Understanding basic Money Terms is crucial for navigating the world of personal finance. Whether you’re budgeting, saving, investing, or borrowing, a solid grasp of financial terminology empowers you to make informed decisions. This glossary covers key money terms to help you build your financial literacy.
A
Annual Percentage Rate (APR)
The annual interest rate you pay on borrowed money, including fees and other charges. APR provides a standardized way to compare the cost of loans from different lenders.
Asset
Anything of value that you own, such as cash, investments, property, or personal belongings. Assets can be used to generate income, secure loans, or sold for profit.
Automated Teller Machine (ATM)
A machine that allows bank customers to perform basic transactions, such as deposits, withdrawals, and balance inquiries, without needing a teller.
B
Balance
The amount of money in an account at a specific time. It reflects the difference between credits (deposits) and debits (withdrawals).
Bank
A financial institution that accepts deposits, makes loans, and provides other financial services. Banks play a vital role in the economy by facilitating the flow of money.
Beneficiary
The person or entity designated to receive assets or benefits, such as from a life insurance policy, will, or trust.
B
Bond
A debt security issued by a government or corporation to raise capital. When you buy a bond, you’re lending money to the issuer in exchange for periodic interest payments and the return of the principal at maturity.
Budget
A plan that outlines your expected income and expenses for a specific period, typically a month or year. Budgeting helps you track your spending, save money, and achieve your financial goals.
C
Capital Gain
The profit realized from selling an asset for more than its purchase price. Capital gains are subject to taxes, which vary depending on the holding period and tax bracket.
Certificate of Deposit (CD)
A savings account that holds a fixed amount of money for a fixed period, typically ranging from a few months to several years, and earns a fixed interest rate. CDs offer higher interest rates than regular savings accounts but impose penalties for early withdrawals.
Checking Account
A bank account that allows you to deposit, withdraw, and transfer money easily through checks, debit cards, and online banking. Checking accounts are typically used for everyday transactions.
C
Collateral
An asset pledged as security for a loan. If the borrower defaults on the loan, the lender can seize the collateral to recover the outstanding debt.
Credit
The ability to borrow money with the understanding that you will repay it in the future, usually with interest. Creditworthiness is assessed based on factors like credit history, income, and debt levels.
Credit Score
A numerical representation of your creditworthiness, based on your credit history and other factors. Credit scores range from 300 to 850, with higher scores indicating lower risk for lenders.
D
Debit Card
A card linked to your checking account that allows you to make purchases and withdraw cash. Debit card transactions deduct funds directly from your account balance.
Debt
Money owed to another person or entity. Debt can take various forms, such as loans, credit card balances, and mortgages.
Dividend
A portion of a company’s profits distributed to its shareholders. Dividends are typically paid quarterly and can provide a source of income for investors.
E
Emergency Fund
A savings account specifically designated for unexpected expenses, such as job loss, medical bills, or car repairs. Financial experts recommend having 3-6 months’ worth of living expenses in an emergency fund.
Equity
The value of an asset minus any outstanding liabilities. For example, the equity in your home is its market value minus the remaining mortgage balance.
F
Finance Charges
Fees charged for using credit, such as interest and late payment fees. Finance charges increase the overall cost of borrowing.
Financial Aid
Money provided to students to help pay for education expenses, such as tuition, fees, and living costs. Financial aid can come from various sources, including grants, scholarships, and loans.
Foreclosure
The legal process by which a lender takes possession of a property when the borrower defaults on a mortgage. Foreclosure can have severe consequences for the borrower’s credit and financial well-being.
G
Gross Income
Your total income before any taxes or deductions are taken out. Gross income is used to calculate your taxable income and determine your eligibility for certain benefits or programs.
I
Income
Money earned from employment, investments, or other sources. Income can be categorized as earned income (wages, salaries) or unearned income (interest, dividends).
Inflation
The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.
Insurance
A contract that protects you from financial loss in exchange for regular premium payments. Insurance policies cover various risks, such as health problems, car accidents, and property damage.
Interest
The cost of borrowing money, expressed as a percentage of the principal amount. Interest can also be earned on savings accounts and investments.
Investment
An asset purchased with the expectation that it will generate income or appreciate in value over time. Investments can include stocks, bonds, real estate, and other assets.
L
Loan
A sum of money borrowed from a lender with the agreement to repay it with interest over a specified period. Loans can be used for various purposes, such as purchasing a home, car, or education expenses.
M
Mortgage
A loan used to purchase real estate, typically a home. The property serves as collateral for the loan.
Mutual Fund
An investment vehicle that pools money from multiple investors to purchase a diversified portfolio of securities, such as stocks, bonds, and other assets. Mutual funds offer professional management and diversification for investors.
N
Net Income
Your income after taxes and other deductions have been subtracted. Net income represents your take-home pay.
P
Paycheck
A check issued to an employee for wages or salary earned.
Principal
The original amount of money borrowed or invested. Interest is calculated based on the principal amount.
R
Retirement
The period of life after you stop working regularly. Retirement planning involves saving and investing to ensure you have enough income to support yourself during retirement.
S
Salary
Fixed compensation paid to an employee, typically on a monthly or annual basis. Salary is often expressed as an annual amount.
Savings Account
A bank account that earns interest on deposited funds. Savings accounts are generally used for short-term savings goals and emergencies.
Stock
A share of ownership in a company. Stockholders have a claim on the company’s assets and earnings and can potentially profit from stock price appreciation and dividends.
T
Taxes
Mandatory contributions levied by governments to fund public services. Taxes can be imposed on income, property, goods, and services.
