Basic Financial Terms you Must Understand to be Finacially Literate

Enhancing your financial literacy is crucial, especially as you embark on your financial journey in Kenya. Whether you're setting up your first bank account or striving to bolster your financial knowledge, there are key concepts that all novices should grasp.

Without a solid grasp of financial management, navigating life in our society becomes challenging. While financial literacy levels vary, mastering fundamental concepts is essential before delving deeper into the realm of finance. Here are twelve critical terms that are imperative for your journey towards financial fluency.

Key Points:

• Financial literacy is indispensable in Kenyan society. Understanding concepts such as checking and savings accounts, credit scores, and taxes is pivotal for effectively managing your finances.
• Checking and savings accounts provide a safe haven for your money, readily accessible for daily needs.
• Maintaining a favorable credit score is crucial for financial success.
• Taxes are obligatory, and the penalties for non-compliance can be severe.

Checking Account: A checking account serves as a secure repository for your funds, typically provided by a savings bank or credit union, insured against losses by regulatory bodies like the Kenya Deposit Insurance Corporation (KDIC). It offers swift access to your funds for day-to-day transactions like bill payments and purchases.

Debit Card: A debit card facilitates access to your checking account funds in the digital era, replacing traditional paper checks. It allows cashless transactions at stores and online platforms, as well as cash withdrawals from ATMs, with transactions limited to available account funds.

Savings Account: A savings account is dedicated to accumulating funds earmarked for future use, offering monthly interest on deposits while maintaining liquidity. Most savings accounts in Kenya are insured, albeit subject to minimum balance requirements and withdrawal limitations.

Interest: Interest refers to the cost of borrowing money, typically calculated as a percentage of the principal amount over a specified period. It can be simple or compound, with compound interest accruing on both the principal and accumulated interest.

Loan: A loan entails a temporary transfer of funds from one party to another, subject to repayment with interest. Loans serve various purposes, including financing major purchases like vehicles, homes, or education, with terms specifying repayment schedules, interest rates, and collateral.

Credit Card: A credit card extends a line of credit to consumers, enabling purchases up to a predetermined credit limit. Cardholders must repay the borrowed amount, either in full or through monthly installments, with accrued interest on outstanding balances.

Credit Score: A credit score assesses an individual's creditworthiness based on their financial history, influencing loan eligibility and terms. Factors such as payment history, debt levels, credit utilization, and credit inquiries impact credit scores, crucial for accessing credit facilities.

Investment: Investment involves deploying funds into assets with the expectation of generating income or capital appreciation. While investments offer potential returns, they also entail risks, ranging from conservative options like savings accounts to higher-risk ventures like stocks.

Stock: Stock represents ownership in a company, tradable in the stock market. Stock values fluctuate based on company performance, presenting opportunities for capital gains or losses, with risks associated with market volatility.

Bond: Bonds are debt securities issued by governments or corporations, offering fixed interest payments to investors until maturity. Bonds provide income stability but are susceptible to inflation risks, with government-issued bonds considered low-risk investments.

Inflation: Inflation denotes the increase in the general price level of goods and services over time, eroding purchasing power. Inflation rates impact asset values and purchasing capacity, necessitating investment strategies to hedge against inflationary effects.

Taxes: Taxes are compulsory levies imposed by governments on income, property, and sales to fund public services and infrastructure. Compliance with tax obligations is essential, with penalties for non-payment, underscoring the importance of understanding tax obligations.

The Bottom Line: Acquiring financial literacy empowers individuals to navigate the complexities of managing and investing money effectively in Kenya. By comprehending fundamental financial concepts and economic dynamics, individuals can safeguard their financial well-being and capitalize on growth opportunities while fulfilling their tax obligations diligently.

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