Top 10 financial terms you need to know before venturing into investment
When you understand financial terms and concepts, you make informed decisions on how to spend, save and invest your money. This will help you achieve your financial goals.
In light of the above, we touch base on common terms associated with savings and investments, to help you get started on your savings journey.
Simply put, a mutual fund pools money from a number of investors. This investment fund is managed by licensed asset managers, whose job is to invest it in high-yielding, low-risk investments such as treasury bills and bonds with the aim of getting a return. This is among one of the safest investment tools and a great option for people with a low-risk appetite.
This is a collection of financial investments like stocks, bonds, and other ranges of assets. It is common for seasoned investors to have a diverse portfolio that manages their risk. This simply means they have placed their ‘eggs’ in multiple financial baskets.
This is an estimation of income and expenditure over a specified future period of time for instance a month or a year. When planning your personal finances, creating a budget is where to start. A realistic budget will help you plan for your income and set aside money for saving and investing.
One of the most effective budget rules is the 50/30/20 rule, where you allocate 50% of your income after tax to your needs, 30% on wants, and 20% is put towards savings.
This is a loan that is to be repaid with interest. Loans can have fixed or variable interest rates. Investing and paying down debt are both good uses of any spare money you might have, however, it is wiser to pay off any high-interest rate debt first, before investing, as this is likely to provide a better return on your money than almost any investment.
Saving involves putting money aside for a specific goal typically under three years. If money is saved into a savings account, it earns interest over a period of time.
This is an investment that represents a share or partial ownership of a company. Simply means the ownership certificates of any company. Over many decades, the investment that has provided the highest average rate of return has been stocks. But there are no guarantees of profits when you buy stock, which makes stock one of the riskiest investments. Stocks are predominantly bought and sold through the stock exchange e.g. the Nairobi Stock Exchange (NSE).
This is a loan to a company or government that pays back investors a fixed rate of return over a specific period. Bonds are used by companies, municipalities, states, and governments to finance projects and operations. An example of a Kenyan bond is M-Akiba through which the government raised funds for infrastructure development. Bonds are one of the safest investment tools, offering more stable and consistent returns.
This is the measure of the rate of increasing prices of goods and services in a country’s economy or inversely, the decline of purchasing power of a given currency. Inflation can occur when there is a sudden increase in production costs such as wages and the price of raw materials or there is more demand for a product, and people are willing to pay higher prices for it.
Inflation can be a concern because it makes money saved today less valuable tomorrow. Inflation erodes a consumer’s purchasing power and can even interfere with the ability to retire making it even more important to invest in high yield investment tools.
Have you heard of the quote that saving for retirement starts from your first paycheck?
One of the ways you can prepare for retirement is to ensure you have a pension fund. This is an investment pool paid for by your employer, yourself, or both, to pay for your retirement. Starting to save early allows for a smooth transition into retirement so that you can continue enjoying the same lifestyle as when you were employed.