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** This lesson is generated with AI assistance and approved by Danny Nelson. This lesson will communicate the essence of the topic for now until Danny can create a full lesson. **
Principal refers to the original sum of money that is either borrowed in a loan or invested in an asset, excluding any interest, dividends, or other earnings.
For example, if you take out a $10,000 loan, the principal is $10,000, and you'll repay that amount plus interest over time.
In investments, the principal is the initial amount deposited, such as $5,000 in a savings account, which then generates returns.
Principal payments in loans reduce the outstanding balance, directly lowering the amount on which future interest is calculated.
Understanding principal is crucial for calculating amortization schedules, compound interest, and overall financial planning.