Having a solid grasp on financial terms and money jargon is an important part of the journey to financial independence. As such, we’ve put together a complete list of the top 65 financial terms we think everyone should know.
Get snug with some coffee and a comfy couch, ‘cause this is going to be a long read!
Don’t have time to read it all? We don’t blame you! Use this handy table of contents to quickly find what you’re looking for!
Table of Contents
#1 – 401(k) Plan
The 401(k) is a retirement plan only available through an employer. The benefits of this plan come from only being taxed once when you cash out at retirement.
Many companies will even match what you put into a 401(k), up to a % of your yearly salary (typically around 6%), and is basically free money added to your plan. It’s one of the few things in life that’s actually free!
Your retirement is one of the most important financial terms to understand, check out our Ultimate Guide to the 401(k) for even more info!
#2 – 403(b)
For all intents and purposes, a 403(b) is pretty much the same thing as a 401(k), with a few minor differences. For starters, 403(b) plans are used by tax-exempt organizations (and people), such as schools, churches, government organizations, and professors.
Not only that, 403(b) plans have significantly less paper work involved in filing them, and thus, costs the organization less to file. This allows for low-income Orgs., such as schools, to still offer retirement options for employees.
Aside from a few minor differences in investment options, the other difference between these plans comes in the form of contributions. A 403(b) plan has a special clause in its maximum allowable contribution (MAC) section. That being – If you’ve been with an organization for over 15 years, you can (potentially) add an additional $3,000 to your MAC.
That being said, organizations are not obligated to give employees the additional MAC bonuses. So check the fine print on your retirement plan!
The maximum allowable contribution for 2019 is $19,000 – or $21,000 with the addition MAC limit for a 403(b).
#3 – Adjusted Gross Income – AGI
Your AGI is your total income, after tax deductions. You can think of AGI very similar to Net Income, with one key difference. AGI is your income before being taxed. Whereas net income is how much you have after being taxed.
Gross, AGI and net income are all sort of related. Here’s where AGI falls in line with them.
- Gross Income – All the money you’ve made throughout the year, from all sources, before anything is taken out.
- Adjusted Gross Income (AGI) – All the money you’ve made, after making deductions, but before doing taxes.
- Net Income – Your total income after taxes.
Let’s say you made $50,000 this year, and owe 10% in federal income tax. Now let’s say you decide to go with the standard deduction when filing your taxes, which is $12,000. Here’s how we break that down into the 3 definitions.
- Gross income – $50,000 (before any deductions or taxes)
- AGI – $38,000 (before paying taxes, but after deductions)
- Net Income – $34,200 (after paying taxes and deductions)
#4 – Amortization Schedule
An Amortization Schedule is a fancy financial term for a payment schedule. Meaning paying off a loan in a specific amount of time.
Let’s say you get a $20,000 loan for a new car and you agree to pay that off in 5 years with equal monthly payments of $333. As we can see, the payments are fixed, therefore it would be considered an amortized loan.
#5 – Annuity
An annuity is a way to set up a “salary” for yourself later in life, by placing a large deposit down with an insurance company.
How annuities work
First, you’ll make a large deposit to an insurance company. That insurance company will then hold your money for a set period of time. After said period of time is over, they’ll begin paying you out in a sort-of monthly “salary”.
What’s the point of an Annuity?
Annuities are usually used as a secondary “backup” retirement option after capping on a 401(k) (or IRA). The difference between an annuity and retirement account is that an annuity is not a long-term investment. You’re simply making a large deposit of money that is insured (so you can’t lose it) with the agreement that it will be paid back to you in the future – plus a little extra.
Annuities are not investments
The most common mistake people make is treating annuities the same as investments. They’re not… well, not exactly.
Annuities are a contract with an insurance company that guarantees to grow your money at a steady rate. As such, they cover any losses that might happen while investing, not you.
You give the insurance company $100,000 when you’re 50 years old, to be paid out in 25 years, at a growth rate of 3%. When you hit 75, you will begin receiving monthly payments until the contract ends, or until death.
#6 – Annual Percentage Rate – APR
Annual Percentage Rate, or APR, is the total cost of a loan with all fees, interest rates and charges added up into a single sum. APR can be confusing and tricky, knowing the ins and outs of this financial term can end up saving you a great deal of money!
The Truth In Lending Act requires any lender to give you the real, full cost of a loan. This was designed to help protect people against hidden “fees” added on by lenders.
What to look for in APR
Here’s a list of some of the most common charges that can make up a loan’s APR. Keep in mind that different loans can have as many, or as few of these as they need.
- Processing documents
- Earnest fees (or escrow)
- Fees for using Discount Points
- Broker fees
- Closing costs
On the flip side, here’s a few examples of fees that aren’t included in APR:
- Any credit checks done
- Contractor fees (such as a realtor’s closing costs)
- Home Inspections
While there may be some laws in place to protect against bad loans, it’s important to understand everything you’re paying for. Banks are under no obligation to do the homework for you. After all, you’re the one they profit from!
#7 – Annual Percentage Yield – APY
Annual Percentage Yield (APY) is how much our money will grow from compound interest.
Lets say I’ve got $1,000 in a retirement fund. In 1 year, with a compound interest of 3%, my APY would be $1,030.42
How do I know if my account uses compound interest?
Easy! Just check how much you earned from interest on your account. If the number stays the same, it’s a fixed account. On the other hand, if the number grows each time, it’s compound!
- Fixed Account – The amount you earn from interest stays the same every time.
- Compound – The amount you earn in interest grows on top of previous interest.
Most banks will calculate your APY for you, but if you really want to do it yourself, you can use a handy APY calculator.
#8 – Adjustable Rate Mortgage – ARM
There’s an important choice you have to make when applying for a new home loan. The first option you have is an Adjustable Rate Mortgage (ARM), and the second being a Fixed Rate Mortgage. Unlike fixed mortgages, ARM’s can shift up or down, depending on the state of our economy.
With a fixed mortgage, you agree to pay the loan, plus 3% interest, for 30 years. Because it’ fixed, your mortgage payment remains the same throughout the life of your loan, regardless of any changes in the economy.
Keep in mind – This only applies to your loan + interest. Your total payments may go up or down depending on your local taxes.
With an adjustable mortgage, you may pay 2.5% this year, but 3.5% the next year. It all depends on how the financial market is doing.
When the housing market is up, you’ll pay a little more. Consequently, when the housing market is down, you’ll pay a bit less.
#9 – Asset
Simply put, an asset is anything that you own that has value to it. Easy enough, right? But what about items you own that aren’t fully paid for yet? Well, they’re still considered an asset, but it comes with a catch. Any money you still owe on your asset is considered a “liability”.
Let’s say you bought a $20,000 car and had to take out a $5,000 loan. Your asset’s worth would be $15,000 and the liability would be $5,000.
#10 – Asset Allocation
Asset Allocation is the process of shifting one’s investments into more, or less, risky markets. If you’re just getting into investing, it’s likely you’ll hear about asset allocation quite a bit, as it can be used in any market.
Why would I allocate (shift) my assets?
Let’s say we have young, hard-hitting investor who placed 30% of his wealth into Bitcoin. While our entrepreneur may have gotten a lucky break, leaving your investments in an extremely high-risk area isn’t smart investing. As our investor gets older, they may want to move their investments into safer areas as they get closer to retirement.
You don’t want to lose everything on a gamble when you’re about to cash out!
An aspiring 20-year-old investor will have 75% of their investments in the stock market. As they get older, they might only want 40% to be in stocks, so they’ll move, or “allocate”, their investments to be in more secure options.
#11 – Balance
The word balance has two different meanings in finance, depending on the context.
For accounts such as checking or savings, the balance means the money available.
For lines of credit and loans, such as credit cards, the balance means what you need to pay on that account.
Simple enough, right? Don’t worry, not all 65 financial terms have to be complicated!
#12 – Bankruptcy
Bankruptcy is the legal process for when someone can no longer afford to pay the debts that they owe.
Given that there are many different forms of Bankruptcy, we’ll just cover the two most common methods here.
What is chapter 7 bankruptcy
This is the most well-known type of bankruptcy, though arguably not the “best” choice.
Chapter 7 gives the person filing a way to “get out” of their debts, without losing everything they own. With Chapter 7 bankruptcy, you’ll be allowed to keep things that are necessary for living, such as your home, furniture, and clothing. Aside from the essentials, all other assets will be liquidated (sold) to pay debt holders.
Chapter 7 bankruptcy is typically reserved for small business owners who’ve failed to become profitable. As for those who’ve made poor financial choices, it’s best to go with our next option.
What is chapter 13 bankruptcy
Chapter 13 bankruptcy applies to those who still have a steady income, but can no longer pay their debts. While there’s really no “good” bankruptcy – chapter 13 will better protect important items from being sold off to pay debt holders. This can include items such as:
- Your house
- A vehicle (no more than one)
- Kitchen Appliances (fridge/stove)
You’ll need a trustee (basically a lawyer) who will help create a 3 to 5-year plan to pay off your debts. During this period, creditors and lenders will not be allowed to file any lawsuits against you or demand collections.
#13 – Bear Market
Bear Market is a financial term used to define an economy that’s doing poorly. Specifically, when the market falls more than 10% in a few days. Such a dramatic drop scares investors from taking any risks with their money.
Think of a bear market as a time for when people are “hibernating” through an economy that is unpredictable and/or unstable.
A “market” can include anything from stocks and bonds to mutual funds and certificates of deposit (CDs).
#14 – Bonds
In a very basic example, a bond is a loan we give to a corporation or government. Bonds are a way for companies or governments to safely grow their operations by letting people invest in them.
Think of bonds as a form of crowd-based funding like Patreon or Kickstarter, but with a return on our investment. We’re “lending” money to someone when buying a bond, with the agreement that it will be paid back – plus interest.
Bonds are 100% insured by the federal bank, making them a fantastic choice for safe investment. Just don’t think you’re going to get rich off of bonds, as their gains are fairly small. That being said, anything is better than nothing when it comes to safe investments.
#15 – Bull Market
A bull market is the financial term used to describe an economy that has seen more than 10% growth for 3 consecutive quarters. Or in other words, an economy that is doing very well. Naturally, this means people are much more willing to heavily invest in companies.
This is particularly true for the industrial markets because they rely on far-looking economic growth.
Think of a bull market as investors “charging” ahead with confidence in the economy.
What’s a market? A “market” can include anything from stocks and bonds to mutual funds and CD’s.
#16 – Capital Gains
Capital Gains simply means any money gained from selling an “important” asset, that must be filed for taxes.
Let’s look at a couple of examples. If you sell your couch on craigslist, this does not count as a capital gain.
If you have a $1,000 stock and it raises to $1,500, so you decide to sell. This would mean you have a capital gain of $500.
With capital gains, it’s important to know a few other financial terms that go along with it.
#17 – Capital Gains Tax
Let’s say you decided to sell that stock for $500 profit, you might have to pay a capital gains tax.
The capital gains tax is a flat rate of 15% or 20% depending on the amount of money you made. Luckily, you don’t have to pay any capital gains taxes if you make less than $38,000, or $77,000 if you’re married.
- Short Term Capital Gains – For any asset you’ve had less than 1 year, you don’t have to pay a tax on.
- Long Term Capital Gains – You’re required to pay taxes on an asset that you’ve held longer than 1 year.
#18 – Cash Flow
Cash Flow is pretty simple, it means the coming and going of money in your bank account or business. Though simple it may be, understanding cash flow is fundamental to healthy financial practices.
- Positive Cash Flow is when you’re bringing in more money than you’re spending on a weekly / monthly / yearly basis. Say you earn $1500 a month, but only spend $1000, that’s $500 in positive cash flow.
- Negative Cash Flow is when you’re bringing in less money than you’re spending. Say you have $2000 in debts you must pay every month, but you only earn $1500. That’s $500 in negative cash flow.
#19 – Certificate of Deposit – CD
Certificate of Deposits (CD’s) are similar to a savings account, with one key difference. Before opening a CD, you must first pick a set amount of time you wish to hold your money. Only after this leeway period is over can the money be used. The growth rate on CD’s isn’t amazing (usually around 3%) but very few investments are this easy to use. On top of that, CD’s are 100% insured by the federal bank.
How to buy a certificate of deposit
To begin, you’ll pick the amount of time you want to “invest” your money, let’s say 5 years. After the 5 years, you can collect your money, plus the interest it made. Assuming a growth rate of 3%, your deposit will have turned into $1,159. All by just sitting there doing nothing!
CD’s are great if you have a specific plan for your future money, such as a college fund, and just need a safe place for it to grow.
#20 – Checking Account
This is where your debit card (or written check) will pull money from when you make a purchase. Hence the name “checking” account.
Checking accounts don’t typically have a growth rate of any kind, they simply act as a secure “holding place” to make payments with.
#21 – Compound Interest
Coming in at #21 is our personal favorite out of these 65 financial terms everyone should know. It’s important to understand the power of smart investing!
Compound interest is interest that grows along with the total value of the loan. Normally interest is calculated on the original value of the loan. In the case of compound interest, it continues to grow with the current value.
When it comes to investments, compound interest is one of the most powerful tools available. On the flip side, compounding interest on debts can be incredibly destructive.
A 401(k) retirement plan is just one example of an investment that takes advantage compound interest.
As for debts – credit cards are the most well-known debt which builds interest on interest.
Did you know? Starting at age 25, just $1,000 added to your retirement account every year will grow to over $150,000 by age 65. That’s the magic of compound interest!
Learn more about the magic of compound interest and why it’s so amazing, right here!
#22 – Cosigner
Ah, the Cosigner, or as I like to call it, a bad idea.
A cosigner is someone who can put their name on a loan, as a sort of “insurance” to the lender. When someone doesn’t qualify for a loan, they can sometimes ask for a cosigner.
How it works
Let’s say your kid is moving off to college and getting his/her own apartment for the first time. Often times students will have little to no credit score, making it difficult to find a place to live.
This is where a cosigner comes in.
As the parent or guardian, you could agree to cosign the loan for them. This means that you are liable for any and all payments for the entire life of the loan. So long as your name is on that loan, it’s essentially your loan that someone else is making payments on. Any missed payments will fall to you to make up, and directly impact your FICO score.
Think twice before cosigning
Look at it this way, there’s probably a good reason for why a bank is declining someone’s attempt to get a loan. Don’t be so quick to jump on the co-signer bandwagon!
Being a cosigner is never a good position to be in and is highly discouraged outside of a few special circumstances. Make absolutely sure of your decision before agreeing to cosign for anyone, even a family member!
#23 – Credit Card
Essentially a small “loan” from the bank that you promise to pay back. Credit cards are also known as a “revolving line of credit” because as you pay the loan off, you can continue to use it.
Keep reading for a deeper dive into how credit cards work and why you should consider owning one.
Did you know? Our National credit card debt in the U.S. hit over 1,000,000,000,000 in 2018. The average household CC debt is just over $6,300.
#24 – Credit Report
Your credit report is a lot like a grown-up version of your report card in school. It will inform you (and whoever is requesting it) on how well you’re handling your debts. This mostly means your payment history on credit cards, loans, mortgages and any other debts you might have.
#25 – Credit Score
An easy way to think of your Credit Score is that it’s a “trustworthiness” score for banks and other lenders to consider, before lending you money.
Your Credit Score is important, so learn how you can improve it with these 3 easy steps!
#26 – Debit Card
A debit card is essentially a plastic check that uses your checking account to directly pay for something. Think of a debit card like pulling cash out of your wallet, but virtual!
What is debit?
The definition of the word debit means to remove money from an account, to pay an amount owed.
Thus, when you buy something with your debit card, your bank “removes” the amount of money you owe from your checking account. Hence the name “debit” card.
#27 – Debt
The money that you owe to someone (such as banks) for buying something you couldn’t afford, but will pay off in time.
Home mortgages, car loans, student loans, and credit cards are the most common forms of debt.
44% of Americans are over their heads in debt. But you don’t have to be! We’re here to help people get educated and learn how to live debt free!
#28 – Delinquency
Delinquency is pretty much just a fancy word for “late”. In finances, it usually means being late on a payment of a debt, such as a mortgage, credit card bill, or student loan.
But don’t confuse that simple financial term to not be significant. Being delinquent on debt is one of the worst things you can do and can lead to serious credit problems, legal issues, and/or lawsuits.
The difference between delinquent and default
Being delinquent on a loan is not the same as defaulting on one. That being said, it is a part of the process.
Think of delinquency as the first stage of defaulting on a debt. If you fail to pay your mortgage, you’ll be delinquent (or late). By failing to pay your mortgage 2 or 3 times, you will go from being delinquent to defaulting.
#29 – Default
To Default on a loan, put simply, means you have not paid your debt multiple times in a row, and have failed to uphold your end of the bargain. There are many different consequences to defaulting on a loan depending on the type of debt, and the amount owed.
While defaulting on a loan is never a good thing, some loans are worse than others. When you default on a loan that’s for something physical, such as your car, the bank can take that item back to pay for the debts you owe. This is what is known as repossession or foreclosure.
#30 – Dependent
A Dependent is tax jargon used to describe someone that you can “claim” on your taxes, for significant tax deductions and credits. Think of it as a reward for supporting someone.
Much like the name implies, a dependent is someone who “depends” on you to survive. Basically, a moocher who isn’t making any money, such as your teenager living at home!
Typically the only people you can claim as a dependent are your children or a relative that lives with you (and depends on you!).
Of course, everything that has to do with taxes has red tape up the wazoo, and dependents are no different. Learn everything you need to know about how to claim a dependent right here!
#31 – Diversification
Diversification, when it comes to finances, means splitting your investment into many different areas, to better reduce the impact if anything bad happens.
Think of that old saying your mom used to tell you, “Don’t carry all your eggs in one basket!”. It might be tempting, but if you trip and drop your basket, you’re going to lose everything.
Keeping your money spread out in different places is a significantly safer way to invest than, say, dumping your entire fortune into WWE stock. Even if you do love The Rock.
Remember, we’re investors here, not gamblers! We’re all about making smart choices, not betting all on black.
#32 – Escrow
Escrow is a financial term most commonly used in real estate when buying or selling a new home.
It refers to a third-party that has nothing to gain from either the buyer or seller. That third party will “hold on to” any deposits made during a real estate sale, while the deal is being finalized. The purpose for this is to prevent either side from using someone’s deposit as a form of leverage or blackmail, and that each party holds up their end of the bargain.
Think of escrow like a referee in a sports game. It’s their job to ensure that both sides are following the rules and playing a fair game.
There’s more than one type of escrow
Another time escrow will come into play is after you’ve purchased a new home. Once the sale is finalized, your bank will have an escrow account set up for you, which will collect up to 2 month’s worth of your mortgage payment. This account will be used to ensure that all home insurance and property taxes are paid on time.
Instead of the bank putting its faith in the homeowner to pay their bills on time, the bank will use an escrow account to pay for it themselves. This prevents the bank from taking any financial hits because of an irresponsible homeowner.
#33 – Exemptions (and Deductions / Credits)
A Tax exemption is a certain amount of money you can remove from your income so that it doesn’t need to be taxed. Keep in mind, this is not the same thing as a credit or deduction. Here’s how they differ:
- Tax exemptions refer to the status you file as. As the name implies, your tax status will exempt you from certain things, such as a dependent child that you care for.
- Tax Deductions are for things you have purchased that year (such as a work uniform).
They work exactly the same, though the names refer to different things.
On the other hand, tax credits are a direct refund on the taxes you owe.
How tax exemptions work
Let’s say you make $50,000, and your total tax rate is 50% (yikes), you would pay $25,000 in taxes. Now let’s say you can claim a $10,000 “exemption” on your income. This doesn’t mean you save $10,000, it means that you don’t have to pay taxes on $10,000 of your total income. Since your tax rate is 50%, this would save you $5,000. The total you would now pay is $20,000.
Deductions work exactly the same way.
On the other hand, tax credits work much more simply. If you have a $5,000 tax credit, this means it saves you exactly $5,000. No IRS shenanigans here!
#34 – Fixed-Rate Mortgage – FRM
A fixed-rate mortgage refers to one of the two different types of loans you can choose from when buying a house (the other being ARMs, Adjustable-Rate Mortgage).
The purpose of an FRM is so that your loan’s total principal (the amount you are borrowing) and interest rates are the same payment for the entire loan. If you agree to an FRM of $1000, you’ll pay that same amount for as long as you have the loan.
Keep in mind, this doesn’t include your property taxes or home insurance. Meaning your monthly payments can still shift up and down slightly. This only counts for the principal, and interest, of the loan itself.
#35 – Garnishment
Here’s a financial term you’ll hopefully never have to deal with!
Garnishment is the fancy legal term for saying “I’m taking some money from your paycheck to cover the debts you owe and there’s nothing you can do about it”. Debt collectors typically only use wage garnishing as a last resort, if the debt holder refuses to pay.
A court order signed by a judge is required before a wage garnishment can be used. That is, unless your debt is with the government (such as unpaid taxes), then no court order is needed.
#36 – Gross Income
Your gross income refers to the total money you’ve made for the year, from all sources (not just your job), but before any taxes or deductions have been taken out.
I like to think of it as seeing how much I could be making, then looking at how much the IRS reapers are going to take from me. Gross!
#37 – Inflation
Simply put, inflation is the rise in the cost of goods or services compared to the value of money. Easy, right? Well, not so much. Things get very, very murky when we start looking at inflation in the real world.
But we’re not here to talk economics, so we’ll stick to the basics for now.
Think of inflation like bodybuilding. You need to eat enough food that you’re gaining a good amount of muscle. But, if you start eating too much food that your body can’t handle, you’re going to put on weight and become unhealthy.
A little bit of inflation is good for the economy, but too much too quickly can be disastrous.
#38 – Interest
Interest is the “cost” or “fee” for borrowing money. It also means the “reward” you get when you invest money.
It’s important to remember that there are two different types of interest, simple and compound interest rates. The vast majority of loans and investments we deal with are considered compound, though there a few that use simple interest, such as car loans.
You can learn more about simple and compound interest rates right here!
#39 – Itemized Deduction
An itemized deduction is one of two ways to deduct (remove) certain things from your income so that you don’t have to pay taxes on them. If there’s one thing to remember about deductions, it’s that they’re always a good thing.
How itemized deductions work
When filing your taxes, you’ll either be able to choose from a standard deduction (based on your filing “status”) or take the route of itemizing your deductions. Essentially this means taking the easy road for less payout, or the hard road for potentially more.
If you do decide to itemize your deductions, make sure you also fill out the standard deduction form to double check you won’t be paying more in taxes.
Asking yourself whether you should itemize or not? The general rule of thumb is, if you don’t own your home and/or have no medical expenses, don’t bother. If you just bought a home, definitely consider itemizing, as you may save a few bucks during tax season!
Taxes are complicated, so let us help! Check out our ultimate guide to tax deductions.
#40 – Lender
A lender is a person or organization (such as a bank or credit union) that gives you money, with the agreement to pay them back, plus a little extra (interest).
#41 – Liability
When it comes to personal finance, liability is just a nicer word for saying debt.
It gets much more complicated when it comes to businesses, but for most people, you’ll only be using this to find your net worth. To do this, first take all of your combined assets, such as your car and home. Next subtract the total of all of your debts (car loan, mortgage, credit cards) from the total of your assets. This number will be your net worth.
#42 – Liquidity
Liquidity is an odd financial term used to describe how easily something can be turned into cash. Naturally, cash is considered the “gold standard” of liquid assets because of how easily it can be used.
Much like the name suggests, think of cash as the “water” of all assets, and other things are different degrees of frozen. How long it takes to thaw these assets is their level of usefulness (liquidity).
if you want to buy a new TV that costs $3,000, you can do that right now if you have $3,000 in cash. But if you had a $3,000 pristine antique Batman action figure, you’d have to turn that into a liquid, or “usable” cash, before you can buy anything.
Knowing all of your assets, and the degree of liquidity in them is an important step in your financial tool chest. You may be rich in assets from your one-of-a-kind action figure collection. But how quickly can you turn those into real cash when a disaster strikes?
#43 – Loan
A loan is an amount of money given to you, under the agreement that you pay back all of the money you borrowed, plus a fee (interest).
That’s all there is to it!
# 44 – Money Market Account – MMA
Money Market Accounts are pretty much a fancy way of saying “checking account that gathers interest”. MMA’s used to be a popular choice for people to deposit large sums of money, as they had a significantly higher deposit requirement than normal Savings or Checking accounts. Though this is largely irrelevant today as savings accounts’ interest rates have caught up with MMA’s.
MMA’s usually offer around 2% interest rates, and unlike a regular savings account, you can write checks or use a debit card with it.
If you’re looking to house a large amount of money in a federally insured account, consider an MMA for your funds. You’ll keep it secure and sneak in some extra interest, not to mention you still have access to it in an emergency.
#45 – Mutual fund
Ah, investing, these are the ones that get us excited! There’s a whole lot more to cover on mutual funds than we can get into here, so we’ll give you the quick and easy run-down.
Mutual Funds are, much like their name implies, an investment where you place your money into a large pool with other people. That pool of money is then placed in the trust of a professional investment manager who is in charge of, and devoted to, one single “fund”. His job is to safely grow this pool of money by investing in various different types of markets, such as bonds and certificates of deposits.
Think of a mutual fund as a sort of socialist system, without all the starving children and tyrants!
Mutual funds are less risky
Mutual funds are extremely popular because of the lack of risk to you, the investor. The ups and downs of the mutual fund are shared between everyone involved. Since your money is only a small piece of the pie, this shared system reduces the “hit” if your investments go down.
Of course, the reverse is also true. Mutual funds are generally lower payout than investing directly into stocks or bonds, as the benefits are shared between everyone.
Still, they’re incredibly useful tools to use as a “safe” way to grow your money. In addition, your money is being handled by a professional who does investing as their career, not some side gig!
#46 – Net Income
Your net income is what you make after taxes are taken from your income, and any benefits you’re provided, such as medical and dental insurance.
#47 – Net worth
What your life is worth… OK, not really.
Net worth is the total of all the things you own (or “assets”), minus your “liabilities” (your debt). As an example, if you have $200 in your savings, but have $500 in credit card debt, your net worth would be -$300.
Did you know? 1 in 5 American households have a negative net worth!
#48 – Permanent Life Insurance – PLI
Permanent Life Insurance is pretty much what the name implies. You pay an insurance company a (very) steep premium for the rest of your life, and your family will claim the “reward” when you pass away.
It sounds like a good idea, as a death in the family (especially the one bringing in money) can lead to complete and total financial ruin, on top of the devastation of losing a loved one.
In reality, permanent life insurance is largely a scam pushed by insurance agents to boost their commission rates. Most people can’t afford the ridiculous cost of a PLI plan, and are simply hurting themselves financially just to have a little peace of mind.
If you truly believe you need life insurance for you or your family, consider something more practical, such as a Term Life Insurance plan, and just steer clear of the hyped-up permanent plans.
Did you know? It’s estimated over 97% of all PLI plans go unclaimed.
#49 – Premium
In the world of financial terms, premium has many different meanings, but we’ll cover the main one people deal with on a regular basis.
The most common place you’ll hear the word premium is when you’re getting insurance. The premium of your policy is simply a fancy way of saying monthly cost. Just like your internet bill, failure to pay your monthly premium (bill) will cause you to lose your coverage.
#50 – Prime Rate
Prime rates are like fancy first class interest rates, sorta like tasty cut of prime rib. It’s the rate banks will charge people who have an exceptionally high credit score when taking out a loan.
Think of it as a reward for being a trustworthy and responsible adult.
You’ll often find prime rates on short-term loans such as credit cards and car loans.
Here’s a simple guide on the different types of interest:
- Low credit score = subprime (high) interest rate
- Medium credit score = average interest rate
- High credit score = Prime (low) interest rate
#51 – Principal
A principal isn’t just the guy that runs your school, it’s an important financial term that plays a big part in our life.
The principal refers to the total amount of money you are borrowing from a bank. Note that this isn’t what you owe the bank, it’s the amount of money that was given to you.
Bruce takes out a 10-year loan for $10,000, with a 10% interest rate. The principal of his loan is $10,000. The total he will pay back over 10 years will be $15,858.09.
- Principal – $10,000
- Interest – $5,858.09
- Total – $15,858.09
#52 – Private Mortgage Insurance – PMI
Private Mortgage Insurance, or better known as PMI, is an added fee tacked on to your regular mortgage when you first buy a house. As with any insurance, this is meant to give your lender some extra security if you fail in some way to pay your mortgage.
It’s basically an “I don’t trust you” fee for the company handing you a huge loan.
When is PMI used?
PMI is most often seen when someone pays less than the standard 20% down payment on a new home. This is becoming more and more common as people are frequently putting down as little as 5% or 10% on their home.
With most mortgages, you can avoid PMI entirely (and often reduce your interest rate) by being responsible and saving up the recommended 20% down payment!
It’s sorta like that clickbait commercial slogan, “why pay more when you can pay less!”. But in this case, it’s actually true.
Ya’ know what the first step in saving up for a new home is? No no, not the lottery! Making an awesome budget!
#53 – Recession
A recession is a complicated financial term used to describe an event when the economy is beginning to slow, or rather, recede. The boring technical definition we use to determine a recession is when the GDP (Gross Domestic Product) is in the negative for 2 consecutive financial quarters.
Now that’s a mouthful.
What’s all that fancy jargon mean for us regular people? Nothing good! Recessions mean massive job loss across the country and fewer businesses being started.
As the economy becomes unstable, the stock market falls because investors don’t have a secure place to invest their money. A recession is basically a domino effect in the economy that hurts every person, and business, in the country.
The second (but no less scary) part about a recession is that it’s the first stepping stone towards the far worse economic disaster – a depression.
#54 – Risk Averse
When it comes to finances, Risk Averse refers to someone who’s a more thrifty investor. Instead of going for high-risk-high-reward investments, they tend towards slower, low-risk investing.
A risk-averse investor would likely go for something such as a money market account or bonds, over say, investing in a high-risk stock in a flourishing new tech company.
#55 – Required Minimum Distribution – RMD
Required Minimum Distribution, if that financial term doesn’t excite you I don’t know what will! RMD is a ridiculously over-complicated word that is used for when you’re required to start pulling cash from your retirement account.
This requirement goes into effect at age 70½, as the IRS comes knocking at your door to demand their share from your long-withheld nest egg. The RMD was a way to keep people from sitting on their retirement accounts and continue building past the intended purpose.
Instead of making our brain hurt from doing the math, we recommend a handy calculator for figuring out what your RMD will be, like this one.
Here’s a quick example of RMD. Let’s say you have $100,000 at age 70½, with a 27-year life expectancy, your RMD would be $3,649, annually.
#56 – Roth IRA
A Roth IRA is a retirement account that gets taxed when you first put the money in. Whereas with a traditional IRA (or 401(k)) the money is taxed when taken out at retirement.
Roth IRA’s are great for people who are earning a low income right now but think they’ll be earning a high wage/pension later in life – such as a doctor or lawyer.
The quick and easy:
- Roth IRA – Contributions are taxed, but you pay no taxes at retirement.
- Traditional IRA – Contributions are pre-tax, and the account is taxed at retirement.
Got a Roth IRA? Learn how to cash in on that investment without getting hit by any taxes or withdrawal penalties.
Did you know? The name Roth comes from U.S. Senator William Roth. He’s credited with leading the 1997 Tax Relief Act, which gave birth to the Roth retirement plans.
#57 – Savings Accounts
A savings account is mostly just a “place” at your bank to house your money securely. Savings accounts sometimes boast about growth rates you’ll receive, but they’re usually incredibly insignificant. Most savings accounts are for just that, saving. Not growing.
Want to grow your savings but don’t want it locked away in an investment? Check out the many online high yield savings accounts. Online banks such as Ally can reach up to 3% interest without any fees or hidden costs!
#58 – Share
A Share is a single tiny unit of ownership of a company.
When a company states it’s going public, this means people can buy, or invest, in a company’s stock. Each piece of that stock is known as a share. If the company does well, so will you, as this little bitty piece is still a part of the whole pie. Likewise, when the company does poorly, so too will your share.
How shares are different
What’s the difference between say, a stock, mutual fund, and a share? The stock or mutual fund would be the whole pie. Whereas the share would be cutting yourself a small piece of that pie.
A share can refer to many different types of investments, it’s just most commonly used with stocks.
How shares work, using goats!
Let’s say there’s a huge farm that owns a herd of 10,000 goats. The farm wants to expand its land, so it decides to sell the ownership of a few goats to fund the operation.
I decide to buy up 10 goats. Though the goats remain on the farm, I gain a small percent as the goat produces milk and the farm prospers. This doesn’t mean I can go to the farm and start driving the tractors or build a fort out of hay bales. I’m simply getting some value as the farm and goats do well.
However, let’s say I bought 2000 goats. The larger my share of goats grows, the more significant my opinion matters. I might have some say on what kind of food the goats are getting, or how often they’re being milked.
Corporations work in a similar manner, albeit with fewer goats involved.
#59 – Standard Deduction
Ah, the financial terms for taxes are near end-less. That’s no surprise either, considering our tax code is estimated to be over 77,000 pages long!
The standard deduction is one of two options you have when filing your taxes. It allows you to ignore or “deduct”, a flat amount of your income in a no-strings-attached agreement with the IRS. This is used by the IRS to help reduce the impact of taxes on lower income households.
These are the standard tax deductions as of 2018:
- Single – $12,000
- Married, filing separately – $12,000
- Head of household – $18,000
- Married, filing jointly (together) – $24,000
Want to learn more? Keep reading about deductions over here ←
#60 – Stocks
Stocks refer to what a company issues out to the public that can then be bought in small pieces (shares). Think of a stock like a big pie that a restaurant has put out. If you want some of that pie, you buy a piece of it – that doesn’t mean you own the chair you’re sitting in at the restaurant.
The idea behind stocks was to allow for a sort of “social kickstart” by letting people invest in a company’s success, while also seeing positive growth themselves.
Stocks are well known in the investo-sphere as high risk, high reward investment, often seeing an average of up to 10% growth annually. On the other hand, they’re also the most volatile and unpredictable, especially in the modern age of aggressive day trading.
#61 – Tax-Deferred
Tax-deferred simply means that you’re putting off paying taxes on something now, and will pay it in the future.
A traditional IRA or 401(k) is considered tax-deferred because you pay no income tax on the money you put in. Once you reach retirement, you’ll then have to pay taxes on that, the same as regular income.
In contrast, a Roth IRA or 401(k) is not deferred, because you pay taxes now, but not when you cash out at retirement. When you start pulling money from a Roth account, that income would be considered “exempt”, not deferred.
Learn more about how retirement plans work over here. ←
#62 – Term Life Insurance – TLI
Term Life Insurance is one of a few options you’re given if you’re deciding to get life insurance. Much as the name implies, you chose a term, or rather, “duration” for the plan. You’ll pay a monthly cost just like any other insurance, and if you pass away during this time, your family (or whoever you have named) will get the payout.
Term Life Insurance is often used for people who are going into a dangerous field and want financial security for their loved ones, such as military or oil riggers.
TLI is the recommended route when choosing life insurance, as the other options are often ridiculously high cost, for a very poor return.
Did you know? A vast majority of all life insurance goes unclaimed, with over $1 billion in payouts waiting to be claimed by beneficiaries.
#63 – Traditional IRA
A traditional IRA stands for Individual Retirement Account. An IRA can be opened whenever you want, even if you have an employer 401(k).
Just like a traditional 401(k), traditional IRA’s are tax-deferred, meaning you’re “delaying” the taxes until a later date (when you retire). IRA’s are a fantastic choice if you want more options on where and what you’re investing in, as opposed to a more strict 401(k). Or better yet, if you can afford it, open one along with your 401(k)!
Don’t get hit with penalties! Learn how to withdraw from your Roth IRA the right way.
#64 – Withholding
Tax withholding was designed to ensure that every person is paying their “fair” share of taxes. Basically, the federal government is, uh, “borrowing” part of your paycheck and giving it to the IRS. That money is then used to “invest” in your local town, state and country (or rather, the pockets of politicians).
One of the main reasons for filing taxes at the end of the year is to determine how much you owe, or are owed by, the IRS. If too much is withheld throughout the year, you’ll get a tax refund. Likewise, if too little is withheld, the IRS will come a-knockin’ for their share.
You can increase or decrease the amount withheld on your taxes, usually from a form given by your employer. Just make sure you do some research and know what bracket you should be in. You don’t want to end up owing the government thousands of dollars at the end of the year!
Taxes suck! So let us help. Here’s our ultimate guide to Tax Withholding Allowances.
#65 – Yield
In financing, yield strictly refers to the percent of gain on an investment’s interest.
If that sounds complicated, here’s an example to clear it up.
Let’s say you bought a bond at $500, with an annual interest rate of 8% you would gain $40.
Your yield on that investment would be 8% ($40 / $500 = 0.08)
Whew, we made it! That’s our list of 65 financial terms everyone should know, or at least, what we think are important!
We strongly believe that having a solid understanding of how money works will set you on the right path to success in life! Of course, that doesn’t mean you’re done just yet. There’s plenty more finance know-how we haven’t covered yet. So keep checking back to get more goodies from your favorite financial aficionados.
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