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In this section, we have become familiar with the language of finance. The language of finance comprises many different concepts and terms, but understanding these concepts and terms is critical to managing your finances successfully. Understanding this language can help you to develop, analyze, and monitor your personal and financial goals.

I defined the term investment as the current commitment of money or other resources with the expectation of reaping future benefits. Interestingly, the definition of the term sacrifice is very similar. We make investments in many areas of our lives; key investments can involve education and skills, knowledge and friendships, food storage and emergency funds, and finances. For the most part, we will be working with financial investments in this course.

Compounding is an important principle to understand. Compounding periods are the frequency with which interest is applied to your investment. Interest may be compounded daily, weekly, monthly, semiannually, or annually. Compounding is important because a dollar received today is worth more than a dollar received in the future. This is because you can invest that dollar today and begin earning money on it. The sooner your money can earn interest, the faster your interest can earn interest, and the more money you will have.

Present value (PV) is another key term. The present value of an investment refers to the current value of a future sum of money. You must remember, however, that money you will earn in the future is less valuable to you than money you have right now; you cannot use future money to earn interest today. You can only earn interest on money you have in hand.

Future value (FV) is the value that an investment will have at some point in the future. The result of a future value equation will be a dollar amount that is larger than the original investment (assuming a positive rate of interest or return); it will be larger because your money will earn interest and earn interest on that interest.


Now that you have completed this section, ask yourself the following questions:

  1. Do I understand the definition of the term investment?
  2. Do I understand the importance of compound interest and time?
  3. Do I have a firm grasp of basic financial terminology?
  4. Can I solve problems related to present value (PV) and future value (FV)?

If you can answer yes to each of these questions, you are ready to move on to the next section!


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