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Glossary of Financial Terms

November 14, 2018

One of the subjects lacking from our education system is financial literacy. We are of the opinion basic finance should be taught in schools but most of the time it is not. Part of our role as financial advisors is to educate our clients as much as they wish.

Below are some basic terms listed alphabetically and definitions you may want to share with your children.

Amortization – Debt paid of over a set period of time at regular intervals. The payment is usually made monthly calculated on the amount borrowed plus interest. A mortgage is an example of an amortized loan.

APR – Annual Percentage Rate reflects the interest and any fees incurred on a loan.

ARM – Adjustable Rate Mortgage has a variable interest rate on the amount borrowed. It can rise or decline based on the market and the terms of the loan.

Asset Allocation – Ratio of various asset types used in your portfolio.

Asset Classes – Different type of investments (assets) such as cash, bonds and stocks that are combined in various proportions to create an asset allocation.

Balloon Payment – A high final loan payment in exchange for lower regular repayments. Borrower would need to save to make the higher balloon payment or else risk defaulting on a loan.

Bonds – Also called Fixed Income. A loan usually made to a government or corporation in exchange for interest payments paid at regular intervals. The loan is to be repaid at a specific future date.

Budget/Spending Plan – Tracking your expenses over a period of time to know where your money is going as well as how much you are or can save for the future.

Cash – Money in your checking or savings account. Used for an emergency fund and monthly spending.

Compound interest – Paid on the cash saved/invested and accumulated interest. If you have $100 and receive 2% interest ($2.00), the new balance is $102. The next pay period, you receive interest on $102 (2% on $102 = 2.04). New balance is $104.04. Simple interest would be $2 on $100 for each pay period, not compounded.

Emergency Fund – Usually six – nine months of expenses kept in savings or money market fund to cover unexpected expenses such as car repair, etc.

FDIC Insured – Insurance for deposits should the bank go out of business. Standard coverage is for deposits up to $250,000 per depositor per institution. Offered on bank savings accounts and certificates of deposit (CDs).

FICO Score – Many institutions use this score as a measure of a person’s creditworthiness. An institution may only lend money to people with a certain score or higher. Range is 300 to 850. Components include credit history, amount owed to others, etc.

Money Market Fund – Investment compromised of short-term investment to pay interest and maintain the share price of $1.00. For instance, many money markets offer check writing and may offer higher interest than a savings account. It is not FDIC insured.

Mutual Fund – A basket of securities combined in one mutual fund portfolio. They can be a basket of stocks, bonds, cash or any combination. Example: S&P 500 Index Mutual fund. Buy $1,000 worth of shares – you own the entire S&P 500 companies versus buying $1,000 of a single company’s stock.

Net Worth – The different between what you own (assets) and what you owe (liabilities/debt)

Rebalancing – Based on your asset allocation, you may add or subtract from an asset that is over your target allocation. If your allocation is 60% in stocks and they have increased to 65%, sell 5% and re-allocate it to the portion of your portfolio (such as bonds or cash) that is below your target allocation.

Stocks – Also known as equities. Stocks offer ownership of a company based on the number of shares you buy.


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