Glossary of Financial Terms: 15 Must-Know Definitions

In a recently conducted survey, only half of the participants were considered to have a passable level of financial literacy.¹ The number sounds low, but it’s not hard to see why 50% of the participants had trouble answering basic financial questions. The financial field is packed full of special terms, abbreviations, and concepts that many people don’t come across every day. It can be tough to differentiate between concepts when you’re simply looking to make the best financial decisions for yourself and your family. But when it comes to your money, you always want to be knowledgeable. That’s why we’re providing 15 must-know definitions you can use to make more informed decisions moving forward.

Banking Terms To Know

Net Worth

Your net worth is calculated by subtracting your liabilities (or debts) from your assets. To determine your net worth, add up everything you have of value, including investments, money in the bank, and the current values of your car and home. Then, you’ll want to subtract any current money owed, including credit card debt, student loan, mortgage balance, and any other debts. The remaining amount is your net worth.

Compound interest

Compound interest is the interest you earn on interest. It sounds confusing, but it can be an effective way to gradually increase your wealth over time. For a bank account, this term refers to incurred interest based on the original deposited amount plus its original interest. For example, if you deposit $1,000 in an account with a 5% compounding interest rate, in the first year, you’ll have $1,050 (the original $1,000 plus 5% or $50). As you enter the next year, that 5% interest rate will apply to the $1,050 (the original amount plus its interest already accrued). By the end of that year, you’ll have $1,102.50.

FICO Score

FICO, an acronym for Fair Isaac Corporation, is a method used to determine how credible a borrower may be. This score typically depends on factors including total debt owed, length of credit history, and previous payment performance. A FICO score can be between 300 and 850. The higher your score, the better your chances (in general) of obtaining loans or other forms of financing.

APR

APR stands for annual percentage rate, referring to the amount of interest gained in an account. It does not include compound interest.

Certificate of Deposit

Often referred to as a CD, a certificate of deposit is an account in which you agree to deposit a certain amount of money and leave it in the account for a predetermined period. In doing so, you will receive an interest rate typically higher than those given in checking or savings accounts.

Investment Terms To Know

Asset Allocation

Often referred to as a CD, a certificate of deposit is an account in which you agree to deposit a certain amount of money and leave it in the account for a predetermined period. In doing so, you will receive an interest rate typically higher than those given in checking or savings accounts.

Capital Gains

A capital gain is the amount of value that an asset has gained or increased since the original purchase. Capital gains are typically used to describe increases in the values of stocks or real estate. However, it’s important to note that these gains are only shown on paper until the actual entity is sold.

Rebalancing

Rebalancing is the process used to help maintain the proper asset allocation for your specific needs. This is a necessary part of keeping your asset allocation in check as stocks, bonds, and other assets are sold or purchased or gain and lose value over time.

Mutual Funds

When choosing to invest in a mutual fund, you and other investors are pooling your money together in one account that is then typically managed by a professional. This type of investment can include any of the most common asset classes, including stocks, bonds, cash, and cash equivalents (such as a CD).

Custodial Account

In the broadest sense, a custodial account is any account managed by another party. Typically, that party has a fiduciary duty to manage the account in the holder’s best interest. The manager could be the brokerage firm you’ve put in charge of handling your investments. The term custodial account also denotes an account set up by a parent or a legal guardian for a minor. 

Insurance Terms To Know

Beneficiary

In the event you were to pass away while owning a life insurance policy, the beneficiary is the person who would receive the insurance payout after your death.

Umbrella Insurance

Umbrella insurance is a type of liability insurance designed to provide blanket coverage protecting most aspects of your financial life. Specifically created in case of a lawsuit, this coverage steps in when you’ve reached the liability limits on your auto insurance or other types of insurance.

Term Life Insurance

Term life insurance is designed to offer coverage only during a designated period. When you select the term, you often have the choice of its duration, such as 10, 20, or 30+ years. Should you die unexpectedly or prematurely during this predetermined time span, your beneficiary will receive an insurance payout. 

Premium

The premium is the actual amount your insurance plan costs. You typically pay your premium on a monthly or an annual basis.

Risk Classification

When determining the premium on an insurance policy, the provider will evaluate your risk classification among other factors, including the length of the policy, your age, and so on. For life insurance, the provider will determine your risk classification based on a number of variables, including your smoking status, BMI, and medical history. 

Whether you’re aiming to dive deeper into the world of investments or take a second look at your current insurance policies, it’s important to have a basic understanding of the concepts and terms used by the professionals whom you consult. This can help you make more informed decisions as you navigate the financial services industry.

^{1 https://www.weforum.org/stories/2024/04/financial-literacy-money-education/}

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.