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Financial Literacy

Dollars & Sense: Finance Terms Defined

finance terms

The finance world is filled with acronyms and finance terms that might sound alien to many people. So we’ve put together a glossary of finance terms that will help you understand money and credit better. (By no means is this list exhaustive.)

Finance Terms Defined:

401(k): Is an account sponsored by your employer that enables you to contribute funds for retirement either before or after-taxes depending on the options offered in your plan.

AnnualCreditReport.com: The only site authorized by federal law to provide free credit reports. Americans are entitled to one free credit report annually from each of the three credit reporting bureaus: Equifax, Experian, and TransUnion.

Amortization: When you get a mortgage or car loan you might be presented with an amortization schedule. This schedule shows the gradual repayment of your loan over a period of time.

APR: APR stands for annual percentage rate. It’s the interest rate you pay when you get a loan or what you earn on an investment in one year’s time including fees.

APY: APY stands for annual percentage yield. It’s similar to APR, except it takes into account the compound interest you earn or pay over a year. APY is higher than APR because it includes the interest you’ve already accumulated in its calculations. Banks advertise APY for savings accounts and APR for loans. Capisce?

ARM: ARM stands for adjustable-rate mortgage. Your interest rate starts out lower but it can go up (sometimes down) over time, which makes them riskier compared to fixed-rate mortgages.

Asset Allocation: A diversification strategy in which you spread your money across different investment types called asset classes. There are three basic asset classes:

  • Cash: Yup, cold hard cash. When you’re investing it also means your savings and money market accounts.
  • Bonds: When you buy a bond you’re basically loaning money to an organization, company, or government. Bonds are considered to be less risky than stocks.
  • Stocks: A share in the ownership of a company. When you purchase a stock, you become a shareholder in the company. We hear Berkshire Hathaway’s annual shareholder meeting is a hoot. 

Cash Flow: The net amount of cash and cash equivalents moving into and out of a business.

Capital Gains (and Losses): If you sell something for more than you spent to acquire it, that’s a captain gain. If you sell it for less than your original purchase, that’s a capital loss.

Credit Limit: The amount you can charge before it’s maxed out.

Credit Report: Contains all the relevant information concerning your use of credit in the past, including payment history, account balances and other details. Sometimes your credit report will contain errors, so make sure that you check your report at least once a year. The three credit bureaus in the U.S. are Equifax, Experian, and TransUnion.

Credit Score: Lenders use credit scoring, among other things, to determine your creditworthiness. A person’s credit score is a number between 300 and 850.

Credit Terms: The agreement between borrower and lender that stipulates the monthly payment amount due, due date, fees and interest.

Creditworthiness: Measure of whether you’re financially sound enough to extend credit to.

Debt Consolidation: The process of combining several loans or other debts into one for the purposes of obtaining a lower rate or reducing fees. 

Diversification: You know the adage, “don’t put all your eggs in one basket.” It’s a risk management technique that divides funds among securities of different industries or of different classes.

Financial Wellness: When a consumer is on top his or her finances. It’s a highly personal state, regardless of income, and one that we all strive for in the present and in the future.

Fixed-rate Loan: A loan where the interest rate doesn’t fluctuate for the duration of the loan.

Gross Income: The total money earned before taxes are deducted. Remember, when creating a budget make sure you take into account your net income, not your gross. Net income is the total money earned after taxes and other deductions are taken out.

Hard Inquiry (or Hard Pull): Inquiries that affect your credit score. Hard pulls must be authorized by you and are generally made by potential creditors to determine your creditworthiness.

Identity Theft: Acquiring personal information in order to obtain credit under another’s person’s name.

IRA: IRA stands for individual retirement account. Unlike 401(k)s, IRA can be opened by an individual and do not have to be sponsored by your employer. You can contribute income up to a set maximum dollar amount.

Net Worth: The difference between your assets and your debts.

ROI: ROI stands for return on investment. Cha-Ching. To calculate ROI, take the gain of the investment, subtract the cost of the investment, and then divide the total by the cost of the investment.

Soft Inquiry (or Soft Pull): Inquiries that do not affect your credit score. Soft pulls are usually initiated by utility providers or employers.

Secured Credit Card: A credit card backed by a cash deposit. When you are rebuilding your credit these types of cards can be helpful.

Secured Debt: A debt secured with collateral to reduce a lender’s risk (e.g. a car loan, mortgage, or home equity line of credit)

Unsecured Debt: A debt that is not secured with collateral (e.g. credit cards, certain personal loans)

Variable Interest Rate: When the interest rate of a loan changes with market condition for the duration of the loan.

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