Personal finance terminology every teenager should know8 min read

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Personal Finance Terminologies

In this article, we have a glossary of some of the most common or essential personal finance terminology you might run into on your finance journey.

Personal finance terminology might not come up during meetings and conversations. However, it is vital to have a basic understanding of the common words.

I am very much afraid of definitions, and yet one is almost forced to make them. One must take care, too, not to be inhibited by them.

Robert Delaunay

The definitions we offer in this article are simply for educations and informational purposes. Please make sure to have a financial expert provide a better understanding when you would like to know how these differ by country/state.

A

Accrued Interest

This term refers to interest you have earned or are required to pay but has not yet paid out.

For example – in the case of a savings account, this could be interest from the start of the month, that has not been credited to your account balance yet.

A second example would be in the case of a loan account. This could be interest from the start of the month that you are required to pay but has not been added to the loan balance yet.

Everything has beauty, but not everyone sees it - Confucius
Everything has beauty, but not everyone sees it – Confucius

Amortization

This term refers to how banks or financial institutions spread out the debt or loan into principal and interest over the loan.

For example, most loans are amortized over 5 / 6 years, while mortgages can go up to 20 to 30 years.

At the beginning of the loan repayment, you would pay more interest and less principal. However, as the loan balance reduces and payments progress, the amount of interest you pay decreases, and the principal’s repayment increases.

Annual Percentage Rate (APR)

The interest rate that you pay on a loan over one year. It includes the actual cost of interest on the loan and includes other fees charged on the loan, e.g., negotiation fees, insurance, and any others.

For example – when the bank says we will offer you a loan at 13.5% interest, this would not be the annual percentage rate (APR). The APR would be slightly higher because you would need to factor in the additional fees.

Annual Percentage Yield (APY)

This term refers to the interest rate that you earn in a year on your investment. This number usually has factored in compound interest.

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In the case of a loan, it is the interest rate you pay on the debt after it compounds.

Annuity

A fixed amount of money paid out periodically giving you an investor a series of future cash flows.

For example, if you have saved 1 million, your annuity might be 10%. You get access to 100,000 every year.

Appreciation

This term refers to the increase in value of your investment or your asset.

For example, when a house value stands at 10 million this year, and next year it is grows to 11 million, you can see it has appreciated by 10% (11 million – 10 million = 1 million, divided by the original 10 million value).

Assets

These are items of monetary value that an individual or a business owns.

For example, if you own a house worth 10 million and shares worth 1 million, your total assets are 10 million.

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B

Balanced Fund

A pooled investment fund that usually splits the investment into both stocks and bonds. A balanced fund often focuses on delivering long-term growth and income for the investors.

Bankruptcy

The legal process by which a debtor seeks relief from the money they owe to a financial institution that they cannot pay back.

Basis Point

One basis point is one-hundredth of a percent. 1 bps = 0.01%. Similarly, 100 basis points are equal to 1 percentage point.

An example, when the central bank moves the initial rate of 6% by 100 basis points, the rate will have moved by 1 percent – from 6% to 7%.

Bearish Market

An economic situation where share prices are falling or decreasing indicating that it is now a buyer’s market.

In a bearish market, there are many investors selling their equities. Therefore, a buyer, after doing their research, could decide to buy the stocks in anticipation of future gains when prices rise.

Bond

A debt instrument where the borrower promises to pay back the lender at a specific rate (usually called a coupon rate) over a particular amount of time.

For example, the government could issue a treasury bond at a coupon rate of 9% over 25 years. The government would be the borrower, and potential investors are the lenders.

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Budget

It is a spending plan created by factoring in current and future incomes, fixed and variable expenses, and investment plans.

Companies create budgets to advise how they should spend on different aspects such as marketing, sales costs, production costs, salaries, etc.

Similarly, individuals create budgets to advise what to spend on savings, investments, rent, utility bills, loans, and mortgages, food, transport, and much more.

Bullish Market

A market condition where share prices are rising, and there are many buyers driving the demand for these stocks up. Usually, a bullish market is a seller’s market.

After doing their research, investors holding certain stocks may decide to sell their stocks to unlock the profits they gained since they bought their stocks are lower prices.

C

Everything you've ever wanted is on the other side of fear - George Addiar
Everything you’ve ever wanted is on the other side of fear – George Addiar

Capital gains/loss

The amount of money you make or lose between the purchase price and the sale price of an investment.

For example, if you bought a car at 100,000 and sold it later for 70,000, your capital loss would be 30,000. If you purchased a house at 10 million and sold it later for 12 million, your capital gain would be 2 million.

Commission

The money that you pay to our broker for gains on the pooled funds that they manage.

For example, if you are investing via a balanced fund, the fund return might be 15%, but your broker has a commission of 3%, meaning that your net return would be 12% after the broker’s commissions.

Compound interest

The interest that you earn or pay under a compounding model. It is added on the principal and grows by gaining interest, and the interest earned then gains more interest.

Credit report

A credit report is an overview of the borrowing and repayment history of an individual. Your financial institution would then use this information to compute your cost of borrowing money in the future.

For example, if you stick to paying your loans on time and in full, you can be preferred for cheaper loans or consideration for getting a higher value loan.

Credit score

The term refers to the numerical value that represents the borrower’s historical ability to pay back debt. One of the most popular ones is the FICO score compiled by the Fair Isaac Corporation.

D

Debt consolidation (Debt restructuring)

A situation where you refinance several smaller loans or debts into one large loan to decrease the interest paid or the duration of paying for the loans.

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For example, one might have ten (10) loans with a balance of 10,000 and with varied interest rates, but they might restructure or consolidate this into one (1) loan of 100,000 at a lower interest rate.

Default

When a person is unable to repay their loan as per its terms, the loan is considered to be in default.

Depreciation

The monetary value that you lose on an investment over time when it decreases in value.

For example, when you purchase a car for 100,000 but sell it later for 75,000, it will have depreciated by 25,000, or 25% (25,000 divided by 100,000)

Devaluation

When the value of a currency or stock reduces, it is said to have devalued.

For example, when a stock reduces from $1 to $0.9, it can be said to have devalued by $0.1 or 10% (0.1 divided by 1)

Diversification

It is spreading out of risk by investing in more than one financial instrument.

For example, when you invest 75% in stocks and 25% in bonds, you can say that you have diversified your investments.

Dividend

A payment that shareholders receive from the ownership of a share of a specific company.

E

Emergency fund

Money that is saved for a rainy day. This money is saved to finance unexpected events, for example, a tire burst, small health expenses, and more.

Pro tip: always have at least $1,000 as your emergency fund.

Bankrate headline - less than 4 in 10 Americans can afford to pay a surprise $1,000 bill from their savings
Bankrate headline

Did you know that according to Bankrate, less than 4 in 10 Americans can afford to pay a surprise $1,000 bill from their savings [1]?

Equity

It is the value of an asset that a person owns. We calculate equity by subtracting what the person owes from the total value of the asset.

For example, if you own a house worth 10 million, but you still have a mortgage of 4 million, your equity on the home is 6 million (10 million – 4 million = 6 million)


Final thoughts on personal finance terminology

Our article shows some of the most common personal finance terminologies but is not exhaustive. So please check out our series of personal finance definitions articles that will help you learn more personal finance terminology that you always need to have in mind.

[1] https://www.bankrate.com/banking/savings/financial-security-january-2021/

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Michael G

I love investing in people! Michael is on a mission to help organizations and individuals become better. Michael has had a distinguished 10-year career spanning through non-profit and the corporate world. Michael's life purpose is in helping to simplify complex problems to define actionable solutions, which is why through public speaking, Michael is focused on inspiring and impacting people towards the right personal growth formula and generating sustainable business growth.

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