12 Financial Terms You Need to Know

Money jargon is everywhere. And, if you’ve spent more than ten minutes trying to learn how to manage your finances, it probably left you scratching your head and searching for a dictionary.

Fortunately, you don’t have to look much further! This glossary of financial terms will help you better understand what you’re reading the next time you’re comparing credit cards, opening a bank account, or setting up your 401k. 

Annual Percentage Rate (APR)

Annual percentage rate — or APR — represents either how much someone will spend on a loan in a year or earn from an investment. It includes both the interest rate and any fees that you might have to pay — like a credit card annual fee. 

APR makes it easy to compare the true cost of different credit cards, auto loans, and mortgages and shop around for the best-earning deposit accounts. 

Asset

An asset is an owned resource that can be used to earn money or provide another benefit either now or in the future. 

Your personal assets could include cash, your home, vehicles, investments, or personal property. Figuring out what assets you own and their value is a key part of determining your net worth and other important personal finance numbers. 

Bankruptcy

Bankruptcy is a court proceeding that allows people to get rid of their debts and repay creditors. There are several different types of bankruptcy that require you to either sell your property to repay as much debt as possible or agree to some kind of modified repayment plan. 

Bankruptcy will dramatically lower your credit score and stay on your credit report for seven years. If you’re in debt trouble, you should exhaust all your other debt-relief options before turning to bankruptcy. 

Budget

A budget is an estimate of your income and spending over a set period of time. Many people budget each month, but you can plan a weekly, quarterly, or yearly budget — or any time frame that works best for you!

A budget is a great way to manage your spending, save for a big purchase like a home, vehicle, and learn financial discipline. 

Compound Interest

Compound interest is interest earned or paid on the principal balance plus any previously accrued interest in a loan or deposit account. To put it simply, you earn interest on your interest. 

For example, if you invest $1,000 into an account that earns 10% compound interest each year, you’ll earn $100 in interest the first year, giving you $1,100 in your account. The second year, you earn 10% on $1,100 — or $110. This repeats (or compounds) every year that you own that investment. 

As you earn interest, it increases your balance, so you earn even more interest the next year. 

Dividend

A dividend is cash or stock that a company pays to shareholders out of either their profits or cash reserves. Many companies pay dividends quarterly. You can earn dividends if you own shares of a company that pays them out as long as you own the stock. The number of shares you own will determine how much you receive. 

Earnest Money

Earnest money is a payment made in advance of a purchase that shows that the buyer is serious about completing a transaction. Typically made in larger purchases like buying a house, earnest money is essentially a security deposit detailed in a contract that lets the seller know you have skin in the game. 

Most contracts have specific contingencies that allow you to get your earnest money back if you back out of the contract for qualifying reasons. However, if you back out for any reason other than what’s specified in the contract, you could lose your earnest money. 

Equity

Equity is money you’d receive if you sold an asset. If you own the asset outright, your equity would be its cash value. You’ll usually hear equity refer to either real estate or stocks. 

In real estate, your equity is your home’s potential sale price minus whatever you still owe on the mortgage. 

When you’re talking about stocks, your equity is the cash value of your shares. As the company becomes more valuable and its shares sell for more, your total equity increases. 

Income

Your income is the total money you receive through either work, investments, product and service sales, or fixed-income sources (like a pension). In personal finance, you’ll see income split into two categories. Your gross income includes everything you earn, while your net income is your gross income minus any taxes and deductions for things like health insurance.

Index Fund

An index fund is a mutual fund or ETF that’s designed to track the performance of a certain segment of either the stocks or bonds market.  Index funds are sometimes called “passive” investments because the fund manager doesn’t actively pick and choose which stocks and bonds will be in the index fund. Instead, they buy all the stocks or bonds in the market segment that it tracks. 

The S&P 500 is a popular index fund that tracks the 500 largest publicly traded U.S. corporations based on their market cap. 

Inflation

Inflation is the rate at which prices increase over a period of time — usually a year. Inflation affects your cost of living. As goods like groceries, clothing, and fuel get more expensive, you’ll need more money to afford the same items. 

For that reason, inflation also measures the value of money. As the price of goods goes up, a unit of money buys fewer goods than it did in the past. 

Net Worth

Your net worth is a measure of your total wealth, accounting for all your assets and debts. This number provides a snapshot of your overall financial health. 

To find your net worth, subtract all of your outstanding liabilities like credit card debt, your car loan, and your mortgage from the total value of all your assets, including your home, cash in your bank accounts, and retirement accounts.  

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