financial literacy

9 essential finance terms you must know

Boost your financial literacy with nine essential terms. From interest to assets, improve your money management skills.

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

Financial literacy is important for a variety of reasons:

  • Making informed financial decisions: Those who are financially literate are able to make wise financial decisions that are consistent with their aims and values. This involves choices on how much to spend, save, invest and borrow.
  • Avoiding financial pitfalls: Financial literacy can assist people in avoiding typical financial risks, such as high-interest debt, excessive spending and investment fraud.
  • Creating long-term wealth: By knowing how to efficiently save and invest, people with financial literacy can help generate long-term wealth. Understanding ideas such as compound interest and diversification is part of this.
  • Enhancing quality of life: Financial literacy can enhance your quality of life by lowering stress brought on by financial uncertainty and giving people the abilities and information they need to reach their financial objectives.
  • 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 finance terms that everyone must be familiar with.

Budget

A budget is a plan that outlines expected income and expenses over a period of time. To keep track of spending and make sure that money is being spent responsibly, a budget is necessary. A monthly budget might, for instance, contain revenue from a job and costs for things, such as rent, utilities and groceries. A budget can assist people in better managing their money and preventing overspending.

Interest

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 instance, a credit card may impose an interest rate of 18% on outstanding balances. To avoid taking on high-interest debt and to make wise borrowing decisions, it is crucial to understand interest rates.

Related: How to earn interest from crypto saving 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 out to borrowers.

Credit score

Based on variables, such as payment history, credit utilization 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 on loans, credit cards and other financial items. For instance, a Fair, Isaac and Company (FICO) score of 700 or higher is generally regarded as favorable.

Since cryptocurrencies are decentralized and unrelated to established credit systems, there is no exact analog of a credit score in the realm of cryptocurrencies. Yet some cryptocurrency borrowers and lenders may determine creditworthiness using alternative credit scoring models built on blockchain technology.

A cryptocurrency lender, for instance, might assess a borrower’s creditworthiness based on their blockchain transaction history, taking into account details such as their payment history, the volume and magnitude of their transactions, and how long they have had their crypto assets. Additionally, some cryptocurrency lending services might ask for cryptocurrency as collateral from borrowers, which might reduce the chance of default and give lenders more protection.

Cryptocurrency

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 currency by allowing 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.

Asset

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

Similar to conventional assets like equities, bonds or real estate, these digital assets are frequently viewed as a store of value. However, cryptocurrencies are a high-risk investment since they are frequently quite volatile and can undergo large price swings.

Liability

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

For instance, if someone borrows cryptocurrency from a lender, they would be responsible for paying back the borrowed cryptocurrency plus interest to the lender. Similarly, until the customer receives their money back, all funds held by a cryptocurrency exchange would be seen as a liability.

Net worth

Net worth is the total value of an individual’s assets minus their liabilities. A positive net worth indicates that an individual’s assets exceed their liabilities, while a negative net worth indicates the opposite. Understanding net worth is important to assess financial health and plan for long-term financial goals.

Inflation

Inflation is the rate at which the general level of prices for goods and services is rising. Over time, inflation can reduce the purchasing power of money and have a substantial impact on savings and investments. For instance, if inflation is 2%, a $100 purchase made today will cost $102 in a year. To make informed financial decisions and prepare for the future, it is crucial to understand inflation.

Related: How to preserve capital during inflation using cryptocurrencies

Diversification

Diversification is a risk-management strategy that involves spreading investments across different assets or asset classes. Over time, diversification can help lower risk and boost profits. To lessen the risk of losses in any one sector, an investor can diversify their portfolio by making investments in stocks, bonds, cryptocurrencies and real estate. In order to reduce investment risk and amass long-term wealth, it is crucial to comprehend diversification. 

Education is key to financial freedom, says Bitcoin advocate Najah Roberts

The Agenda podcast discusses the importance of financial literacy and education in Part 2 of a conversation with BTC advocate and entrepreneur Najah Roberts.

Can Bitcoin help Black Americans build wealth in a country that has historically and intentionally prevented them from doing so? The Agenda podcast recently sat down with Najah Roberts, a Bitcoin educator and entrepreneur, to explore the question. 

In Part 1 of the conversation, released on Feb. 1, Roberts told hosts Jonathan DeYoung and Ray Salmond that Bitcoin (BTC) might be the greatest opportunity Black Americans have had to close the country’s wealth gap. She stressed the importance of communities having financial sovereignty and control over their own money, which can help uplift entire generations.

In Part 2 of their conversation, released on Feb. 15, DeYoung and Salmond chat with Roberts about building financial literacy, the struggles of operating a community-focused crypto exchange, and how to work with children and youth to prepare them for the blockchain and technology revolution that is already underway.

Self-sufficiency and self-custody

While Bitcoin may offer a path to self-sufficiency, Roberts strongly believes that investment moves must be made in parallel with the best practices of financial literacy: “Never invest more than you can afford to lose. That is a ground rule.” She stressed that Bitcoin is not a “get-rich-quick” scheme — adding to “be very careful in what you invest in because all coins are not created equal, and most of these coins are created to extract money from your bank account.”

Roberts pointed out that financial literacy is rarely a topic taught in schools, and she believes that’s by design:

“If they have people that don’t know better, they won’t do better. And they continue to have people that will work in this country and not really understand that they’re working for money instead of allowing money to work for them. And so the select few that get that memo, they do well. And so, as we continue to get into this new digital space, education has got to be the foundational piece for both children and adults.”

Roberts pushes the importance of education with her brick-and-mortar Bitcoin exchange, which has two elements: The Bitcoin Banq is the for-profit exchange, while Crypto Blockchain Plug is an associated nonprofit educational center that teaches people the ABCs of BTC. However, the entities’ focus on self-custody and not holding customer assets has caused some challenges for Roberts, who explained that it was hard to find a banking partner:

“They told me I had to have $1 million a day minimum. I don’t hold $1 million a day. I’m not doing some of the things that some of these other exchanges are doing to ensure that they’re padding their pockets, because we immediately take the money from the individuals, and we immediately give them their Bitcoin. We’re not holding on to their Bitcoin. We’re teaching them day one to be self-sovereign.”

Crypto is for the children

While many adults remain skeptical about crypto — or simply don’t understand it — Roberts said that children and the youth often have an instinctual understanding of blockchain’s potential. She runs Crypto Kids Camp, an educational program for children and young adults in inner-city and rural areas, teaching participants about cutting-edge technologies like nonfungible tokens (NFTs), virtual reality, drones and more.

In Roberts’ experience, “Digital currency to them is like second nature,” as they are “already using it in video games. They’re buying stuff with Robux, and they’re doing all this other stuff already.”

At the end of the day, what Roberts wants to convey to both the kids and their parents is that learning new technologies opens up new possibilities for growth and success. “All of these things we’re bringing to the children’s mind early,” said Roberts, adding:

“Our children need to be made aware of these technologies so as they grow and as their parents watch them, they’re able to actually maneuver them into the space that’s most important to them and not actually what we want as parents or what we want as teachers, because that does not fare well. […] What we want to do is expose children to every aspect of technology so that they can pick and choose what works or what they like the best. And then that parent can actually take that and have something to build upon.”

To hear more from Roberts, tune in to the full episode of The Agenda on Cointelegraph’s new podcasts page, Spotify, Apple Podcasts, Google Podcasts or TuneIn — and be sure to check out Cointelegraph’s other new shows as well.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Is it possible to achieve financial freedom with Bitcoin?

Bitcoin aims to bring power back to the people. Beyond that, a calculated investment in Bitcoin can potentially bring one closer to financial freedom. But how does one do that?

Over the last 14 years, investors have been attracted to Bitcoin (BTC) for many reasons — from being a potential solution to the economic woes of the existing fiat economic system to reaching the unbanked and diversifying portfolios. However, a large portion of the general public sees Bitcoin as a gateway to financial freedom amid growing fiat inflation and geopolitical uncertainties.

Traditional banking systems have, time and again, served as a tool for centralized governments to dictate financial access, especially during emergencies. Most recently, the Ukraine-Russian war served as a case study for how cryptocurrencies helped the displaced and the unbanked access funds for basic necessities.

As intended by the creator Satoshi Nakamoto, Bitcoin seeks to bring power back to the people. No amount of regulations, sanctions or bans can stop people from using Bitcoin as money. Beyond that, a calculated investment in Bitcoin has the potential to bring people closer to attaining their dream of financial freedom. But how can people achieve that?

Hodl

The massive volatility of cryptocurrencies coupled with the restlessness of an investor is a recipe for an instant loss. Many fail to understand that Bitcoin — unlike other cryptocurrencies — is a long-term investment. Hence, Bitcoin veterans recommend holding the asset during bull markets and buying the dips during bear markets.

According to data from UpMyInterest, setting aside a few off-years, Bitcoin holders witnessed a mean annual return of 93.8%, which in its best-performing year, spiked to 302.8%.

Historical summary of Bitcoin annual returns. Source: UpMyInterest

As simple as it sounds, hodling (crypto lingo for holding assets) has proved difficult for investors. Some factors that trigger abrupt Bitcoin selling include the spreading of FUD (fear, uncertainty and doubt) and price movements.

While it makes sense in the short-term to earn profits off Bitcoin’s volatility, zooming out the price chart reveals a long-term greater incentive in holding. Moreover, investors owning Bitcoin will always have the option to utilize this spending across geographical boundaries without losing value.

Dollar-cost averaging

Considering Bitcoin as a viable long-term investment option, many investors tend to implement the dollar-cost averaging (DCA) strategy. This involves setting aside a predetermined dollar amount from a regular income to be reinvested in Bitcoin every day, week or month.

While El Salvador was initially criticized for adopting Bitcoin as a legal tender amid crippling inflation, the country could repurpose the resultant unrealized gains to fund social projects, such as building hospitals and schools.

With the Bitcoin bull run running out by 2022, Salvadoran President Nayib Bukele followed a strategy similar to DCA, wherein the country would purchase 1 BTC every day.

When Bukele announced his plan for buying Bitcoin, it was priced roughly at $16,600, as shown by data from Cointelegraph Markets Pro and TradingView.

Bitcoin price movement ever since Nayib Bukele announced plans to purchase 1 BTC every day. Source: TradingView

Since then, BTC’s price has surged 40.46%, providing much-needed relief to Salvadorans. Investors looking for financial freedom must pursue a similar strategy while reacting to market changes and public sentiment.

Self-custody

When it comes to the long-term holding of Bitcoin, the key is not to trust any other third-party entity with the assets’ private keys. Investors who store Bitcoin on crypto exchanges unknowingly give away complete control of their assets.

Ever since the FTX fraud came to light, the case of self-custody grew stronger. Investors that suffered losses owing to the alleged misappropriation of funds realized the importance of self-custody. Maintaining ownership of the private key — via self-custodial wallets — becomes paramount for those that seek financial freedom in its truest sense.

The FTX fallout also forced crypto exchanges to prove the existence and safety of users’ funds in order to avoid a low liquidity situation.

Although hardware alternatives for crypto self-custody require an upfront investment, it is up to the users to choose an ideal method of storing the private keys, even if it means writing the private keys on a piece of paper.

The three practices mentioned above — hodl, DCA and self-custody — form the main pillars of financial freedom. However, users are not limited from trying other strategies that suit their needs.

Achieving financial freedom with Bitcoin is possible. Given the nascency of the crypto ecosystem, investors are advised to focus on the long-term benefits of Bitcoin while reaping short-term gains in the process.