Just in case, my friends, let’s learn 6 financial terms we should know and their meaning behind them.
Educators talk about “accountability” and “accreditation.” Human relations experts invoke “career path” and “casual dress.” Insurance companies discuss “indemnity” and “cash value.” Every industry has its own jargon.
You need to know the lingo if you’re involved in a specific field. The financial world touches just about everyone.
Whether you manage a home or run a small business, you should know basic financial terminology. Sooner or later, it’s bound to appear in your life.
I can’t even count on one hand the times I misunderstood certain financial terms in my life.
From setting up new bank accounts to filling out tax forms – I wasn’t always 100% sure what was being asked of me.
This is what ultimately led me to become a personal finance blogger.
In my frustration upon realizing that I didn’t understand important financial terms and concepts, I threw myself into financial literacy books.
I started off by reading “Your Money or Your Life: Transforming Your Relationship with Money and Achieving Financial Independence,” by Vicki Robin and Joe Dominguez, and “Facing Goliath: How to Triumph in the Dangerous Market Ahead,” by Keith Springer.
I recommend that you get acquainted with all the terms below and grab a good book that will increase your financial literacy.
An asset is something that has monetary value. The most obvious is money itself, which can be straight cash or savings and checking accounts.
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Certain investments, such as stocks, bonds, and CDs (certificates of deposits), are assets. So are custodial accounts established through the Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA).
UGMA and UTMA accounts let minors own securities and inherit valuables such as real estate, fine art, and patents.
Note that these items are assets of the minors, not assets of the custodians of the accounts.
If you own a business, it’s an asset. Real estate can be an asset, but the home you live in can’t be an asset.
Though you continually spend money on your house in the form of taxes and repairs, it’s not bringing in any cash.
Retirement plans, pension funds and annuities aren’t assets, either.
Another financial term is liabilities. Liabilities are any monetary obligations you have. These include loans, credit card debt and homeowners’ property taxes.
Mortgages are liabilities, too. This distinction is a large part of short sales involving residential mortgages. In a short sale, the home seller won’t get enough to fully pay off the home loan.
A business’s liabilities include monetary obligations to suppliers and any products or services it owes but has not yet delivered.
Your net worth is based on your assets and liabilities. Add up your assets, subtract your liabilities and you are left with your net worth. In general, the larger your net worth is, the healthier your finances are.
Banks and other lending institutions use your FICO score to measure your credit risk. In a nutshell, the score refers to how likely you are to pay back a loan.
Your FICO score is based on how much you currently owe, how long you’ve been using credit and how well you’ve paid debt off in the past.
FICO scores run between 300 and 850: the higher, the better. Lenders might not offer good interest rates on loans or credit cards to people with scores below 620.
The term FICO is short for the Fair Isaac Corporation, the company that originated the process that determines credit worthiness.
Stocks and Bonds
Stocks and bonds, two items often used together in a phrase, are different types of investment opportunities.
- Stocks: A stock is a share in a company. When you buy stocks, you own a piece of the business. When they make money, you make money, which is called the dividend. With common stocks, you get dividends and you can vote in shareholder meetings. People with preferred stocks can’t vote, but their dividends get paid before those of common stocks.
- Bonds: You’re lending money to a company when you buy a bond. Your return on the investment is repayment of the loan plus interest.
The 5 C’s
The 5 C’s are another way lenders assess if an individual or company is a good credit risk for a loan.
- Capacity: This refers to your ability to repay debt. It considers the amount and type of your income and its stability. Your income history, current debts and repayment of prior debts are all factored in.
- Capital: Income is an essential component to loan repayment. However, capital — composed of savings, investments and other assets — is also examined as a payment option.
- Collateral: A lending institution might look at your assets, or collateral, and regard them as another way to repay the amount you owe.
- Conditions: Both local and overall economic climates are taken into account, because they affect your ability to repay. The lender also looks at the purpose of your loan.
- Character: This is a subjective assessment. Your credit and housing histories, experience, education and references are used to weigh how likely you are to repay the loan.
Anum Yoon is a personal finance writer who is dedicated to sharing her insights on money management with others.
She believes that a greener, energy-efficient lifestyle is the key to living a more fulfilling life.
When she’s not typing away on her keyboard, you can find her poring over a new recipe she found on Pinterest or at the power rack in her gym.