Did you know these 5 terms that could change your financial health? Let CRED make it simpler

The current generation is tremendously blessed with resources and the most prominent one in the list is technology. Having been born in an era of innovations, technology has become an integral part of a millennial’s daily life. Despite having the resources to access information and knowledge, they do not have a strong grip on matters of finance, savings, and usage of credit.

While many worry about taking the first steps towards investing, now there exist mobile applications like CRED that help its members maintain their credit score, give them timely reminders to pay bills, and offer exciting rewards. Financial well-being is central to everyone’s lives, mental and physical health. It is essential to take baby steps towards it. The first step towards being financially healthy is by equipping yourself with sufficient knowledge in order to start our journey towards taking a promising control of our finances. To steer one in that direction, here is a round-up of certain basics that CRED believes one should be aware of to make the most of your financial journey.

Compounding: It is one of the simplest ways of growing your wealth. Those who are able to understand this, earn from it and those who don’t, somehow tend to pay for it. In simpler words, compounding is a continuous process of adding interest to your principal amount and to the accumulated interest on it. For example: If you have INR100 and you get an interest of 10% on it, this will make the total amount to INR 110. Further, next year, you get an interest on the amount of INR 110 thus resulting in an interest on interest. Compounding therefore increases the growth of returns and when we are talking money we always want some growth, right?

Credit Score: This score is a numerical expression that determines one’s creditworthiness and is an advocate to show the capability of paying back loans. It varies from 300-900, and is an important aspect when you approach the banks for a loan and could be your trusted tool during emergencies. A higher score is achieved by cultivating healthy financial habits- timely repayment of EMIs and dues, no default on loans, avoiding too much debt at one time, and regularly checking your score to ensure that no errors are being made.

Overdraft: This is an extension of the credit facility, which allows money withdrawal from an existing bank account, even when the account balance is zero. The overdraft limit is based on an individual’s credit profile and an interest would be levied only on the amount utilized. This is best suited for short term requirements.

Asset allocation: It is basically where you choose to put your money, balancing it between risks and rewards. Your financial portfolio division should be based on short and long term goals along with your risk and time you can afford. The three major asset classes include equity (stocks), fixed income (bonds) and cash (cash equivalents). Your choice of investment could also be other physical assets like real estate. Instead of stock picking, you could start by deciding what mix of stocks, bonds, and mutual funds you want to hold.

Rebalancing: It is the process of realigning by periodically buying or selling of assets to maintain an original or desired level of asset allocation. It is similar to rearranging your wardrobe by putting on jackets and hoodies when it is winter. In rebalancing, one changes the allocation of assets in the portfolio to manage risks. For example: if your current asset distribution is 40% stocks, 30% bonds and 30% cash and you would like to leverage the stock market when it is doing well, you could relocate it to 60% stocks, 20% bonds and 20% cash. Ideally, you should rebalance your portfolio at least once in a year

Capital Gains: As the name suggests, a capital gain is the increase in an asset’s value from the time you acquired it to the time you sold it. Your capital gain can be called your profit. Capital gains are common on assets such as real estate, stocks, and mutual funds. Capital gains are subject to a different tax treatment compared to your usual salary/business income. Different taxes apply to short-term gains– assets owned for less than a year– than long-term assets.

Now that the once-so-heavy terms have been dissected to their simplest meanings, we hope these will help in taking that first step towards financial discipline and stability. After all, planning and executing will be fun and easier when there are apps like CRED, making your bill payment journey seamless and rewarding while you travel to work with a hot cappuccino, and have no regrets!

This article has been created by the Studio18 team on behalf of CRED