Written by Liz Word under the direction and review of Lorna Saboe-Wounded Head.
You don’t have to be a finance whiz to understand basic financial terminology. Knowing the basics can help you interpret your own financial health and set goals for the future. This article will explore general personal finance terminology and provide a definition for each concept. You may have already encountered some of these financial concepts, but a refresher on terms you may not use every day can be helpful. Read through the list and share the knowledge with a friend. Share the article with someone who may benefit or may be going through a financial situation.
Financial Concepts
- Asset: anything that has value, tangible or intangible. For example, if you own a vehicle it is an asset.
- Depreciation: The value of any asset can be said to depreciate when it loses some of that value in increments over time. Using the same example above, your vehicle is a depreciating asset because the value of the vehicle is reduced every time you drive it.
- Appreciation: increase in the value of an asset over time. For example, maybe you bought a house 10 years ago, but recently a company came in and built a golf course in your neighborhood. It can be said that your house will appreciate because of the addition to the neighborhood.
- Liability: A legal obligation to repay or settle a debt. Liabilities are considered either current (you pay within a year or less) or long-term (you pay after a year).
- Collateral: Any asset you pledge as security for repayment of a loan. When you pledge a particular asset for collateral, it becomes subject to seizure by the lender if you fail to pay back the loan per your agreement.
- Interest Rate: A percentage of the principal amount charged by the lender for the use of its money. For example, at the end of the month if you do not pay off your credit card—you are charged interest on the balance (use) of the card.
- Fixed Interest Rate: Interest rate on a loan that is established in the beginning and does not change for the lifetime of the loan.
- Floating Interest Rate: Will change with market fluctuations.
- Principle:Original sum of money borrowed in a loan or put into an investment.
- Equity: Describes ownership in a company and synonymous with the financial term stock. Owning stock in a corporation means you own a specific number of shares. You are a shareholder when you own shares of a corporation.
- Annual Percentage Yield (APY): Annual rate of return taking into account the effect of compounding interest. APY is calculated by the resultant percentage assumes that the funds will remain in the investment vehicle for a full 365 days.
- Compound Interest: Is the addition of interest to the principal sum of a loan. AKA interest on interest. For example, you reinvest interest, rather than paying the interest off. You do this because you earn the interest on the principle amount plus the previous accumulated interest.
- Credit Score: A numerical expression used to represent your creditworthiness. Your payment history, amount(s) owed, length of credit history, new credit, and type of credit used all affect your credit score.
- Net Worth: Value of all assets you own, minus the total of all liabilities (assets – liabilities = your net worth).
Understanding financial vocabulary is crucial when making financial decisions and planning your future. Brush up on vocabulary annually and don’t hesitate to look up a new finance term when you come across it. There is no such thing as knowing too much.
For more information on financial terminology visit the Consumer Financial Protection Bureau website.
Reference
The Most Important Business Finance Terms and Definitions (2018) by Meredith Wood and Fundera Publishing, New York, NY.
