KNOW YOUR INSURANCE: PART 3 OF 3.

Sometimes, lines between distinct disciplines are blurred and terms from one discipline are borrowed and used in another. It is always good to keep an open mind and learn what you can so that you have a wide grasp of financial products that you encounter.

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The following are some of the basic terms that both banks and insurance use to explain their products.

Rule of 72

In the finance discipline, the rule of 72 is a method for estimating an investment’s doubling time. The said amount of money is divided by the interest rate per specific period to obtain the approximate length of time (usually years) required for doubling.

Compound Interest

Interest that is earned or charged on interest.

A fixed deposit with a principal of $100 that earns 1% interest per month has a balance of $101 at the end of the first month. In the second month, the 1% interest is earned on the $101, and not the $100.

Similarly, a credit card balance of $200 at 2% interest per month has a balance of $204 if the balance isn’t paid by the end of the first month. In the following month, the 2% interest is charged on the $204, not the $200.

Credit Worthiness

Your reputation as a borrower, which is based on your credit history.

If you are prompt in making your credit card or other loan repayments, you are deemed to have high credit worthiness. If you do not make your repayments by the due date frequently, you are deemed to have low credit worthiness.

Dollar Cost Averaging

An investment technique which involves using a fixed amount of money to invest in shares, regardless of the price, at regular intervals over a long period of time.

Assume that the amount of money used to buy shares is fixed, and the market value of the shares fluctuates. At a higher market value, the number of shares that you are able to purchase is lower than at a lower market value. Thus, by buying more shares when prices are low and fewer shares when prices are high, you’ll be less vulnerable to market fluctuations.

Interest

A fee charged on borrowed money.

A credit card company usually charges an interest rate of 24% per annum.

Managed Funds

A type of investment managed by a financial institution. The money is invested in a number of securities, giving each investor greater diversity in his or her investment portfolio.

A fund manager determines the investments to buy or sell and investors don’t have the day-to-day control.

Minimum Sum

The minimum amount on your credit card bill that has to be paid, as required by the financial institution that issues your card.

This is usually 3% to 5% of the outstanding balance or $50, whichever is higher.

Shares/Stocks (also known as Equities)

A share (or stock) constitutes part (or a ‘share’) of a company. Therefore, if you buy a share (or stock) in a company, you become a joint owner of the company.

If you buy all the shares (or stocks) in a company, you own the company.

Publicly-traded companies issue shares to raise money for their businesses.

Unit Trust

An investment that pools money from individuals or organisations with that of other investors. This money is invested collectively in a number of funds, such as managed funds.

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