Any person who is just starting out on their financial journey could be forgiven for thinking that the learning curve is a little bit steep at times. This is especially the case when it comes to some of the language and terminology used to describe common financial products and services.
It’s vital to cut through the jargon, so in today’s blog we are looking at, and decoding, a few key pieces of finance lingo that everyone should know on simple, everyday terms.
Financial Lingo List
Amortization – When you get a mortgage or a car loan, you might be given an amortization schedule, which shows your payments each month and how it affects the total amount you owe. Amortization refers to making regular payment instalments overtime to pay off debt. It includes both the principal amount of money that you borrowed and the interest on the payments. Knowing how your debt is amortized lets you calculate how long it will take to pay down, and how much faster (or slower) you would pay it down if you raised or lowered the monthly payment by some amount.
APR – APR stands for Annual Percentage Rate. It’s the interest rate you’d pay on a loan (such as credit card debt you don’t pay off when the bill’s due) or earn on an investment in one year including fees.
Capital Gains – This is the difference between how much something was worth when you bought it and how much it’s worth later on. If the difference is negative, it’s a capital loss. If you have an investment or asset that has positive capital gains, they aren’t taxable until you cash out or sell the asset.
Compound Interest – One of the most powerful (and possibly harmful) forces of the financial world. Interest is earned as a percentage of the value of whatever you start with – either an investment, or a debt. And each time the value increases, the same percentage applies to the new, larger value, making it even larger. And then even larger… and so on! This is why a very small investment held with a steady interest rate over time can end up growing into a large, healthy source of wealth. It’s also why debt can bury your finances quickly: it’s always expanding faster and faster, unless you pay it down quick!
Garnishment – A legal process where a debtor’s personal property is taken from them in order to satisfy a debt or court award. If you have a particularly long-lasting or large debt owed to a particular entity, they may try to garnish your wages or property in order to resolve the matter.
Inflation – The gradual increase or rise in the price of goods of a period of time. Inflation is calculated by seeing how much the average person spends on a calculated “basket” of goods and services – everything from food to vehicles to insurance! It is an important economic driver when paired with the national bank interest rate: one effectively offsets the other.
Net Worth – This is simply the difference between the value of what you own and what you owe. Add up all your assets – your house, vehicles, investments, cash, and so on – and compare them to any debts you may have. Now you know your net worth!
These are just a few of the many financial terms you may come across in daily life. Remember: boil down the jargon and look at any decision that may affect your financial health and future in the simplest terms you can!