Understanding Financial Lingo

The financial industry is filled with jargon and acronyms, and staying on top of them all isn’t easy. Not understanding these financial terms can make it difficult to plan for your future and make important financial decisions. It helps to know the basics, and I’ve summarized some common terms:

401(k)

A 401(k) is a plan that helps you save for retirement. They are offered by your place of work. Whatever amount you decide to set aside is tax deferred and is sometimes matched by the company. This means they are dedicating money to your account! Traditionally, your contributions are taken out of your paychecks and grow over time until you withdraw the money in retirement.

APR

This acronym stands for Annual Percentage Rate. This is the rate you’d pay on a loan or earn on investments. The higher the APR, the more money you’ll have to pay over time on a loan. With a credit card, this is what you’ll be paying if you don’t pay off your balance in full each month, so try to find the card with the lowest APR possible. In savings, the APR being high is a good thing — it’s the percentage your account balance earns.

APY

This stands for Annual Percentage Yield. This is similar to APR. However, APY also factors in the compound interest you would earn or pay for the year, making it a normalized representation of an interest rate.

Assets

Assets are things you own that can be measured to determine your net worth. An asset can be anything from your car to the funds in your checking account.

Compound Interest

“Compound interest is the eighth wonder of the world. He who understands it, earns it...he who doesn't...pays it.” - Albert Einstein. Compound interest is so incredibly powerful. It is interest paid on both the original amount of money and on the interest it has already earned. To make sure you completely grasp the concept, watch the video below:

Debt Consolidation

This is a form of debt refinancing, where you take out one loan to pay off a combination of others. By taking out one loan at a lower interest rate, you can lower the amount you’ll have to pay over time. This also means you’ll have one payment instead of many.

Diversification

When you investing, it can be wise to earmark money in a variety of areas to reduce risk. If you have all of your money in one place and then it fails, your total investment goes down the drain!

Five C’s Of Credit

Having a good credit score is very important. It can help you get a job, a house, loans and more. The Five C’s of your credit score are what lenders use to decide whether or not to lend you money. 

Capacity: Can you make the payments in full and on time?

Capital: What are your assets and net worth?

Character: What is your financial reputation?

Collateral: What assets do you have to secure the loan?

Conditions: Why do you need the loan?

Inflation

When the general level of prices rise in relation to an increased volume of money. Essentially, this means the power of the dollar is lowered.

Gross Income

This is your income before accounting for any taxes or deductions. When making a budget plan, it’s important to factor in all taxes and deductions.

Net Income

This is your income minus your income tax and other deductions. This gives you a more accurate look at determining whether your earnings match up with your expenses.

Net Worth

This is the value of all of your assets minus your debts. Your net worth can be negative if your debt owed is greater than the value of all of your assets owned.

IRA

This acronym stands for Individual Retirement Account, and unlike a 401(k), these retirement plans can be opened by individuals. Your place of work won’t match your contributions, but IRAs sometimes have better investment options. Also, if you work for yourself or you do freelance work, a 401(k) might not be an option.

 

Is there any financial terminology that you don’t understand? Let me know!

Take care,

Jake