example: Vehicles are common depreciating assets; a car’s value decreases the moment you drive it out of the showroom.

15. Compound Interest

Definition: Interest on both the original amount and previous interest.

Example: In India, Public Provident Fund (PPF) compounds annually, making it a popular long-term investment.

16. Simple Interest

Definition: Interest earned only on the principal.

Example: Some fixed deposits offer simple interest, calculated only on the initial deposit amount.

17. Risk Tolerance

Definition: Your ability and willingness to endure financial losses.

Example: Younger investors may have higher risk tolerance and invest in equities, while retirees might prefer safer options like fixed deposits.

18. Expense Ratio

Definition: Fund management fee.

Example: Mutual funds in India charge an expense ratio; lower ratios are better for investors as they reduce costs.

19. Tax-Advantaged Accounts

Definition: Accounts with tax benefits.

Example: Investments in PPF, EPF, and National Pension System (NPS) offer tax benefits under Section 80C of the Income Tax Act.

20. DCA (Dollar-Cost Averaging)

Definition: Investing the same amount regularly, regardless of market conditions.

Example: Systematic Investment Plans (SIPs) in India follow DCA, where you invest a fixed amount each month in mutual funds.

21. Gross vs. Net Income

Definition: Gross is before taxes, net is after taxes.

Example: If your gross monthly salary is ₹70,000 and you take home ₹60,000 after TDS, ₹60,000 is your net income.

Conclusion

Familiarity with these terms not only enhances your financial vocabulary but also empowers you to make better money decisions.

Test your financial IQ by assessing how many of these terms you understood before reading.

Improving your financial knowledge is a step towards financial independence!