Your Money Bible: 25 Financial Terms Everyone Should Know
Do you know your AGI from your ARM from your PMI? Or does the mere mention of those acronyms make you go, “Huh?”
If you don’t speak personal finance, don’t worry—we’re here to help.
We know that managing your money can sometimes make you feel like you’re learning a foreign language. So we compiled a handy glossary of must-know money terms that affect all aspects of your financial life.
Whether you’re confused about amortization or not sure what escrow, exactly, is good for, this primer will help you get up to financial speed.
Handy Banking and Credit Terms
1. Compound interest When you’re investing or saving, this is the interest that you earn on the amount you deposit, plus any interest you’ve accumulated over time. When you’re borrowing, it’s the interest that is charged on the original amount you are loaned, as well as the interest charges that are added to your outstanding balance over time.
Think of it as “interest on interest.” It will make your savings or debt grow at a faster rate than simple interest, which is calculated on the principal amount alone.
2. FICO score A number used by banks and other financial institutions to measure a borrower’s credit worthiness. FICO is an acronym for the Fair Isaac Corporation, a company that came up with the methodology for calculating a credit score based on several factors, including payment history, length of credit history and total amount owed.
FICO scores range from 300 to 850, and the higher the score, the better the terms you may receive on your next loan or credit card. People with scores below 620 may have a harder time securing credit at a favorable interest rate.
3. Net worth The difference between your assets and liabilities. You can calculate yours by adding up all of the money or investments you have, including the current market value of your home and car, as well as the balances in any checking, savings, retirement or other investment accounts. Then subtract all of your debt, including your mortgage balance, credit card balances and any other loans or obligations. The resulting net worth number helps you take the pulse on your overall financial health.
Handy Investing Terms
4. Asset allocation The process by which you choose what proportion of your portfolio you’d like to dedicate to various asset classes, based on your goals, personal risk tolerance and time horizon. Stocks, bonds, and cash or cash equivalents (like certificates of deposit) make up the three major types of asset classes, and each of these reacts differently to market cycles and economic conditions.
Stocks, for instance, have the potential to provide strong growth over time, but may also be more volatile. Bonds tend to have slower growth, but are generally perceived to have less risk. A common investment strategy is to diversify your portfolio across multiple asset classes in order to spread out risk while taking advantage of growth.
5. Bonds Commonly referred to as fixed-income securities, bonds are essentially debt investments. When you buy a bond, you lend money to an entity, typically the government or a corporation, for a specified period of time at a fixed interest rate (also called a coupon). You then receive periodic interest payments over time, and get back the loaned amount at the bond’s maturity date.
6. Capital gains The increase in the value of an asset or investment—like a stock or real estate—above its original purchase price. The gain, however, is only on paper until the asset is actually sold. A capital loss, by contrast, is a decrease in the asset’s or investment’s value.
You pay taxes on both short-term capital gains (a year or less) and long-term capital gains (more than a year) when you sell an investment. By contrast, a capital loss could help reduce your taxes.