Full knowledge of essential personal finance vocabulary and terms would undoubtedly boost your financial literacy.
Most Americans have fallen into the trap of believing that if you don’t work in a finance role, then finance is of little concern to you.
However, the US survey data clearly indicates that most Americans have lost hold of their financial rein because of financial illiteracy.
The percentage of Americans who score 60% on a basic financial literacy test has since 2009 been dropping.
Entrepreneurs and individuals need to be familiar with and understand the meaning of several personal finance vocabulary.
This helps a business conversation flow freely and gives an entrepreneur a professional outlook and also a deep understanding of his business finances and, for an individual, financial insight into managing their finances properly.
Therefore, knowing the financial language of business and how and when to use it is an integral part of financial literacy for every business entrepreneur.
Below are important personal finance vocabulary and terms that will improve your command and understanding of financial and business conversations.
Personal Finance Vocabulary Words That’ll Improve Your Financial Literacy
1. Accruals
This is a business and financial term for defining a business expense incurred but yet to be recorded in the business book. An example of such would be wages and taxes.
2. Accrual Basis
This is a method of accounting in which income is recorded when they are earned, and expenses are recorded when they are incurred.
Accrual basis is adopted mainly by large-scale businesses to monitor the business’s finances easily and maintain financial transaction records.
3. Appraisal
In simple words, an appraisal is a professional opinion of market value. It is quite similar to appraisal in real estate when acquiring a house.
4. Asset
Anything that has value, tangible or intangible, and is business-owned is regarded as an asset. Examples of such are cash in hand, buildings, and equipment.
5. Articles of Incorporation
Articles of Incorporation are legal documentation of a business.
This document states the date of creation of the business, name of business, type of business, and type of business structure and incorporation.
6. Annual Percentage Rate (APR)
APR is the actual cost of a loan on a yearly basis. This includes all interest and fees.
It is the sum-up total of interest that would be paid and to be determined by the initial amount loaned, or the principal, and is shown in percentage form.
In summary, APR shows the actual cost of borrowing in a loan.
7. Balloon Loan
In this type of loan, the repayments plan is structured on a predetermined schedule, and the final weighty payment, or so to say balloon payment, is made at the end.
This type of loan is ideal for thriving small business owners. It gives them the financial pathway to grow their business at the early stage of taking on the loan.
However, business owners considering taking up a balloon loan should be double sure their business can make enough profits to make the last balloon payments as it would be a weighty one.
8. Balance Sheet
The balance sheet is one of the essential business books of a business, for it holds reports that give overview information of the financial state of a business.
It is a book that summarizes the assets and liabilities of a business. In addition, it gives an idea of a business’s net worth.
9. Bankruptcy
Bankruptcy is a federal law that can serve as a tool to individuals or businesses going through a difficult financial phase in a business.
Bankruptcy allows a business a more relaxed ground to get over a debt, completely clear off the bulk of the outstanding debt or being free from the obligation of paying such debts.
Filing for bankruptcy for a business has an adversely negative effect on the credit score of such business; therefore, diligent thoughts should be given on the subjects before a business file for bankruptcy.
10. Bootstrapping
Bootstrapping means the reinvestment of profits made by a business corporation on the business itself.
It is similar to an individual using his personal funds to finance the startup and growth of a business itself.
If such business is becoming stable, the reinvestment of profits made from the business to further the growth of the business is the definition of bootstrapping.
11. Bluechip
Blue-chip is a term often used to describe the stock of companies considered a good investment.
A few examples of blue-chip companies are Disney, Tesla, and PepsiCo.
12. Capitalized interest
This is the interest that is added at varying rates to the balance of a loan.
An example is student loans in which this happen after the forbearance or deferment ends.
13. Certificate of deposit
A certificate of deposit is a financial instrument used in keeping away a certain amount of cash for a certain period and to be later used in exchange for a higher interest rate. CDs returns are guaranteed.
14. Closing date
This is the date marking the end of a credit card billing cycle. The balance that is on your card on the closing date is what you owe on your next bill.
15. Collateral
Collateral is an item, property, or asset that a lender accepts to guarantee or secure a loan from a borrower.
If the borrower does not pay the loan completely, the collateral becomes the lender’s property.
16. Commission
A commission is a fee paid by a financial-services company to a financial adviser when a product is sold to a client by the adviser.
It is also referred to as the fee an investor pays to a broker for completing a financial transaction.
Usually, commissions are determined as a percentage of the cost of the product in question.
17. Debt-to-income ratio
A debt-to-income ratio is a total of your monthly liabilities divided by your earnings for each month before taxes.
Such liabilities could be in the form of mortgages, student loans, credit card debt, etc.
18. Deductible
This is the amount you are required to pay out of your pocket before your insurance coverage comes in to cover the rest.
19. Deferment
Deferment is a loan status permitting you to stop payments on your student loans temporarily.
So if you have a subsidized loan, interest will stop accruing on your balance until the resumption of payments again.
20. Defined-benefit plan
This is a form of retirement plan financed or funded by an employer in which the employer pays a certain amount periodically to the employee once in retirement.
An example of a Defined-benefit plan is pension.
21. Dividends
Dividends are periodic payouts made by companies to investors that own shares in their company.
The source of dividend payouts comes from a company’s earnings.
22. Emerging markets
These are national economies in the developing countries that are steadily growing productively on the international stage.
Investment in emerging markets is a way of splitting your portfolio.
23. Employee stock options
This is a means to purchase a company’s stock below the usual rates.
Most often, employee stock options are part of a proposition for a job’s compensation package.
24. Equity
Equity is your proprietary right to completely have legal control of an asset after you must have accounted for the debt you owe on it.
An example is purchasing a house with a mortgage; in that situation, your equity in the home is the value of the home subtracted from your outstanding loan balance.
25. Escrow
This is an account set apart for the purpose of keeping money for periodic expenses such as property taxes.
An intervenor between the saver and the payee runs the account and deposit the payments.
26. Estate planning
Estate planning refers to the activity of preparing your finances in the event of death or incapacitation.
This involves preparing a will, re-evaluating life insurance policies, appointing a power of attorney, and deciding the inheritors of your assets.
27. Expense ratio
This is a fee charged to shareholders of funds every year. Such funds could be mutual funds, exchange-traded funds, etc.
Investors should be aware of the rate of the expense ratio of their investments so as to avoid their returns being eaten up by fees.
28. Fiduciary
A person or organization acting in the capacity of a financial advisor. The fiduciary is bound legally to be honest with you in all financial matters and act in your best interest.
29. Fee-only financial planner
A fee-only financial planner is a fiduciary whose earnings come from direct compensation from their clients.
Their pay isn’t commission-based on financial products sold to their clients.
30. Federal loans
These are US government-approved loans and have better interest rates than regular loans.
31. Financial Industry Regulatory Authority (FINRA)
These are organizations not under the government but have full authority from the government and regulates brokers to shield and protect investors from being victims of fraud.
32. Forbearance
Forbearance is a loan status that permits you to hold on payments on student loans or mortgages temporarily.
However, you should be aware that during forbearance, interest doesn’t stop accruing on your balance. So, in the end, you end up paying more than you ought to.
33. Garnishment
An official, authoritative, or legal instruction to cut down individual wages to make payment for taxes, child support, and other related debts of such individual.
34. Glide path
This is a description of transfer from a less conservative asset allocation to a conservative one towards the close of a target-date retirement fund’s retirement year.
35. Gross income
The total amount of income of an earning inclusive of wages and any other income before taxes, insurance, and retirement contributions is deducted.
36. Guarantor
A third party in a rental agreement that is brought in by a renter and agrees to pay the landlord in the event the renter is unable to pay rent.
37. Index
This is a tracker that measures the market performance of a specific sector, usually by using a group of different securities to indicate a theoretical investor portfolio.
Examples of indices are the Dow Jones Industrial Average and the S&P 500.
38. Index fund
This is a mutual fund comprised of investments indicating a market index and gives an investor built-in diversification. Their fees are usually very low.
39. (Roth) Individual Retirement Account
Roth IRA is a tax retirement savings plan with an advantage and not tied to an employer.
It is different from the traditional IRA that only permits applicants to contribute money pre-tax and is taxed when a withdrawal is made in retirement.
In the case of Roth IRA applicants, contribution is post-tax and can be withdrawn free from tax fees in retirement.
Related: How To Retire Early In 15 Practical & Easy Ways
40. Itemized deductions
Itemized deductions occur when you take individual tax deductions, such as deducting your mortgage interest instead of the standard deduction.
41. Liquidity
Liquidity is a term to describe how easy it is to convert a particular asset to cash.
42. Living will
A living will is a legal document stating down health measures you want to be taken in the event of you being incapacitated or unable to express your wishes.
43. Loan consolidation
This is the replacement of two or more loans with a larger loan.
This financial tool is applicable to use in a debt situation and in seeking reduction of interest rate or monthly payment.
44. Margin
This is buying investments with funds borrowed from your broker.
To invest on margin, you’d be required to have a margin account. A margin is similar to a loan. You pay back with your profits.
45. Marginal tax system
A marginal tax system is a form of taxation system where taxpayers pay the minimum tax rate on their first dollar earning, and the maximum rate on their last dollar earned.
46. Money-market account
This is a high-interest-rate savings account that necessitates having a higher opening balance and monthly balance than the usual savings accounts.
This type of account permits access through debit-card and cheque-writing.
47. Mutual fund
This is a financial tool that uses money from a single pot from several investors in purchasing a diversified mix of bonds, stocks, and other securities.
48. Net worth
This is the sum-up value of all your assets (wages, income, investments, properties) subtracted by the sum-up total of your debts.
49. Overdraft
These are balance dues when you withdraw an amount of money from an account that surpasses its account balance.
50. Penny Stocks
These are stock shares belonging to small public companies and worth not more than a dollar apiece.
The risk of trading in penny stocks is very much high.
Final Thoughts on Financial Vocabulary
Hopefully, the above personal finance vocabulary and terms would help boost your financial literacy.
In business, we are always learning. The stream of knowledge flows endlessly in every field of endeavors, and that includes the business field.
Therefore, it is important for every individual and entrepreneur in the business world, be it a rookie or an expert, to improve their financial literacy.
It would help distinguish between good and bad financial advice and make savvy decisions.
Personal finance in itself is the concept of money and assets management, savings, and investments.
