Financial Terms

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25 Financial Terms Every

Functioning Adult Should Know
REBECCA MCREYNOLDS, LEARNVEST
AUG. 15, 2014, 11:04 AM
Flickr / Peter Werkman
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 dont speak personal finance, dont worry were here to help.
We know that managing your money can sometimes make you feel like youre learning
a foreign language. So we compiled a handy glossary of must-know money terms that
affect all aspects of your financial life.
Whether youre 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 youre investing or saving, this is the interest that
you earn on the amount you deposit, plus any interest youve accumulated over time.
When youre borrowing, its 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.
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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
borrowers 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.
RELATED: Net Worth: Why You Need to Know It and Grow It
Handy investing terms

4. Asset allocation. The process by which you choose what proportion of your
portfolio youd 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 bonds 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 assets or
investments 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.
RELATED: What Are Capital Gains? A Guide to When These Taxes Apply
7. Rebalancing. The process of buying or selling securities over time in order to
maintain your desired asset allocation. For example, if your target allocation is 60%
stocks, 20% bonds and 20% cash, and the stock market has performed particularly
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well over the past year, your allocation may now have shifted to 70% stocks, 10%
bonds and 20% cash.
To rebalance your portfolio, you could sell some of your stocks and reinvest the
proceeds in bonds, or invest new money in bonds to bring the portfolio back to the
original balance.
8. Stocks. Also called equities or shares, stocks give you ownership in a company.
When you buy stocks, you become a company shareholder, giving you a claim on part
of that companys assets and earnings. The two main types of stocks are common and
preferred.
If you hold common stock, you can vote at shareholders meetings and receive
dividends however, youre also lowest on the totem pole in the corporate ownership
structure. Preferred stockholders have a higher claim on assets and earnings than
owners of common stock (for example, they receive their dividends first), but they
dont have voting rights.
RELATED: Stocks, Bonds, Funds: Whats the Difference?
Handy real estate terms

9. Amortization. This is the process of paying off your debt in regular installments
over a fixed period of time. Your mortgage is amortized using monthly payments that
are calculated based on the amount borrowed, plus the interest that you would pay
over the life of the loan.
10. ARM. An acronym for adjustable rate mortgage, a type of mortgage in which the
interest you pay on your outstanding balance rises and falls based on a specific
benchmark. ARMs usually start out at a fixed rate for a short period of time, and then
the rate resets annually based on the benchmark, plus an additional amount.
For example, if you have a five-year ARM, you will have a set rate for the first five
years. Then the rate will change based on the terms of your mortgage. This means
your monthly mortgage payment may start out low, but then rise (sometimes
significantly) after the fixed-rate period is over.
RELATED: Adjustable Rate Mortgages Make a Comeback
11. Escrow. An account held by an impartial third party on behalf of two parties in a
transaction. During the home-buying process, the buyer will deposit a specified
amount in an escrow account that the seller cant touch until the terms of the contract,
such as passing an inspection, have been fulfilled and the sale is completed.
An escrow account can also hold money that will later be used to pay your
homeowners insurance and property taxes. You can put money in escrow every
month, so that when your premiums and taxes are due, you have enough to cover
those bills.
12. Fixed-rate mortgage. A mortgage that carries a fixed interest rate for the
entire life of the loan. With a fixed-rate mortgage, you dont have to worry about your
payments going up if interest rates rise. The downside is that you could be locked into
a more expensive mortgage if interest rates go down.
RELATED: 4 Couples, 4 Home Purchases: How Much Can They Afford?
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Handy career terms

13. Defined-benefit plans. Employer-sponsored retirement plans, such as
pensions, in which the employer promises a specified retirement benefit based on a
formula that may include an employees earnings history, length of employment and
age. The employee may or may not be required to contribute anything to the plan.
Because of their high costs, many companies no longer offer this type of benefit.
14. Defined-contribution plans. A retirement plan companies may offer as a
benefit to their workers in which the employer, the employee or both make
contributions on a regular basis. The 401(k) and 403(b) are the most common forms
of defined-contribution plans. The money that goes into these accounts comes out of
earnings pre-tax, so you dont pay taxes on the amount you put away every year.
Qualified withdrawals (usually those you make at age 59 or older) are taxed as
ordinary income. The value of the retirement benefit is determined by its investment
performance. Unlike with defined-benefit plans, the employee, rather than the
employer, shoulders the investment risk in the account.
RELATED: 401(k) Loans: What You Should Know
15. Executive compensation. The pay and benefits package provided to senior
executives, which is usually different from whats offered to the typical employee.
Executive compensation often includes a base salary, bonuses, incentives based on the
companys earnings (such as stock options), income guarantees in the event of a sale or
public stock offering, and a guaranteed severance package. These packages are
typically negotiated individually and spelled out in employment contracts.
16. Stock options. An employee benefit that gives the owners of the option the
right, but not the obligation, to buy their employers stock at a preset price and within
a specified period or on a specific date. Companies often use these as management
incentives.
For example, if a manager helps boost the value of the companys stock above the
price of his or her option, the manager can buy the stock at the lower price and pocket
the gain if they sell. But all shareholders benefit from the increased value of the stock.
RELATED: 10 Things Youre Embarrassed to Ask About Negotiating
Handy insurance terms

17. Permanent life insurance. A type of policy that provides coverage over the
lifetime of the insured and also offers an investment component called cash value. You
can withdraw or borrow against that cash value after a surrender period. Premiums
for permanent life insurance are typically more expensive than for term life insurance.
18. Premium. The payments you make to an insurance company in return for
protection from financial losses within the scope of your policy. You can pay premiums
monthly, quarterly, semiannually or annually.
19. Private mortgage insurance. A type of policy that mortgage lenders require
when home buyers provide a down payment of less than 20%. Also called PMI, this
protects lenders against loss if borrowers default on their payments, and the
premiums increase the amount homeowners pay each month. For some mortgages,
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once your loan-to-home-value ratio reaches 80%, you no longer have to pay PMI, but
in some cases, it is permanent for the life of the loan.
RELATED: 13 Things That May Make Life Insurance More Costly
20. Term life insurance. A type of policy that provides coverage over a set period,
generally anywhere from five to 30 years. If you die within the set term, your
beneficiaries receive a payout. If you dont, the policy expires with no value. The policy
owner can decide to renew coverage after the term is over and can cancel at any time
without penalty.
21. Umbrella insurance. A type of policy that provides additional liability coverage
beyond what your home, auto or boat insurance may provide. You might consider
umbrella insurance if youre at risk for being sued for property damage or other
peoples injuries, such as if you hire a nanny or other employees to regularly work in
your home. Umbrella insurance can also protect your assets if someone sues you for
slander or defamation of character.
RELATED: The Facts and Myths of Life Insurance
Handy tax terms

22. AGI. Short for adjusted gross income, your AGI is calculated as your gross income
(e.g., what you earn from your job, a pension or from interest on investments) minus
certain I.R.S.-specified deductions. You fill out your AGI at the bottom of page one of
Form 1040 when you file your taxes. Your AGI is used to determine your taxable
income, minus any additional I.R.S.-qualified deductions that youre eligible to take.
23. Dependent. A person who is financially dependent on your income, typically a
child or an adult relative you may support. You can claim a tax credit or exemption for
these dependents when filing your taxes, which reduces your taxable income.
RELATED: What You Need to Know About Tax Exemptions
24. Itemized deduction. A qualified expense that the IRS allows you to subtract
from your adjusted gross income, which further reduces your taxable income.
Itemized deductions can include mortgage interest you paid, medical and dental costs,
or gifts to charity. Itemized deductions must be noted on IRS form Schedule A.
25. Standard deduction. A standard amount that can be used to reduce your
taxable income if you decide not to itemize your deductions. Your standard deduction
is based on your tax-filing status, and its the governments way of ensuring that at
least some of your income is not subject to tax.
This story was originally published by LearnVest.
* Copyright 2014 Business Insider Inc. All rights reserved.
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15/8/2014 www.businessinsider.com/financial-terms-every-functioning-adult-should-know-2014-8?

25 Financial Terms Every

Flickr / Peter Werkman

Handy banking and credit terms

Handy investing terms

Handy real estate terms

Handy career terms

Handy insurance terms

Handy tax terms

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