Guide to financial independence part 1: financial terms and jargon

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Whether you’re 14 or 42, you’re likely thinking about your financial independence. While this may mean freedom from your parents or from the droll of a 9-to-5, the first step is to be financially literate. As Investopedia explains, financial literacy is the ability to understand and effectively use a variety of financial skills, like budgeting and investing.

Before you can conquer those steps, you may need some help understanding financial jargon. Financial independence may seem daunting when you don’t totally understand the terms, which is why we’ve created this guide to help explain some of the most common terms you’ll find when dealing with your finances.

Most common financial terms:

APR: Stands for Annual Percentage Rate; the cost of borrowing money on a yearly basis, expressed as a percentage rate. You’ll encounter APR when looking at credit cards or when looking at loan rates, like auto loans or mortgages.

APY: Stands for Annual Percentage Yield; the interest rate earned on an investment in one year. You’ll see APY when looking at accounts that earn interest, like a savings account or CD.

Asset: Any item with monetary value, such as stock or real estate. Assets can also include things like your retirement accounts, jewelry, and art.

Beneficiary: The person or organization named to receive proceeds or benefits. For example, you may name your spouse or parents as the beneficiary of your life insurance.

Credit: Borrowing money, or the ability to borrow money, to buy something with the intention of repaying the money later. This could be through a credit card or through a loan.

Credit Score: An estimate of how likely you are to pay a loan back on time based on information from your credit reports. This score is calculated using five factors: your payment history, amount owed, new credit, length of credit history, and your credit mix.

Debt: Any money you owe another person or a business.

Depreciation: A decrease in the value of an asset.

Equity: This is the amount of money that belongs to the individual owners of a business after all assets and liabilities have been accounted for. Additionally, you will hear the term equity regarding housing. Home equity is your property’s current market value, excluding any liens that are attached to that property, and can be used to determine things like how much you can borrow when taking out a home equity line of credit (HELOC).

Gross income: The sum of all your earnings, like wages and salaries, before taxes and other deductions like Social Security are taken out.

Income: Money earned or received. Income can come from your job, such as wages, salaries, tips, and commissions, or from other sources like dividends on investments, tax refunds, monetary gifts, and inheritances.

Inflation: When you have to pay more for the same goods and services. Typically, the prices of goods and services increase over time, while purchasing power of money decreases.

Interest: An extra fee charged for the ability to borrow money. A bank or credit union may also pay you interest if you deposit money in certain types of accounts, like a CD.

Compound Interest: Interest that is earned on the amount of money you deposited, plus any interest you’ve accumulated over time. Accounts like CDs, high-yield savings accounts, and money market accounts earn compound interest.  

Interest rate: The percentage of a sum borrowed that is charged by a lender or merchant for letting you use its money. Interest rates differ from APR in that APR is a measure of the interest rate plus the additional fees charged with the loan.

Liabilities: Something that is a disadvantage, money owed, or a debt or obligation according to law. For example, if you have student loan debt, car loans, or credit card debt, that would be considered a liability.

Liquidity: The measure of your ability to access your money, or how quickly your assets can be converted into cash. Cash, of course, is the most liquid, while assets like real estate or land are much less liquid due to the time it takes to sell.

Net Income: Amount of money you receive in your paycheck after taxes and other deductions are taken out; also called your take-home pay.

Net Worth: You can calculate net worth by subtracting what you owe (your liabilities) from what you own (your assets). The remaining number can help you determine the overall state of your financial health.

Principal: The core amount you borrow or contribute before interest or returns kick in. In lending, principal is the initial amount you borrow, like the full price of a new car. You promise to repay this amount, plus interest. In investing, it’s the amount of money you put in with the expectation of growing over time.

Return: How much money is made or lost on an investment. Your rate of return is the same number, expressed as a percentage.

Key Takeaways:

  • Financial literacy is your ability to understand and use financial skills, like budgeting or investing.
  • The best way to become financially literate is to start by understanding the most common financial terms.

It’s important to note, this list isn’t totally comprehensive but compiles a list of terms you’re most likely to deal with, so you can take on your financial freedom with ease. Don’t see a definition you were expecting? Add it in the comments below!

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