Financial Literacy Terms

Financial Literacy is a key to controlling your destiny and living the life of your dreams. Challenge yourself to learn just one of these terms each day.

Loan - Money borrowed from a bank or other lending institution that must be repaid at a future time.

Amortization - The reduction of a loan amount that occurs each time a loan payment is made. By making slightly larger loan payments each month, you might be able to amortize your home loan in 15 years instead of having to make payments for 30 years.

Depreciating Asset - Something you might purchase (such as a car) that decreases in value over time.

Appreciating Asset - Something you might purchase (such as a house) that increases in value over time.

Interest - The amount of money paid in exchange for borrowing money. You pay interest if you borrow money, but you earn interest if you put your money in a bank account.

Compounding Interest - Is the interest on a loan or bank account calculated on both the initial amount and the interest that has already accumulated. This is why credit card debt can spiral out of control. But as an investor, it is a powerful tool to grow your money.

Finance Charge - Generally, it is the interest you pay on a credit card if you don’t pay off the full balance each month. This is often one of the most expensive ways to borrow money.

Predatory Lending - Unfair, deceptive or fraudulent lending practices that can take advantage of people who are unsuspecting or not knowledgeable about better alternatives. They often use aggressive sales pressure and can include home loans, payday loans, instant tax refund loans, and credit card debt.

Credit Card - A plastic payment card that allows you to pay for merchandise and services in exchange for the promise to pay the bank back for the original amount plus any interest or other fees. Spending too much on your credit card can negatively impact your credit score and result in high interest charges.

Credit Score - Is one of the ways that banks determine how good of an interest rate to offer you on a credit card or loan. Being responsible with money and always paying your bills on time will help you get a good credit score.

Net Worth - Is calculated by adding up the value of everything you own (your assets) and subtracting the amount of everything you owe (your liabilities).

Balance Sheet Personal Financial Statement - A document you prepare on a periodic basis to list the value of everything you own (assets) and everything you owe (your liabilities).

Cash Flow Personal Financial Statement - A document you prepare on a periodic basis to list all of your cash inflows (such as earnings or investment income) and all of your cash outflows (money you spend).

Savings Account - An account at a bank or other financial institution where you can deposit money and earn interest.

Investment Portfolio - Is your collection of financial investments such as stocks, bonds, and money you have in a savings account.

Investment Strategy - Is how you decide to invest your money based on your goals and how much risk you want to take.

Return on Investment (ROI) - Measures how well your investment performed. You would have a 10% ROI if you bought an investment for $100 and now it is worth $110.

Dividends - Money that some companies pay to investors on a regular basis from their profits. Money you receive from dividends are also included when calculating your return on investment (ROI).

Appreciation - The amount of money you make if the price of a stock or other investment goes up in value.

Rule of 72 - Dividing 72 by the annual rate of return will quickly estimate how many years it will take to double your investment. If you expect an annual return of 10 percent, then it will take approximately 7.2 years to double your investment (72 divided by 10 = 7.2).

Inflation - is a general rise in the price of goods and services. Deflation is the opposite, when prices are falling. Both can affect investment decisions since something you buy today could change in value due to inflation or deflation.

Price-to-Earnings Ratio (P/E Ratio) - A ratio that helps you evaluate whether to buy or sell a stock. It compares a company’s share price to the amount of money it earns per share.

Market Capitalization - Is the value of a company calculated by multiplying the total number of its stock shares by the current price of a single share of stock.

Basis Point - Is a common unit of measure for interest rates and stock prices. One basis point is equal to 1/100 of 1%.

Bonds - Are issued by governments and corporations as a way for them to borrow money. If you buy a bond, they generally pay you regular interest payments for a fixed period of time. Unlike stocks, bonds do not give you ownership in a company.

Stock - An investment that represents your ownership of a fraction of a company. You are a shareholder if you own stock in a company.

Stock Market - Where stocks in companies are bought and sold. The New York Stock Exchange and the NASDAQ Stock Market are two of the most well-known.

Stock Index - A measurement of the performance of a group of selected stocks. Some well-known examples are the Dow Jones Industrial Average, the Standard & Poor 500, and the NASDAQ Composite.

Fees - Money that some companies charge for their products or services. Fees can vary widely and can include sales commissions, management fees, and administrative costs.

Business Plan - Outlines how a company will get started, grow and become profitable.

Intellectual Property - Is a way to use your smarts and creativity to create something with monetary value. Some examples are inventions, designs, and music.

Initial Public Offering (IPO) - The process where a private company decides to issue share of stock to the public for the first time.