Do you feel lost when reading or hearing financial terminology from your bank, insurance, investment agent or the IRS? You’re not alone! If you’re a layman, there are probably a few financial terms that leave you feeling a little baffled. When you have to think on your feet, it sure helps to know exactly what you’re being told.
OK, so we won’t promise you the full dictionary. It could contain so much information that it just makes you even more confused! Instead, we’ve picked 30 terms you’ll probably encounter at some time. Knowing their precise meaning will come in handy. Already proud of your financial acumen? See how you fare when it comes to understanding our list!
In this guide...
1. Permanent Life Insurance
If you’re willing to pay more for life insurance, permanent life insurance gives you access to a cash amount that you can withdraw or use as collateral after a specific time period. Term life insurance is cheaper than permanent life insurance, but you can’t withdraw any funds.
These are the payments you make in order to keep your insurance current. Most people pay by the month, but some people choose quarterly, bimanual or annual payments instead.
This acronym stands for Private Mortgage Insurance. If you buy a home with a deposit of less than 20 percent, your lender may require you to get Private Mortgage Insurance to cover your payments if you’re unable to do so. In some cases, once you have paid off more than 20 percent of your home’s value, you can drop this insurance.
4. Term Insurance
Just as the name suggests, term insurance only covers a specific timeframe. At the end of that period, you can either renew your insurance or cancel it without incurring any penalties.
5. Umbrella Insurance
As its name suggests, Umbrella Insurance gives you an extra protection that a regular policy doesn’t cover. For example, it may cover personal injuries if third parties sue you for damages or slander. It will cost you more, but if you believe that you may be at risk, for example, you employ household help, it might be worth considering.
Banks and Credit
6. Compound Interest
Sometimes it works in your favor. Sometimes it works against you. Compound interest is calculated at a specific percentage over a specified period. Then, it’s calculated again. So, if you save or lend an amount at 5 percent interest, that doesn’t mean you only get 5 percent added to the amount full stop. Instead, you get or pay that percentage for every period that your debt or savings exist.
When saving, you can reinvest your interest adding to the total amount that earns interest, growing your money. When you are in debt, you need to pay off more than the interest charged, or your debt would only grow instead of shrinking.
7. FICO Score
He Fair Isaac Corporation invented the FICO score, giving it the acronym we know today. You probably know that it’s a score that rates your creditworthiness on a scale of 300 o 850. How is it calculated?
Banks look at how you have handled payments in the past, how long you’ve been managing your finances, how well (or how badly) you’ve coped with commitments during that time, and how much you owe in total. If you have a low FICO score, you may not be able to get good terms on a loan.
A fiduciary is a trustee for a family trust, but could also be the executor appointed in a deceased person’s will, or a conservator, guardian or conservator of funds. If you undergo bankruptcy, a fiduciary may be appointed to manage your assets.
9. Net Worth
You always hear about the “net worth” of millionaires and billionaires, but you have a Net Worth score too. How do you calculate it? Subtract the value of your debts from the value of your assets and the remaining amount represents your net worth. You need to grow this value as much as you can if you want a comfortable retirement one day and it shows how healthy or how vulnerable you are financially.
10. Term Deposit
A term deposit or time deposit is placed in the bank for a fixed period of time during which you will not have access to the funds or else you will be penalized. Term deposits usually have a higher interest rate, and the longer you keep your money tied up, the better your yield at the end of the period.
11. Asset Allocation
Putting all your eggs in one basket is rarely a good idea. When you have money to invest, you spread your risk by allocating assets into a variety of asset classes and subclasses. Your capital can be allocated to stocks, bonds, and cash. Within your stock portfolio, you may allocate assets to property, financials, industrials and resources. The percentages of your capital that you employ in different asset classes is known as your asset allocation.
Although bonds are low-yielding investments, they’re also very safe. You are basically lending money to a big organization (usually the government). You will receive interest payments and the option of getting your initial investment back when your bonds mature.
13. Capital Gains and Losses
If an investment or asset ends up being worth more than you paid for it when you bought it, you have a capital gain. This amount is taxable, but only if you sell it for the higher price. If the value of your assets decreases over time, you can likewise claim the loss back from tax – but only when you sell the investment.
Let’s suppose you have allocated your assets in a way you’re comfortable with to create a balanced portfolio. Perhaps one of your investment categories has done exceptionally well this year. Since it has grown in value, the percentage asset allocation now differs from your preferred target. To get the balance right again, you would have to sell out some stocks and purchase others in an under-represented asset class.
These are shares in companies. You own (usually a small percentage) of their earnings and assets. Although some forms of shareholding give you the right to vote at meetings, most are preference shares. You have certain advantages over common shareholders, but you can’t vote – except with your feet – since you can sell shares you aren’t happy with.
You would usually spread your capital over several different companies and kinds of stock so that you can easily roll with the punches if one of your investments doesn’t perform as expected.
Property Investments and Real Estate
When your home or car loan is divided into fixed monthly installment payments. The process of paying off these installments is called Amortization.
ARM stands for “Adjustable Rate Mortgage.” You must think carefully about this because an ARM gives you a fixed interest rate for a set period. After that, it’s adjusted according to a benchmark, and an additional amount is added. That means your installments could increase significantly after your fixed interest rate period ends.
An Escrow payment is any amount that is held by a third party and then released upon the fulfillment of certain conditions. In the real estate context, your deposit on a house could be held by a lawyer until conditions of sale have been fulfilled. Since this can take several months, your Escrow payment may earn interest which would then be due to you.
19. Fixed-Rate Mortgagess
When you take a Fixed-Rate Mortgages, your interest is set at a certain percentage for the lifetime of your home loan. If you get your mortgage when interest rates are low, you can be sure of the same favorable rate for the duration of your loan. But if you do so when they have reached their peak, you could lose out if interest rates drop.
20. Satisfaction of Mortgage
When you have paid your mortgage in full, your lender supplies you with a document to prove that you no longer owe anything on your property. This document is the satisfaction of mortgage document.
Work and Career-Related Terms
21. Defined Benefit Plans
In the financial world, security costs. A defined-benefit plan is a retirement plan that lets you know exactly what your retirement benefits will be if you continue to contribute at current levels. But these plans are costly and are seldom offered these days. If the investment fund loses money, the employer has to make up the difference to give you the promised benefits.
22. Defined Contribution Plans
There are various forms of defined contribution plans. Your contributions are tax-free, but if the investment fund your retirement money goes into does poorly, you suffer the financial consequences.
23. Executive Compensation
While most employees work for a set salary, executive compensation includes a few extras such as incentive bonuses, stock options, and severance packages that are agreed when the executive signs his or her contract.
24. Stock Options
These are used as an incentive, particularly for high-level employees. For example, if your work causes the value of the company to grow, you may be able to buy stocks at a reduced price in recognition of your efforts.
25. Variable Pay
Variable Pay means that your full compensation package includes discretionary or performance-based payments. For example, you might earn commission, or there may be times when you must work overtime. These amounts aren’t constant, so they are classed as variable pay or variable remuneration.
Tax Terms You Need to Know
This is your Adjusted Gross Income. It is calculated by subtracting tax deductible items from your gross income (for example, your pension payments). Simply put, it is the income you are taxed on, although there may be additional deductibles over and above that.
If you have to support children and sometimes even other adults, this is taken into account when calculating your tax. Because you have the extra expense of supporting your dependants, you pay less tax.
28. Itemized Deduction
These include amounts you spend on tax deductible items such as charitable donations and medical costs. They are not subtracted from your gross income when you calculate your AGI, but they are noted on your tax forms, and these amounts are not taxed.
29. Limited Liability Company (LLC)
If you start your own business with one or more other people, you can keep its assets and liabilities separate from your personal finances by forming an LLC. This form of business is often preferred by people starting business partnerships or small corporations.
30. Standard Deduction
If you don’t have itemized deductions, you are automatically granted a standard deduction so that not all of your income is taxed. Its value is based on your tax-filing status.
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