23 Mar 28 Financial Terms You Should Know
If you’ve ever learned a foreign language, then you may understand what it’s like when you first start navigating the waters of investment and finance. It seems like everything is shortened into an acronym, and every time you get a handle on something, there seems to be something else that you need to learn to stay “up to speed” in this industry.
To make it a bit easier, we’ve created a list of the top 28 financial terms you should know. Refer to this list anytime you hear a new term and want to understand what it means. We’ve even divided it into categories to help you narrow things down even more. Before long, you’ll be confidently speaking the language of “investment” with others who speak this language as well.
Happy investing!
Banking and Credit Terms
Compound Interest – This is the interest you receive on the money you deposit plus the interest you’ve amassed as you’ve invested and saved in various accounts. It’s similar when you borrow: Compound interest is the interest you incur on the original loan plus the interest you’re charged gradually over the life of your loan.
FICO Score – This is a number that financial companies use to determine the risk associated with lending money to a particular borrower. The acronym stands for Fair Isaac Corporation, the company that invented this method for measuring the financial liability of borrowers. The lower your score, the riskier it is to lend to you; the higher your score, the more likely you will be approved to borrow.
Net Worth – The easiest way to determine a person’s net worth (or financial health) is to subtract their liabilities from their assets.
Insurance Terms
ACV – This stands for Actual Cash Value and represents the value of a property at the time it is lost or damaged.
Beneficiary – The person(s) named in a life insurance policy who receives the payout when you pass away.
Term Life Insurance – This type of insurance has cheaper premiums but only lasts for a specified amount of time (10, 20, or 30 years). If you die while owning this policy, your beneficiaries receive a payout from the insurance company.
Whole Life Insurance/Permanent Life Insurance – As the name implies, this insurance lasts your whole life, but the premiums cost more. It also often offers a tax-deferred investment option (like dividends) in addition to paying beneficiaries when you die.
Taxes Terms
AGI – This means Adjusted Gross Income. It’s determined by calculating your gross income and subtracting specific IRS-allowed deductions. Your AGI helps determine your actual taxable income.
Dependent – Dependents can be children or adult relatives that you financially support. When filing your taxes, you can reduce your taxable income by receiving tax credit or exemptions for dependents.
Tax Deduction – This is an allowable expense that is deducted from a taxpayer’s gross income thereby lowering how much he or she pays in taxes.
Real Estate Terms
ARM – This stands for Adjustable-Rate Mortgage. With this type of mortgage, the interest you pay on the balance of your loan fluctuates based on certain criteria, such as market activity. This also causes your mortgage payment to vary from month to month.
Earnest Money – This is a “good faith” deposit given to a seller by a buyer to show that the buyer is serious about the agreement between them.
Escrow – As you pay your mortgage each month, a portion of your payment is designated for the escrow account which holds your homeowner’s insurance and property taxes until they are due and need to be paid.
Fixed-rate mortgage – This type of mortgage’s interest rate never changes; it’s permanent. Your mortgage payment each month won’t fluctuate like an ARM will. (There are pros and cons to this: If rates are higher than your fixed rate, then you’re set. But if your fixed rate is higher than the variable rate, then you will pay more interest.)
Retirement Terms
401(k) – This is a retirement plan that is established by an employer to assist employees in saving for retirement. Employees can choose to have a portion of their paychecks deposited directly into their accounts. Sometimes employers match the amounts employees put into their 401(k) plans. (This is usually pre-taxed funds.)
IRA – IRA stands for Individual Retirement Account. People can deposit pre-tax, tax-deferred income toward investments to prepare for retirement; taxes aren’t paid until money is withdrawn from the account.
Pension Plan – A Pension Plan is a benefit some employees receive when their employer deposits money into a pool of funds that is then invested to produce income that is set aside for their retirement.
RMD – This is the Required Minimum Distribution amount that you must begin withdrawing from your traditional IRA account no later than April 1 once you’re 70.5 years old. You can withdraw more than the RMD if you’d like, but the RMD is the minimum. Click here to view the Internal Revenue Service’s calculation worksheets to determine the RMD for your particular situation.
Investing Terms
Asset – This is something like a stock, bond, real estate, or other investment that can make money for you.
Bond – Also known as fixed-income securities, bonds allow you to lend money to a company or government at a fixed rate. You are repaid the amount of your investment, along with interest, at specified time intervals until it’s fully repaid.
Broker – This is a person or company that acts on your behalf, for a fee, to buy and sell investments.
Capital Gains – This is the amount that an asset or investment increases in value over its original price and on which you will be expected to pay taxes after it’s sold.
Diversification – Diversification is a method by which investors manage the risk in their portfolios. The idea is that rather than putting “all your eggs in one basket,” so to speak, it’s more profitable and safer to utilize multiple kinds of assets.
ETF – This stands for Exchange-traded Fund. ETFs are traded like stocks and vary in price throughout the trading day on the stock exchange. Lower costs and buyer-driven values are associated with ETFs compared to Mutual Funds.
Liability – A liability is a person’s or company’s debts, such as loans, mortgages, and accounts payable, just to name a few.
Mutual Fund – A Mutual Fund is a way to invest by collecting money from many different investors who pool their money together and put it into securities like stocks, bonds, money market products, and other assets. Mutual Funds are maintained by managers and companies, and owners experience losses and gains and pay taxes on the latter.
Stocks – When you buy a stock, you essentially become a shareholder or partial owner of that company, depending on how many shares you buy. As such, you’re entitled to assets and other earnings of the company. There are common stocks and preferred stocks. If the company is successful, you can sell your stocks at a higher price than you purchased them and make a good profit.
Stock Options – This is a benefit that some employees are offered that allows them to purchase company stock for less than nonemployees. Companies often use this as a bonus or incentive to reward employees.
Finally, if this all seems like Greek to you, then do yourself a favor and contact a trusted and knowledgeable financial advisor to help walk you through the process. If you’re looking for someone you can count on, contact www.russellandcompany.com today. You don’t have to go this alone; just reach out and get the help you need to plan for a secure future for yourself and your family.