14 Financial Terms Everyone Should Know

Financial literacy is a valuable skill that can pay off in dividends (pun intended). It allows you to make informed decisions about spending and saving money, avoiding debt, building wealth, and planning for the future. But there are a lot of financial terms out there, and it cannot be obvious to understand what they all mean and why they are essential. We've taken the guesswork out of it for you. Here are 14 financial terms everyone should know.

Build your financial literacy with these 14 financial terms 

The more you build your financial literacy, the better you’ll be able to master your finances.

1. Budget

Your budget is a plan that shows how much money you have coming in and going out each month. And, while we know this term might be a bit obvious, we’d be remiss if we didn’t include it as a starting point. After all, setting a family budget and knowing how to allocate your net income is critical to ensuring you are focusing the right amount on your needs, wants, and savings.

2. Interest

Interest is the cost of borrowing money, expressed as a percentage of the amount borrowed. Try playing with an interest calculator to understand better how much you might pay on your credit card balance, for your installment loan, or if you want to buy a new car.

3. Credit score 

Your credit score is a numerical rating typically generated using the FICO algorithm. Your score will fall between 300 and 850, and a good score falls within the range of 670 to 739. The average credit score in the U.S. is 714.  Credit reporting agencies will report on your spending habits (the balances on your credit cards) and how well you pay your bills to lenders to ensure you will be a quality borrower. To build a good credit score, the key is responsible spending, perseverance, and diligence. Ensure you can pay your bills on time, and don’t bite off more than you can chew.

4. Debt 

Financial institutions look at the amount of debt you have when deciding whether or not to give you a loan. Debt is money that you owe to another person or entity. This includes balances due on installment loans, title loans, credit cards, auto loans, mortgages, etc. As a rule of thumb and to help boost your credit score, it is recommended that you keep your credit card balances to 30% or less of your credit limit.

5. Collections

If you fail to pay a debt on time or at all, there is a risk that the lender or creditor will sell your debt to a third-party collections agency. The collection agency is then responsible for contacting you to demand payment. It may take various actions to collect the debt, such as reporting your delinquent account to credit bureaus, calling or sending letters to you, or even taking legal action to obtain a judgment against you. If your account goes into collections, it can negatively affect your credit score and remain on your credit report for up to seven years. It is always best to manage your budget wisely to ensure you can make monthly payments.

6. Equity 

Equity is the value of an asset less any outstanding debts related to that asset. An example of equity is owning shares of stock in a publicly traded company such as Apple. When you own a company's equity, you are entitled to a portion of its profits and assets. For example, if you own 100 shares of Apple stock, you have equity in the company and are entitled to a portion of its profits and assets based on the number of shares you own. As the company's value increases, the value of your equity (i.e., the value of your shares) also increases.

7. Inflation

A term we hear quite often in the news these days, inflation is the rate at which the general level of prices for goods and services is rising and purchasing power is falling. Consumers must pay attention to the inflation rate as it directly impacts our prices for goods and services, cost of living, and investment returns. Inflation is highly dependent on the nation's economic state. When the economy is flourishing, inflation rates slow and the price of goods do not rise as substantially as they would in a worse economy. 

8. Investments 

An investment is an asset or item purchased to generate income or appreciation. Common consumer assets can include real estate, retirement accounts, education, antique vehicles, collectibles, etc. Investments gain value over time and can be sold/used at higher amounts than when purchased. 

9. Mutual funds 

Mutual funds pool money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. Mutual funds can be an excellent way to grow your wealth. They can be professionally managed and provide diversification (you can invest in stocks, bonds, and other securities to spread your risk and reduce volatility).

10. Stocks

Stocks are another type of popular investment option for consumers. In this case, you purchase shares in the ownership of a company and, as a result, have a legal claim to a part of the company’s assets or earnings. By owning stock in a company, your stock’s value is tied to how the company performs monetarily, or the stock market. If stock in the company is being sold, your stake in the company loses value, and vice-versa if stock in that company is being bought at a higher rate. 

11. Bonds

Bonds are debt security that represents a loan made by an investor to borrow, most often, a government or corporation. Bonds are less risky than stocks as they are less volatile, making them a good investment for retirement planning. Think of a bond like an IOU (I owe you), which indicates a promise to get your money back after a certain period.

12. Asset allocation

You may hear about asset allocation from your investment firm or whoever manages your retirement accounts. Asset allocation refers to dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash, to achieve a specific investment objective, such as saving for your child’s education or your retirement.

13. Risk tolerance

Your risk tolerance is how much uncertainty you will accept to pursue a financial goal. People with a greater willingness to take risks in their investments often opt for stocks, equity funds, and exchange-traded funds (ETFs) - which are an example of a group of assets or stocks being traded together-, while those with a lower tolerance for risk tend to lean towards bonds, bond funds (an investment into groups of bonds and other lower risk items) , and long term investments.

14. Liquidity 

Liquidity refers to one's ability to convert an asset into cash quickly and without significant loss of value. Cash is the most liquid asset because you can use it immediately to pay your bills or make purchases. Stocks are also considered relatively liquid as they can be bought and sold quickly and easily. Conversely, real estate, such as your home or land, is considered less liquid. From finding a buyer to closing the deal. Putting real estate on the market can be a time-consuming ordeal. 

Know your financial terms 

Understanding primary and more complex financial terms is essential to making informed decisions about your money. Whether managing your finances, investing for the future, or seeking a loan or credit, a solid understanding of financial concepts can help you make the most of your resources and avoid costly mistakes. 

*The content on this page provides general consumer information or tips. It is not financial advice or guidance. Each person’s circumstances are unique. The Cash Store may update this information periodically. This information may also include links or references to third-party resources or content. We do not endorse the third-party or guarantee the accuracy of this third-party information. There may be other resources that also serve your needs.