This Children’s Day, we decided to do away with all the complicated finance jargon flying around and have come up with simpler and more fun ways to describe common financial terms to make finance easier for kids to understand.
Let’s face it – financial terms are sometimes hard to understand. Even adults have a difficult time wrapping their heads around many financial concepts. Imagine what it must be like for kids then? Why should kids have to know anything about finance, you ask? Well, that’s because when it comes to financial literacy, the earlier you start the better.
Finance, you may think, is for adults and therefore, very boring. But think about it. As kids, you too start handling money from a young age in the form of pocket money, cash gifts from your relatives on a festive occasion or a birthday and so on. So, wouldn’t it be a good idea to know some basic financial concepts so that you can use this knowledge to start making wise financial decisions like saving up for your college education early on?
Let’s check out a few terms:
Don’t you love it when you get the highest score in the class social science quiz or your team wins after getting the highest score on annual sports day? A Credit Score is a lot like that. With a high Credit Score, you’re undoubtedly a winner.
Just like any score, a good Credit Score says a lot about you. It tells banks that you’re a champ when it comes to dealing with finances. That is, you pay your bills on time, you don’t borrow more money than you need and when you borrow money from the bank, you have every intention of repaying it. A Credit Score of 650+ is considered super impressive. Sounds easy, doesn’t it? It really is.
Think of a situation where a person borrows Rs. 100 each from you and your friends and at the time of borrowing, promises to pay you and your friends back not Rs. 100 but Rs. 250 each after a few years. Sounds unbelievable? Well, a scenario like that is quite possible with Mutual Funds.
A Mutual Fund is a pool of money contributed by various people who are interested in seeing their money multiply over a certain period of time. But this involves certain risks too. Sometimes, you may not get back the amount of money that you thought you would at the time of putting in your money. So you must choose the friend you decide to give the money to very wisely and carefully.
Sorry guys, but unlike your school report card, outstanding here doesn’t mean that it’s something to be super proud of. Outstanding balance is the amount of money that you have to pay back to the bank for all those purchases you made using your Credit Card.
Sometimes it can be exactly the amount that you spent using your Credit Card (if you pay back the money within a certain number of days as allowed by the bank) and sometimes it can be much more than what you had borrowed. This happens when the bank adds an “interest” to the amount that you had originally spent because you didn’t pay back the bank on time. So, it is always good to clear your outstanding balances on time. You also get some brownie points by doing that. How? With every Credit Card bill that you pay on time, your Credit Score will improve. Isn’t that a good thing?
Equated Monthly Instalments (EMI)
Remember that time when you wanted that expensive toy car but your pocket money wasn’t enough to pay for it? You cleverly asked your parents to buy it for you on the condition that you would pay them back little by little every month from your monthly pocket money. Well, Equated Monthly Instalments (EMI) work exactly like that.
When you buy something expensive and are unable to pay for it entirely, you borrow money or take a ‘loan’ from a bank to be able to pay for it. To pay back the bank in turn, you need to pay a fixed amount every month, also known as Equated Monthly Instalments (EMI) until you’ve paid back the entire money that you had borrowed.
One thing to remember here is that an EMI includes interest over and above the amount that you have borrowed. Interest is calculated on the borrowed amount. And the longer you take to repay your bank, the higher the interest that you will have to pay.
Secured and unsecured loans
Most of us would remember bribing our friends with our most prized GI-Joe or WWE trump card for one shot at playing their video game. Secured loans are exactly like that. When you take a secured loan, you have to offer something valuable that you own in exchange. Banks do this so that if you don’t repay the loan, the bank can take the thing that you offered in exchange and sell it to get back the money they loaned you.
Unsecured loans, on the other hand, can be given by the bank to you without taking anything in return from you. The bank will only do this if it thinks that you’re going to pay back the loan and are responsible with your money. So, you must pay your bills on time and maintain a good Credit Score to show the bank that they’re trustworthy.
Since life is uncertain, grown-ups buy a life insurance policy for those times when they may fall sick or in case they aren’t around anymore. ‘Sum assured’ is that amount of money that the insurance company promises to give the person’s family after his death or after a certain period of time to make sure that they can pay for their expenses like food, clothes, and school fees.
Claim Settlement Ratio
Insurance companies get a lot of ‘death claims’ every day. A ‘death claim’ is the request the company receives to pay money to the person or his family who has a life insurance policy with the company after his death. The number of claims that the insurance company pays the money for out of the total number of claims or requests that it receives from various policyholders (people who’ve bought a policy from the company) is known as the claim settlement ratio.
Every month, you receive pocket money from your parents. Since you use this pocket money to your benefit, you are the ‘beneficiary’ of this pocket money. So, a person who gets something that will benefit them is called a beneficiary. Similarly, when a person buys a life insurance policy, he or his family will be paid a sum of money after a certain period of time. The person who gets the money is called the ‘beneficiary’ of the policy.
Whole Life Insurance
Just like your parents promise to take care of you your entire life, a Whole Life Insurance policy protects an individual for his entire life. Some part of the policy includes insurance and some part includes investment.
When you join a school, your school teachers and principal promise to take care of you until you graduate, which means that they promise to take care of you for a certain period of time. A Term Insurance is a lot like that. It is a type of life insurance that provides coverage for a certain period of time or years
Additional Reading: Term Life Or Whole Life Insurance?
Now that these common financial terms are at your fingertips, you are officially ready to make some wise and responsible financial decisions in the future. But till that time, enjoy these days of gay abandon and have a splendid children’s day.