As withtechnology, the finance world is filled with acronyms and terms that might sound alien to many people.
So weve created a financial glossary for you that explains important yet often confusing money concepts.
This isnt a comprehensive list by any means.
Youll need to know these when managing your money, investing, or simply having a conversation about finance.
This is like getting free money, andyou should not pass it up.
An amortization table can also be motivating by showing you how your debt can be whittled down each month.
APR:APR stands for Annual Percentage Rate.
APY includes interest youve already accumulated in its calculations, so it is higher than the APR.
This is why banks advertise the APY for savings accounts but the APR for loans and credit cards.
ARM:No, not your body part.
ARM in the financial world stands for adjustable-rate mortgage.
Its a mortgage with an interest rate that periodically changes after a certain number of years.
Diversification:Diversification is the financial industrys equivalent of dont put all your eggs in one basket.
When you invest, you want to put your money in a few different areas to reduce risk.
(Bubbles can happen in any industry, eventulip bulb-buying.)
Asset allocationis a diversification strategy in which you spread your money across different investment types, calledasset classes.
How much you put in each class depends on your goals, risk tolerance, and timeline.
The three basic asset classes are:
Cash:Yes, were defining cash.
Bonds come with a defined term ormaturity(when the bond can be redeemed).
US Treasury bonds, for example, are used by the government to pay off federal debt.
They pay a fixed interest rate every six months until they mature (from 10 to 30 years).
Some bonds are considered safe investments, compared tojunk bondsthat have higher risk but greater potential payout.
Stocks:A stock is a share of ownership in a public or private company.
When it does poorly, however, so does your stock investment.
Ourbeginners investment guideandarticle on picking investments for your retirement accountcan help you get started.
Theyre easy to tell apart when you consider the animals characteristics.
In a bear market, investors pull back (like bears hibernating).
If you sell it for less than your original purchase price, its a capital loss.
The IRS taxes capital gains but lets you deduct capital losses on your taxes.
Learnhow investing affects your taxes here.
Compound interest:You know how a lie just leads to another lie and the problem just multiplies exponentially?
Thats pretty much how compound interest works.
Say you make a $100 investment that goes up 10% one year, or $10.
Its value is now $110.
Your investment is growing at a faster rate each year because of the previous interest.
Why you oughta know this:Compound interest isone of the most powerful forces in the universe.
It can cause you to quickly get buried under debt, or make you richer while you sleep.
It might be the most important financial concept everyonekids includedshould learn.
Your credit score is similar.
Before you make any major financial move,check and improve your credit score.
Dividends:A dividend is a portion of a companys profits that they pay out to their shareholders.
Theyre usually paid quarterly.
Its regular, taxable income, although we could reinvest it and buy more shares.
you could justset it and forget it(for the most part).
Why you oughta know this:When choosing your investments, look at the expense ratio.
Your investments will likely do better.
IRA:An IRA or Individual Retirement Account is another pop in of retirement savings account.
Why you oughta know this:You dont have to invest in your employers 401(k) plan.
than the 401(k) does.
Index funds typically have lower expense ratios because theyre not actively managed by people trying to beat the market.
Instead, they merely venture to mimic the stock market.
Knowthe basics of mutual fundsandhow they compare to similar ETFsorexchange traded fundsso you know where youre money is going.
Its a better yardstick for your financial progress than your income.
Prime rate:The Prime Rate is the lowest interest rate banks will charge their customers.
The prime rate is tied to the interest ratesset by the Federal Reserve(or The Fed).
When they increase the federal fund target rate, prime rates go up.
Tax-deferred:Tax-deferred refers to delaying taxes on your income until later.
Investment earnings grow tax free until you withdraw them.
Learn abouttax-deferred versus tax-free growthhere.
Photo byMega Pixel(Shutterstock).
