By Ben Luthi
Ben Luthi has been a freelance writer since 2013, covering all things money and travel. His work has appeared in many major publications and financial websites, including U.S. News & World Report, The New York Times, Fox Business, Experian, FICO and more. Ben lives in Utah with his two kids, and loves spending his free time traveling, hiking and talking about credit cards.
In everyday financial management, you may come across terms you’re not familiar with. Here are some of the more common financial terms and what they mean.
401(k): A 401(k) is an employer-sponsored retirement plan that offers tax benefits to those who contribute. In some cases, your employer may offer to make contributions as an employee benefit. The term 401(k) comes from the section in the tax code that defines its terms.
529 plan: A tax-advantaged college savings plan that allows you to save for eligible education expenses on a tax-free basis.
Amortization: When you get approved for a loan, the lender amortizes it over the agreed-upon repayment schedule. This process determines what your monthly payment must be, given the loan’s interest rate, to get to a zero balance by the end of the loan’s term.
AGI: Adjusted gross income (AGI) is a term you’ll find a lot during tax season. It’s calculated by taking your gross income for the year and subtracting certain deductions allowed by the IRS. Your AGI helps determine your qualification for certain tax credits and deductions and also helps you calculate your taxable income.
APR: Short for annual percentage rate, APR is often considered interchangeable with your interest rate, but it’s more than that. The APR on a loan or credit card is the total cost of borrowing, including interest, fees, and other charges, which is annualized based on the loan amount and term.
APY: Similar to APR, an annual percentage yield is the total amount of interest you can expect to earn in a deposit account. That typically includes checking, savings, certificates of deposit and money market accounts.
ARM: If you’re buying a house, you may come across this term, which stands for adjustable-rate mortgage. Unlike a fixed-rate mortgage, which keeps the same rate throughout the life of your loan, an ARM starts off with a lower fixed rate for a set period, then can change each year as market rates fluctuate.
Assets: Assets are economic resources that you have at your disposal. It can refer to bank account balances, investment balances, home equity and more.
Bankruptcy: A legal process that can provide certain protections for consumers against their creditors. Depending on the type of bankruptcy, you may be required to get on a restructured payment plan or sell off some of your assets to satisfy some or all of your unpaid debts.
Collateral: An asset used to secure certain types of loans and which the lender can repossess to satisfy the debt if the borrower defaults. Common forms of collateral include a vehicle with an auto loan, a home with a mortgage loan and a deposit with a secured credit card.
Conventional loan: A conventional mortgage loan is a loan that’s not guaranteed, insured or backed by a government agency.
Cosigner: If you can’t get approved for a loan on your own, you may be able to add a cosigner to the application. A cosigner with good credit can improve your chances of getting approved by essentially promising to make payments if you can’t.
Credit history: A history of your relationship with credit. Your credit history is maintained by the three national credit bureaus, Experian, Equifax and TransUnion. A good credit history can help you get approved for new credit at favorable rates.
Default: This occurs when you’ve left a debt unpaid for a set period of time, which can vary by lender.
Equal housing lender: Also called equal opportunity lender. These lenders are prohibited from discriminating against borrowers based on race, color, religion, national origin, sex, handicap, or familial status. SouthEast Bank is an Equal Housing Lender.
Escrow: This is an account that’s typically used with mortgage loans. Your monthly payment often includes principal and interest, homeowners insurance premiums, and property taxes. An escrow account is held by a third party and is used to hold insurance premiums and property taxes until they’re due.
FICO score: FICO stands for Fair Isaac Corporation, a credit scoring company. Your FICO score is a numerical representation of your credit history. When you apply for credit, most lenders use your FICO score to determine whether to approve your application and, if approved, how much to charge you in interest and fees.
FDIC: Short for the Federal Deposit Insurance Corporation, the FDIC provides insurance for account holders in the event that a bank fails, so they don’t lose all their money. Insurance is limited to $250,000 per depositor, per insured bank, per ownership category. SouthEast Bank is insured by the FDIC.
Foreclosure: If you default on your mortgage loan, the lender may foreclose on the home, which involves seizing the property and selling it on the market to recoup its losses.
FSA: A Flexible Spending Account, FSA for short, is an employer-sponsored health savings plan. If your employer offers one, you’ll decide each year how much you want to contribute during the upcoming year. You’ll then make regular contributions through payroll deductions, but you’ll get access to the full amount at the start of the plan year. The caveat is that you must use all of it during that plan year. Otherwise, you may lose some or all of the remaining balance.
Grace period: This term can have different meanings. With credit cards, it’s the period after each statement period closes, during which you can pay your bill in full and avoid interest. With student loans, it’s the period of time (typically six months) after you leave school before you are required to start making payments. In other instances, it can be a period after a due date during which you can make a payment without incurring a late fee or losing insurance coverage.
Interest: The amount of money you must pay to borrow money, excluding fees and other finance charges. Interest is typically represented in the form of an annualized rate.
HSA: A Health Savings Account (HSA) is a tax-advantaged health savings plan. If you qualify to contribute to one, your contributions are deductible on your tax return, and you can use that money to pay for qualified medical expenses on a tax-free basis.
IRA: Short for individual retirement account, an IRA allows you to set aside money for retirement outside of an employer-sponsored plan. A traditional IRA allows you to deduct contributions on your tax return, but you’ll end up paying taxes on your gains when you start taking withdrawals. A Roth IRA doesn’t allow deductions on contributions but allows your funds to grow tax-free.
Liabilities: In short, liabilities refer to debts and other financial obligations.
Mutual fund: This investment vehicle allows multiple investors to pool their money together to invest in stocks, bonds and other financial securities.
Net worth: In short, your net worth is your assets minus your liabilities. In other words, if you were to pay off all of your debts, this is how much you would have left over.
PMI: Short for private mortgage insurance, PMI protects the lender in the event that a borrower fails to keep up with their mortgage payments. You typically need to pay PMI premiums if you have a conventional loan and put down less than 20%.
Points: When you buy a home, you may have the option to buy discount points to reduce your interest rate. The cost of a point is typically 1% of the loan amount and reduces your interest rate by 0.25%.
Share: A unit of ownership in a company. It’s the smallest denomination of a company’s stock, and the price of a share can vary from minute to minute.
Term life insurance: Term insurance is a form of life insurance that offers protection for a set period, often between 10 and 40 years. If you die during the term period, your beneficiary will receive the death benefit. But if you outlive the term, you’ll no longer be protected.
Whole life insurance: A form of permanent insurance, whole life provides protection for the remainder of your life, as long as you keep paying your premiums. Whole life also includes a cash value component, which acts as a type of savings account. A portion of your premiums goes into the cash value account, and it can grow over time.
Familiarizing yourself with common financial terms is a great way to strengthen your understanding of money management. Once you’ve learned these terms, you can put them into action when setting and accomplishing your own financial goals.
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Information contained in this blog is for educational and informational purposes only. Nothing contained in this blog should be construed as legal or tax advice. An attorney or tax advisor should be consulted for advice on specific issues.
