Jargons look too technical and dry to people who are not very familiar with them. But some jargons explain a lot in just a few words. Though they seem theoretical, their real-life application can be amusing. This is especially true when it comes to financial jargons.
Here is a collation of six financial jargons, when adopted, can make your life better. You might be using a few of them in your daily lives but unsure of how meaningful they can be. Let’s learn them today!
Return on Investment (ROI):
Return on investment is the quantitative measure of the performance of your investment. This is arrived at by dividing the net gain from the investment by the actual cost of the investment. ‘The best ROI is always achieved with zero budget’, a famous quote says.
Not just the finances, you can consider the concept to weigh if the time and energy you have spent on something are worth it. As an example, you can consider weighing the options of assigning a task to an in-house employee or to a freelancer based on the ROI in terms of the time and effort required in the two cases. You may have to consider both tangible and intangible factors while considering the ROI in certain cases. Though it may be subjective, it is worth considering ROI.
Compounding:
Compound interest is an interest calculation method where the principal includes the accumulated interest of previous periods for a loan or deposit. Based on the scenario, compounding can be threatening or rewarding respectively. Albert Einstein had said, ‘He who understands it, earns it. He who doesn’t pay it.’
Applying the concept to physical fitness, you can understand that spending 20 minutes every day on any physical fitness activities can lead to positive outcomes in the long run. Small and regular positive habits can have an exponentially bigger effect on our physical and mental health.
Diversification:
Holding different types of investments, ranging from domestic to international stocks, bonds, and other asset classes, is the key to reduce your risk and balance the returns if one of them underperforms. The quote, ‘Concentrating your assets can make you rich, but diversifying your assets keeps you rich’, paints the picture perfectly.
When you put all the fruits you bought from the market in the same basket; one spoilt fruit can spoil all the other fruits in the basket. When you place different fruits, say apples and oranges, in different baskets, even if the apples rot, you can have oranges when you are hungry. Agree?
Also Read: ESG Funds: Should You Invest in These Funds?
Cost Per Unit:
This jargon may sound like it has nothing to do with you and is only meant for manufacturers and buyers. Did you know that cost per unit or cost per use is a measure of the utility of an item you purchase by dividing the item’s cost by the number of units it contains or the number of times you can use it? Spend a minute to calculate the better deal among the alternatives available in terms of cost per unit or cost per use.
Consider that you have been to purchase toothpaste. If you and your spouse have the habit of brushing teeth two times a day, then you will obviously use more paste than a single person who only brushes teeth once a day. Therefore, buying a 100g tube twice a month may not be a better choice than buying a 200g tube once a month. Also, compare the cost of a 100g tube with the 200g. In many cases, the 200g tube will be much cheaper than the 100g, making it the better choice for you.
Liquid Reserves:
Cash is the most liquid form of assets one can have since it is quickly accessible without any effect on its value. There are other cash-equivalent assets, such as the savings account and Treasury bills, that are easy to access during emergencies or opportunities.
When it comes to your career, it is always good to develop skills in more than one field. If you happen to lose a job suddenly, you will be able to quickly find another job in any of the fields you are skilled in. The same works even if an exciting opportunity comes the way that suits you better. In this case, your skills are your reserves for emergencies or opportunities.
Opportunity Cost:
At all the major stages of my life, I have had two choices in front of me. Though both would be tempting in their own way, choosing one among them turns out to be tough. This is when opportunity cost comes into the picture. In financial terms, choosing one investment option means leaving out on the possible returns from the other investment option. Opportunity cost is being aware of what you lose when you give up on one opportunity and pursue the other. Charlie Munger, an American Investor, says, ‘Intelligent people make decisions based on opportunity costs’.
Say, you have two offer letters at hand, one from your hometown and one from a nearby metro city. The former offers a smaller package as compared to the latter. Would you give up the metro city one because you can stay at home and save a few more pennies? Or, would you pursue a big job at a metro city and get more exposure to the cost of setting up new accommodation for yourself? Though there may not be one correct answer here, it is good to understand what you gain and lose through the different choices you have.
So, you must have understood the financial jargons better through the respective real-life scenarios. It is definitely fine if you understand the real-life events better through the jargons!
For any clarifications/feedback on the topic, please contact the writer at apoorva.n@cleartax.in
