The importance of a full grasp of the essential financial literacy vocabulary words can not be overemphasized.
Do you know that 4 in 7 Americans are financially illiterate?
According to a US survey data, 19% of Americans report spending beyond their income in the past year.
12% of adults in the US wouldn’t be able to pay their usual monthly bills if they suddenly incurred a $400 expense.
38% of adults in the US have less than $1,000 saved to deal with a financial emergency.
All these are a result of a lack of financial literacy. When it comes to financial literacy, the majority of Americans are the least knowledgeable.
It is, however, imperative to understand and be acquainted with financial terminologies as it will improve your financial literacy and enable you to manage your finances better.
Below are 50 crucial financial literacy vocabulary terms, and meanings that will help improve your knowledge of finance.
Essential Financial Literacy Vocabulary Words
1. Solo 401k
The Solo 401k is a retirement plan for self-employed individuals or small business owners without full-time employees.
This account plan follows the same traditional employer-sponsored 401k option.
The only difference is that it is meant or more fitting to self-employed individuals as they do not have employer contributions.
2. Growth
This is the increased value of an investment over a period of time. Growth differs from regular investment.
A typical investment is a source of income; growth does not immediately yield profits as all of its immediate profits are likely reinvested to build its investment further.
This style of investment is usually adopted by medium to large businesses experiencing upward movement.
The financial reward of growth is the increase in stock or value of such investment over time.
3. Growth and Income
Growth and income simply refer to the most stable assets in an investment portfolio and are a constant income source.
They are usually reputable, established companies that provide essential services and have been in business for a long time.
They are less likely to be adversely affected by market conditions.
4. Equity
Equity is the monetary value that would be returned to shareholders of a company if all of the company assets were sold or liquidated and all its debt paid off.
It is a degree of residual ownership in a firm and helps investors determine a company’s financial value and health.
5. Debt-to-Equity Ratio
The debt-to-equity ratio is a means used to value a company’s financial leverage by dividing its total liabilities by its shareholder’s equity.
It’s a measure of telling the rate at which a company is financing its operations through debts in comparison to wholly-owned funds.
6. Traditional IRA
Traditional IRA, an acronym for Traditional Individual Retirement Account, is a retirement account that allows individuals to make contributions of pre-tax dollars for withdrawal during retirement.
During withdrawal, individuals would be taxed at the rate of their current income tax rate.
7. Roth IRA
This is an individual retirement account that is tax-free in growth and withdrawals during retirement. Contributions into the account are taxed.
However, the qualified withdrawals are tax-free.
Rules of Roth IRA states that individuals above the age of 59 and a half or older and have owned such an account for five years can make withdrawals at any time and won’t owe federal taxes.
8. SEP IRA
Simplified Employment Pension or SEP is an individual retirement account designed for self-employed individuals or small business owners to contribute to their retirement savings needs.
Contributions are tax deducted.
9. Self-Direct IRA
Self-Direct IRA is another type of retirement account that allows individuals the freedom to invest in nonliquid assets such as stocks, cryptocurrency, intellectual properties, or liens.
It is different from the typical IRA and unique.
10. Capital Gains Tax
Capital gains tax is taxes imposed on the profit from sales of a non-inventor asset.
For instance, if you purchased a house for $200,000 and sold it off for $350,000, the $150,000 gain would be subjected to capital gain tax.
Most capital gains are made from property sales, stocks, bonds, real estate, and precious metals.
Related: 50 Personal Finance Vocabulary You Should Know
11. Bull Market
A bull market is a condition in the financial markets when securities prices are rising or anticipated to increase.
This term is often used in referring to the stock market. However, it can be applied to anything else that can be traded.
Examples would be cryptocurrency, bonds, or commodities.
When a market shows an upward trend for an extended period, it can be said to be a “bull market.”
12. Bear Market
A bear market is when securities prices experience a fall by more than 20%. During times like these, investors’ sentiments are pessimistic.
Falls of this kind could last for months and may have long-lasting damage to securities’ market value.
Usually, in this period, people are less likely to invest in the market.
13. Mega Backdoor Roth
This is a tax strategy that you can implore to increase contributions to your Roth Individual Retirement Account and go around the Roth IRA income restrictions or limits.
These contributions are never taxed, and upon withdrawal in retirement, it is also tax-free.
14. Capital Gains
Capital gains are profits made from the sales of assets such as stocks, bonds, or real estate.
The difference between the selling price and purchasing price of an asset is the capital gain.
If you purchase an asset for $35,000 and wind up selling it for $60,000, your capital gain would be $25,000.
15. Credit
The definition of credit as a financial term has several meanings.
However, the term credit is defined as a contractual agreement in which a borrower gets something of value in borrow terms from a lender and payback at a later date with interest.
16. APR
APR is a financial acronym for Annual Percentage Rate. It is the total annual cost for money borrowed that you are required to pay.
It is calculated and expressed in percentage and serves as a measure for borrowers in comparing loans as it reflects the interest rates and fees to be paid on loans you intend to take.
17. APY
The financial acronym AOY stands for Annual Percentage Yield and is quite similar to APR.
APY is the rate of return on an investment or savings and takes into account compound interest and other variable interest.
18. Passive Income
Passive income is a form of income that doesn’t require much active work but instead pulls its earnings from several side ventures such as rental property, blogging, or peer-to-peer lending.
This form of income is taxable as well; however, the IRS treats it differently.
19. FSA
FSA means Flexible Spending Account. It is a form of savings account that allows the account holder with specific tax advantages.
An employer usually opens it for their employees in which they save up a part of their income for payment for future qualified expenses.
20. No-Loads Funds
No-Loads Funds are a type of mutual fund that is sold without commission fees or a sales charge.
This type of mutual fund is sold directly by the investment company to investors and therefore doesn’t involve a third party in the sales transaction process.
The absence of a third party in the sales transaction thus results in the lack of a commission fee or sales charge.
21. Blue Chip Companies
A Blue-chip is a reliable, well-established, and financially buoyant company. Blue-chip companies sell products and services that are in high demand.
They are known to thrive in the face of unstable or harsh economic conditions.
22. TVM
TVM, which means the time value of money, is a concept that the money in your possession now is worth more than the same sum in the future.
It is so because of the potential earning capacity of the money.
This concept holds that as long as money earns interest, any amount of money is more valuable the sooner it is received.
23. Aggressive Growth
This is a form of investment fund which aims to return the highest possible capital gains.
This type of investment funds is held in companies with potential and high thriving stocks.
Usually, this type of investment fund gives back high returns, yet it also can result in deep losses.
24. Dollar-Cost Averaging
Dollar-cost averaging is an investment strategy aimed at reducing the impact of market volatility.
It involves investing a fixed amount in the same fund or stock at regular intervals over a period of time.
When properly done, dollar-cost averaging can boost your investment portfolio.
25. Leverage
Leverage is an investment technique that involves using borrowed capital or money to increase and strengthen an investment portfolio or the potential return of a particular investment.
It is also the amount of debt a company uses in financing its assets.
26. Investment Sectors
In an economy, a sector is an industry group that manufactures or produces similar goods and services.
When it comes to investment, investors usually refer to various investments of particular goods or services as a sector.
Examples are the energy sector, financial sector, health care sector, agricultural sector, and technology sector.
27. Mutual Funds
Mutual funds are financial vehicles made up of a collection of assets such as stocks and securities and are financed by a pool of money from several investors.
The combined holdings of the mutual funds are referred to as its portfolio.
28. Risk Tolerance
Risk tolerance is the ability or extent to an investor is willing to endure a potential loss of money in an investment.
An investor’s risk tolerance determines the kind of investment they can partake in.
It is best for an investor to have a good understanding of how much of a loss they can take before embarking on an investment.
29. Year to Date Rate of Return
The year-to-date rate of return or YTD is a calculation used by investors to assess and analyze the performance of a portfolio of stocks.
It is the amount of profit or loss made from the first trading date of a calendar year from an investment.
30. Tax-Advantaged Accounts
The tax-advantaged account is a financial term to describe any form of an investment option or savings plan, or financial account.
Examples are IRAs, annuities, municipal bonds, and 401(k)s.
31. Fixed Expense
Fixed expenses are expenses that do not change and are fixed.
Mortgage, loan payments, utility bills, and rent payments are all types of fixed expenses.
In the case of utility bills, they may change, but the difference is minor, therefore, insignificant.
32. Liquidity
Liquidity is the ease at which an asset or security can be dissolved into cash for a price that reflects its actual market value.
Assets such as bonds, stocks, cryptocurrency are very liquid as they can be easily converted to cash in a matter of days.
33. Compound Interest
Compound interest is the added interest on the principal amount of a deposit.
It is the added interest upon the interest of the principal amount rather than withdrawing it.
In other words, it is the reinvesting of interest earned.
34. Deferred Compensation
Deferred compensation is the portion of an employee’s income reserved for payment at a future date, usually in the form of pension plans, retirement plans, or stock-option plans.
Taxes on deferred compensation are deferred until the time of payment.
Related: How To Retire Early In 15 Practical & Easy Ways
35. Producer
In finance, a producer is an individual or business organization that creates with the combination of labor and capital, goods and services.
Business firms are typical examples of producers in an economy.
36. Bond
Bond also referred to as a fixed income, is investment security whereby investors lend out money to the government or companies for a specific time frame and receive regular interest payments in return.
Companies use this process to raise capital as well as the government.
37. EE Bond
Series EE Bond is an interest-bearing bond made available by the US government and is guaranteed to grow and double in value over the course of its investment period.
EE bonds bear interest and are not marketable.
38. ROI
ROI is a financial acronym for Return On Interest. It is a metric to evaluate the performance or profitability of a particular investment or compare the performance of several investments.
It is calculated by dividing the net profit of an investment by its cost.
A high ROI signifies good investment and high profits.
39. Volatility
Volatility is the rate a price of a security rises or drops for returns.
This is used to understand the risks of an investment and can be determined by calculating the standard deviation of the annualized returns for a period of time.
Investment with high volatility poses more risk but also offers huge gains.
The higher the risk, the higher the profit.
40. FIRE
FIRE which means Financial Independence, Retire Early, is a brutal investment and savings program to help individuals achieve financial independence early in life by frugality.
Individuals in the FIRE program save an average of 70% of their income and make small withdrawals in retirement.
41. Bankruptcy
Bankruptcy is a legal declaration by an individual or corporation of being unable to repay incurred debts and thus needs such debt to be cleared or reorganized.
This financial tool protects the borrower from debt collection; notwithstanding, such borrowers would be required to sell off their assets to repay their debt.
42. Default
A default in finance means the failure of a borrower to meet their financial obligation to repay a debt, loan, or security.
Default could happen if a borrower misses or stops making the necessary monetary payment of an incurred debt.
43. Overdraft
An overdraft occurs when an individual makes a withdrawal despite having insufficient balance in their account, and the financial institution grants an extension of credit to enable such a transaction.
However, such an individual is expected to bring back up their account balance to a positive number to cover the overdraft payment.
44. Variable Interest Rate
A variable interest rate is a type of interest rate on security or loan that fluctuates over time because it is based on conditions of the economy.
If an individual takes up a loan with a variable interest rate, they may pay more or less in the total interest based on economic conditions.
45. Fixed Interest Rate
This is the exact opposite of the variable interest rate.
As its name implies, a fixed interest rate is the interest rate on a loan or security that does not change throughout the period of such liability.
They remain fixed.
46. Dividend
Not to be mistaken with profit, a dividend is a portion of a company’s earnings distributed to its shareholders as an appreciation for investing their money in the company.
47. Cosigner
A cosigner is an individual who acts as a backup to a borrower in obtaining a loan.
Such individuals take up the legal obligation to be responsible for the debt obligation of the loan in the event the borrower is unable to make repayment.
48. Creditworthiness
Creditworthiness reflects the likelihood of a person or an entity’s financial ability to repay back debt to justify an extension of credit.
49. Budget
A budget is a financial spending plan that is based on your income and expenses.
It tells how to manage and spend your money or expenses for a certain period.
The period could be a week, month, or year.
50. Return
Return as a financial term refers to the amount made or lost in a business endeavor or on an investment over a period of time.
Final Thoughts on Financial Education
To be financially literate is essential.
Our daily lives hang on the balance of our finances, and thus, having a deep understanding of your finances will lead to proper management of them.
Hopefully, the above financial literacy vocabulary and its meanings will help educate you to understand better and take care of your finances.
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