50 Personal Finance Terms Everyone Needs To Know

Do you ever go to the bank but don't understand what the banker is talking about? What about talking to a realtor, but you don't get what they are saying.  Do you get to understand the personal finance terms being used by your insurance agent?

It is important to understand how common personal finance terms apply to your financial life. With this knowledge, you will have the power to take control of your finances. If you are confused about the meaning of assets, or liabilities, income, or any other finance-related word, I will break it down for you. 

Everyone needs to know the basic financial terms. Knowing the personal finance glossary will help your investment and money management.

Here Are 50 Personal Finance Terms You Need To Know

Personal Finance Terms About Banking

1.Savings Account

A savings account allows you to accumulate interest on funds you’ve saved for future needs. Interest rates can be compounded on a daily, weekly, monthly, or annual basis. Savings accounts vary by monthly service fees, interest rates, the method used to calculate interest, and minimum opening deposit. 

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2. Current Account

A checking account offers easy access to your money for your daily transactional needs and helps keep your cash secure. Customers can use a debit card or checks to make purchases or pay bills.

3. Interest Rate

The interest rate will be the percentage amount that your lenders will charge for borrowing your money. The interest you have to pay on a loan will be calculated based on the interest rate.

4. Compound Interest

Compound interest is an interest that is applied on top of interest. You can also think about calling this a prominent one among personal finance terms.

The interest and capital amount will be subjected again to the second interest rate to calculate the compound interest. Compound interest can be referred to as “interest on interest.” Take a look at the compound interest calculator.

5.  Assets

Assets are all the things that you own outright. They can be a current asset or a fixed asset.  Common assets include cash, Stock, paid-off Cars, Inventory, paid-off mortgage, and stocks.

6.  Liabilities

Liabilities refer to the debt that you owe. They include student loans, car notes, mortgages, and even credit card debt.

7.  Net worth

Net worth is a measure of the wealth of an entity, person, corporation, sector, and country. It is the difference between your assets and liabilities. Net worth is one of the best personal finance terms everyone should know. 

8.  Money market account

A money market account is a checking or hybrid savings account that will pay higher interest to you than an ordinary savings account. However, you will need to maintain a high account balance to keep such an account.

9. Capital Gain / Loss

When you sell an investment that has increased its value, your profit is called a capital gain. Depending on your income, the type of asset, and the time you had it, you may owe taxes on the proceeds of the sale, the Bank rate explains. This can be real estate or stocks. On the other hand, capital loss decreases the asset’s or investment’s value. A capital loss can reduce the amount of taxes you owe.

10.  Fixed Interest Rate

A fixed interest rate is a constant rate that applies to liability, such as a loan or a mortgage. It can be applied for the entire term of the loan or only for part of the term, but it remains the same for a certain period.

11. Variable Interest Rate

Variable interest rates are based on a benchmark typically linked to a market interest rate. As that benchmark increases or decreases, the variable interest rate adjusts accordingly.

12. Loan 

Amount of money borrowed at a specified interest rate.

13. Collateral 

An asset is promised as collateral for a debt so that if the debt is not repaid as agreed, the lender can collect the security and sell it to recover the money owed on the debt.

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Personal Finance Terms About Your Income

14. Gross Income 

Gross income will be the amount of money you make or on your paycheck before you pay taxes or go ahead with any other deductions. You will often be able to see this written on the financial statements as AGI. AGI refers to adjusted gross income.

15. Net Income

Net income is the take-home amount that you will be getting. In other words, it will be the amount of money that is left in the paycheck when all the deductions are made.

Personal Finance Terms About Insurance

16. Insurance Premiums

An insurance premium is the amount of money paid to an insurance company for the financial protection of an asset such as a house, a car, or your health. It can be paid monthly, quarterly, or annually.

17.Contribution Plan

A defined contribution plan refers to a retirement account such as 401 (k), 403 (b), or a similar retirement plan offered by an employer to help employees save for retirement.

18. Term Life Insurance. 

A type of policy that provides coverage during a certain period, usually 10 to 30 years. This type of policy guarantees a payout (death benefit) within a specified term. In case there was no death, the policy expires with no value.

19. Whole life insurance or Permanent Insurance 

This type of life insurance policy doesn’t expire, guaranteeing a death benefit and possible cash accumulation. This is one of the personal finance terms I recently wrote about so you can understand which type of policy is best for you.

Credit and Debt Terms

20.      Debt consolidation

Debt consolidation is the process where you combine multiple debts that you have into a single debt payment. This will help you to reduce the overall interest rate that you have to pay on the debts.

21.      Credit utilization rate

This is the difference between the total credit balances that you have and the total credit limit. This is one of the most important parameters that is used when calculating the credit score.

22.      Credit score

A credit score refers to the overall health of your credit status. Lenders tend to take a look at it and understand how you are to make loan repayments. Furthermore, when calculating the credit score, different factors, such as your debt payment history, age of credit, and the amount you owe will be considered. Credit scores range from 300-850; the higher the score, the better. 

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23.      Refinancing

Refinancing is the process where you go ahead and replace a loan that you have with another one. Most people do this to receive a better interest rate.

Investing Terms

24.      REIT

REIT stands for Real Estate Investment Trust. They provide people with the chance to invest in income-generating commercial real estate properties.

25.      ROI

ROI stands for Return on Investment. This is the parameter that determines the return that you receive out of an investment that you made.

26.      Mutual funds

Mutual funds refer to a professionally managed portfolio of securities owned by people who purchase shares of the fund. However, there are pros and cons when choosing mutual funds or ETFs 

27.      Micro-investing

Micro-investments are small-scale investments. If you are investing a small amount of money, you can call it a micro-investment.

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21.      Liquidity

Liquidity refers to the ease that you have to get money in your hands. Likewise, it can also refer to the ability that you have to sell an asset without creating an impact on its price.

28.  Dividends

When you invest in a company with REITs or stocks, the dividend will be the amount you will pay once the company earns a profit from your investments.

29.  Diversification

This is a process where you go ahead and invest in many different sectors and industries. To reduce the overall risk associated with investments, it is a  common investment strategy where you diversify your portfolio across multiple assets. In order words, you spread out risk while taking advantage of growth.

30.  ETF

ETF stands for Exchange Traded Fund. This is marketable security, which is tracking a stock index or any other securities bundle. It will provide you with automatic diversification.

31.  Asset Allocation

The process by which you choose what amount of your portfolio you would like to devote to various asset classes, based on your objectives, personal risk acceptance, and time horizon.

32 .Bonds

Bonds, commonly known as fixed-income securities, are essentially debt investments. These can be company or government bonds. 

33. Stocks

Having stock in a company grants you some level of ownership of the company. When you buy shares, you become a shareholder of the company, which gives you a claim in the company. More so, stocks are sometimes called equities or shares. 

34. Rebalancing

Rebalancing is the process of buying or selling investments overtime to maintain the desired asset allocation.

Personal Finance Terms About Real Estate

35. Amortization

This is the process of paying your debt in regular installments for a fixed period of time. For example, the mortgage you pay monthly is calculated using the amortization method on the amount you borrow.

36. Escrow 

An impartial third party maintains an account on behalf of two parties in a transaction. An escrow account can also hold money that will later be used to pay your homeowners insurance and property taxes.

37. Private Mortgage Insurance

It is a type of insurance that mortgage lenders require when home-buyers provide a less than 20 percent down payment. It is also known as PMI. 

38. Fixed-rate Mortgage

A mortgage carries a fixed interest rate for the loan's entire life, but there are both pros and cons compared to ARM. 

39. Adjustable rate mortgage 

These are mortgages with interest rates that the larger market rates determine rise and fall and. Also, ARMs usually start at a fixed rate for a short period of time, resets annually.

Other Personal Finance Terms

40: Credit 

The purchase of goods or services in the present with the promise to pay in the future, with money you still plan to earn.

41. Creditor 

Someone you owe money to. This person can be an individual, a firm, government. 

42. Debtor

Someone who owes money to another person. The person may be an individual, a firm, a government, a company, or another legal person. Debtors sometimes refer to a borrower. 

43. Arrears 

Arrears the past due amount owing.

44. Layaway 

A method of paying for merchandise in small amounts and receiving the goods at a later date. Furthermore, merchandise is set aside for the client until it is paid for in full.

45. Budget 

An expense plan that takes into account your sources of income, all your monthly and annual expenses, as well as your future needs.

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46. Guarantor 

A person who stands in for another's contract or who warranty to pay a sure debt if the original borrower defaults.

47. Liquid Assets 

Assets that can be turned into cash easily, term deposits.

48. Joint Debt 

A debt that is agreed to by two individualists. Each debtor is fully liable for 100% of any amount owing.

49. Garnishment 

It is a legal order to withhold money from your paycheck and revoke it to another party, such as a creditor.

50.  Itemized Deduction

A qualified expense that the IRS allows you to subtract from your AGI helps reduce your taxable income.

Final Thought

Financial literacy is something that we all should be aware of. It will provide us with the opportunity to take control of our finances in a better way and achieve numerous positive results that come along with it. Try to understand the basic personal finance terms and glossary as you embark on your personal finance journey.

Michael launched Wealth of Geeks to make personal finance fun. He has worked in personal finance for over 20 years, helping families reduce taxes, increase their income, and save for retirement. Michael is passionate about personal finance, side hustles, and all things geeky.