Personal Finance Glossary
When it comes to personal finance, getting started is the most difficult part. There are so many terms you need to understand and the jargon can really make your head spin. To get you started on the right foot, we’ve created this glossary to help you become a financial whiz:
The 50/30/20 is a popular budgeting method. To budget using the 50/30/20 rule, you divide your after-tax income into three categories: 50% for needs, 30% for wants, and 20% for savings.
Annual fee is the yearly fee charged by banks or other financial institutions to customers for using their products and services, such as credit cards.
Expressed as a percentage of the principal amount (the total cost of a good or service you pay for with a loan), annual percentage rate (APR) is the yearly total interest, or the cost of borrowing money, that borrowers have to pay to lenders in addition to the principal amount.
While APR talks about money owed, annual percentage yield (APY) refers to the amount of money you earn, including compound interest, on your investments or your savings account.
Annuity is an insurance contract between the insurer (insurance company) and the insured (you) where the insurer agrees to make regular or one-time disbursements to you as a payout for your contributions. It’s typically used as a stream of income for retirement.
The mortgage amortization period refers to the length of time during which you will pay your entire mortgage. Most new homeowners get a mortgage amortization of 25 or 30 years. To simply put it, your mortgage amortization period is made up of multiple mortgage terms.
Automated teller machines (ATMs) are special computers that provide self-serve service for basic transactions such as fund withdrawals, bill payments, and fund transfers between accounts.
As the term suggests, a balance transfer credit card allows you to transfer your credit card balance to another account with a lower rate of interest so that you can save money on interest costs.
This is a legal process that can reduce or pay off the amount you owe on your debts. How much you pay and whether you qualify will depend on your income and your assets. Bankruptcy may allow the borrower a fresh start but it comes at the cost of your credit report – it stays on the borrower’s credit report for a number of years, making it difficult to borrow again in the near future.
Blockchain is the digital database that forms the backbone of cryptocurrency systems. It differs from a traditional database by the way in which it collects and stores information. While a traditional database structures data into tables, blockchain databases do it in blocks or chunks.
Bond is a fixed-rate of return loan given by an investor to a company or government (the borrower) to fund their operations. Bonds are a popular investment option because of their relative safety compared to other assets, such as stocks.
Budget can be defined as a spending plan that takes into account your income and expenses. It’s one of the most important concepts in personal finance that gives an estimate of how much you make, spend, and save and can help you make better financial decisions.
A cash back reward is either a dollar figure or a number of points that you earn when you spend money with a credit card.
Capital gains are expressed as the difference between the increased value of an asset and the original price paid by the investor to buy that asset.
When a company goes public, they sell shares of common stock. By purchasing shares of the common stock, shareholders are effectively purchasing small units of the company’s ownership as investments.
Compound interest is the interest calculated on the principal amount plus any interest accumulated until the date of calculation. Compound interest is also known as interest on interest.
A measure of the cost of a virtual basket of goods expressed as a percentage when compared to the same time in the previous year. The CPI helps the government determine if they are meeting their inflation goals.
Cosigner is the person or entity that signs the application for a loan or a rental alongside the borrower. The cosigner has the legal obligation to act as a backup repayer in case the borrower fails to repay the loan.
A credit card is a card issued by a bank or a financial institution that allows the cardholder to purchase goods and services on credit or borrowed funds.
A number between 300 and 900 that indicates your trustworthiness with debt. What credit you use, and how you use it, impacts your credit score. The higher your credit score, the easier it is to get a loan and the better interest rates you will qualify for.
Credit history is the detailed representation of your debt repayment track record and appears on your credit report.
Credit limit of your credit card is the maximum amount available for you to borrow on that credit card for transactions.
Credit union is a member-owned, non-profit financial cooperative that provides services similar to a commercial bank, such as granting loans, accepting deposits, etc.
A form of digital currency whose transactions are maintained by a decentralized system.
The total amount of money that a borrower owes a lender is known as debt.
Debt consolidation is defined as the act of combining the debt owed by the borrower to various sources, such as credit cards and loans, into one single payment.
The money paid to shareholders in return for their investment in the company’s equity is defined as a dividend.
A direct listing is when a company forgoes the underwriting process altogether and becomes public by directly allowing their insiders to sell their shares on the open market, without raising new shares. This can decrease the cost of the IPO but increases the risk for the financing bank.
Down payment is a portion of the total purchase price of an expensive commodity (such as a house) or service that’s paid upfront at the time of the purchase.
Electronic funds transfer (EFT) is the transfer of money from one account to another through an electronic channel.
Equity can mean different things in different investment scenarios. Shareholder equity is the sum that’s returned to a company’s shareholders in case of a liquidation event, such as an acquisition or initial public offering. Home equity, on the other hand, is the property’s current market value, minus any liabilities (such as remaining balance that still needs to be paid) attached to the property.
ETFs, or exchange-traded funds, are investments that bundle multiple assets to trade as a single product on a financial market.
How a government manages spending and taxation levels in ways meant to influence the economy.
Flipping is the practice of buying an asset and quickly reselling to earn a quick profit. Flipping is generally discouraged by most brokerage firms.
Refers to items or commodities that can be exchanged with other assets or commodities of the same type, such as currency, commodities, and precious stones. For example, cash is fungible: you can exchance certain amounts, such as a $20 bill, for the same amount in a different denomination, such as four $5 bills.
A grant is a financial amount given by an entity – such as a foundation or a trust, to another entity, such as an individual or a company – to fulfill a specific goal or complete a particular task.
A person’s gross income is the total they earn before taxes and other deductions, such as employment insurance and pension plan.
Growth investing is a high-return, high-risk strategy focussed on investing money in high-growth companies that are expected to grow at an above-average rate compared to the rest of the market.
Growth stocks are stocks that are expected to grow at a higher-than-average market growth rate.
A high interest savings account gives you an interest rate on your savings that is higher than the national average.
An Initial Public Offering (IPO) is the event when a company transitions from private ownership to public ownership. The company is able to raise capital by issuing shares of stock to the investing public. Investors can then purchase shares fo the company.
Interest is the sum that a borrower has to pay to the lender on top of the principal loan amount as the cost of borrowing money from them. Interest can also refer to the amount of money earned through investments or other financial products.
Rate of interest or interest rate, expressed as a percentage of the principal amount of the loan, is the rate a borrower has to pay interest to the lender.
Inflation is the measure of the decrease of purchasing power of currency for a given basket of goods over a period of time. It’s a fundamental result of supply and demand.
Also known as the offering price, issue price is the price investors can purchase shares at of the company before the company goes public and begins trading on the open market.
A joint credit card allows two individuals to share the same credit card account. The joint credit card is issued based on their combined incomes and credit histories.
The liquidity of an investor is their ability to quickly sell off any assets, securities, and investments and cash in according to the current market price.
Lock-up period is a pre-defined time frame after the IPO when investors who own equity stakes in the company can’t sell their shares. This is done to make sure the stock prices are allowed to stabilize immediately after the company goes public. They usually last anywhere from 3 to 24 months.
The macroeconomic policy decided by the national or central bank of the country to control the nation’s economic growth is known as a monetary policy.
A mortgage is a loan from a mortgage lender or a bank to help you buy a house or any other piece of real estate. It’s a written commitment in which the property you’re buying acts as your collateral; which means if you fail to repay your loan amount in the stipulated period of time, you can forfeit your property to the lender.
Mortgage term is the amount of time that you’re committing to your current mortgage rate selection. A mortgage term can typically be anywhere between one and 10 years, but the most common term is five years.
A mutual fund is an investment product that combines money from various investors and invests it into diversified stocks and bonds. The allocation of the mutual funds assets in the portfolio is done by professional money managers based on the investment objectives of the portfolio.
Net worth is the total wealth of an individual and calculated as a sum of all investments and assets minus liabilities.
NFTs are any digital item that can be exchanged using blockchain technology. Each NFT can only have one owner. The non-fungible part of the NFT means that it can be made unique from other items.
Option is a derivative financial contract that gives the individual the right to purchase or sell an asset at a fixed price by their expiration date.
Overdraft is a type of short-term line of credit or loan given by a bank or financial institution to an individual, so that they can pay off their expenses when their account balance is zero.
Premium, short for insurance premium, is the sum paid by an individual to their insurance provider each month towards their insurance contract.
A prepaid card is different from your debit card because it’s not associated with a chequing account. Prepaid cards are similar to credit cards but they only allow you to spend money that you load onto the card.
Price band is the price range in which different groups of investors are allowed to bid for the IPO shares. This range is different for different groups and is set by the underwriter and the company.
A broad category of credit given to an individual with the agreement that interested will be paid on a fixed amount of money. These loans range in size from just a few hundred to tens of thousands of dollars, and they can offer many different term lengths and interest rates to consumers.
The profits you earn in return of your investment in a particular asset is known as the Return on investment (ROI) of that asset.
Unlike a traditional credit card, a secured credit card needs you to pay a cash deposit upfront to use the services of the credit card.
Secured loan is a loan given only after the borrower pledges some type of a collateral asset (such as their home, vehicle, or cash) to fulfill the lender’s condition of borrowing.
Special Purpose Acquisition Company (SPAC), also referred to as “blank check” company, is a company created with the sole purpose of raising money to acquire private companies looking to go public.
Stock is a type of security that gives the shareholder a fraction of ownership in the company that issues the stock.
When a company pays cash to buy the stocks of their own company on the open market, the event is known as stock buyback.
A marketplace where shares of public-listed companies are traded (bought and sold) by the general public.
Stock split is the event in which a company issues more shares of the company to existing shareholders, effectively decreasing their share price, and making the shares more affordable to small investors on the market.
An index of 500 leading publicly traded companies in the US based on market capitalization weight.
A legal entity in which a trustor is given rights by the trustee to hold and manage assets on behalf of a third-party beneficiary. There are quite a few purposes for creating a trust, but the most common ones include either protecting the resources for the beneficiary in the event of the granter’s death or setting aside a sum of money for emergency purposes so that family members don’t end up spending it all.
A loan given by the lender to the borrower without the need of a collateral is known as an unsecured loan.
Vesting is a time-bound schedule that decides when and how many benefits, such as stock options, become available to an employee in their employment duration.
The return on investment income you realize and generate from an investment is known as the yield and it’s either calculated as a percentage on the purchase price of the investment or the market value of the investment.