21 Financial Terms to know in 2021

Spreading financial literacy is one of my 2021 resolutions. So, if learning more about your finances is on your resolution list… keep reading!

Financial Terms: A quick story

When I got my first job in financial services I knew NOTHING about the industry… After training at a bank I became more familiar and curious about finances. It took me time to learn all the bank jargon on top of the financial jargon… and when I got my investment licences and took MBA level investment classes — yup, you guessed it! I learned even more complex words and phrases.

The funny thing is, instead of impressing my clients, it made me more unrelatable. So I started to become quite good at explaining complex ideas to clients and helped them sort through meetings with other members of our team to make better decisions for themselves.

I find this to be a big barrier to personal finance. Most people want to know more about how to find success in their finances- but it can be hard to start when reading about it feels like reading a foreign language. Most schools leave out the basics of personal finance, placing many people behind the ball and left feeling intimidated instead of inspired.

So, here is my New Year’s gift to you… enjoy! Use these 21 terms to jumpstart your financial literacy and gain more confidence this year.

Can you spot 3 ways to build wealth? Let me know!

21 Financial terms to learn in 2021

1. Net Worth:

This is your Total Assets minus your Total Liabilities. In addition, it’s an excellent measure to track as you make your way along your path to financial wellness. I also love using this to make a few other metrics. Want to know more? Read all about your net worth on this blog.

The 5 Steps to Financial Clarity & Success workbook makes processing your net worth easy & automatic. The best part, you can use ONE document to track your finances All. Year. Long!

2. Appreciation:

The increase in monetary value of anything you own. For example: You bought your home in 2013 for $190,000. In 2019 your home was appraised at $250,000. It has appreciated $60,000 or an average of $10,000 per year. This is one way to build wealth.

3. Dividend: 

Money that a company might pay you if you own their stock. Typically paid out 4x/ year. Companies make decisions on if and what type of dividends they pay based mostly on their profits and past dividend payouts. Dividends can be paid in cash or reinvested to buy more stock and are another way to build wealth. Besides looking at a company’s dividend, you can also look at the company’s ‘Dividend Yield.’ That shows the dividend/stock price and is expressed as a percentage and is a quick way to compare dividends between companies.

4. Capital Gains: 

Any proceeds you get from selling an asset (like your home, land, or stock). There are 2 types of capital gains: Long term capital gains are from assets you’ve owned for OVER 1 year and Short term capital gains are from assets you’ve owned for UNDER 1 year. Although taxes vary year to year, Long-term capital gains will always be taxed less than Short-term capital gains.

5. Equity: 

When you hear equity- We could be talking about one of 2 things. Home Equity: The amount of value in your home. Shareholder’s Equity: The amount of value left over for shareholders. This is also an easy way to evaluate a company’s financials…especially if you’re interested in investing in that company.

Owning equity may also give shareholders the right to vote on corporate actions and in any elections for the board of directors.

A home equity example, if the value of your home is $200,000 and your mortgage is $150,000, your equity is $50,000. Some banks will also use a lendable equity to calculate how much money they could lend you on the asset. This could be anywhere from 50%-90% of the asset’s value.

6. Exchange Traded Fund (ETF): 

A security listed on the stock exchanges and can be traded throughout the day just like ordinary stock. Although ETFs trade like one stock- they are actually a bundle of associated securities. They can be made up of domestic or international stocks (companies), bonds (debt issued from companies or the government), or commodities (items that can be traded in bulk like gold, grain or oil). A commonly traded ETF is the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index. ETFs are becoming more popular because they trade for a lower cost than mutual funds, while offering a similar level of diversification.

7. Mutual Fund: 

Mutual funds are similar to ETFs in that they are made up of a ‘basket’ of securities that are typically related (Like a AAA rated bond fund, international stock fund, or a large cap equity fund). The big difference from a ETF is that a Mutual Fund is a professionally managed portfolio — ever picture a rich, wall street-type of a guy… yeah, he’s probably a mutual fund manager! This guy picks out the securities that will be in the fund, as well as how much of each security. This professional management doesn't come for free. Mutual funds charge fees, commonly called ‘expense ratios’ and sometimes commissions. Keep this in mind when looking at the performance of a fund. Another reminder, when you purchase a mutual fund you are putting money into the fund and not actually buying stocks, so instead of a share price, the purchase price of the fund is called the NAV (net asset value)/ share. How do you make money? The fund will typically pay out a ‘distribution’ payment to fund holders every year based on the appreciation of the underlying stocks and dividends received.

8. Annual Percentage Rate (APR): 

The Truth in Lending Act (1968) mandates that lenders disclose the APR to borrowers so that they can easily compare rates. Can you imagine trying to compare a monthly and daily rate on two different credit card or mortgage products — super confusing! Reminder: the APR is NOT the total amount of interest charged over the life of the product.

9. Cash flow: 

If cash is king, then cash flow is…The Queen! Cash flow is what’s left over when you take all your income and subtract out all your expenses and purchases. Usually you look at this on a monthly or yearly basis when you’re making your budget. Earning $10,000 each month doesn't mean much if you spend $9,500. Once you have enough cash flow to cover all your expenses and bills, you are ‘cash flow positive’ and are likely no longer living ‘paycheck to paycheck.’ Now, what you do with your cash flow can dramatically affect how you build wealth. Hoard it in a savings account and you’ll be losing money due to inflation. Do your research, invest and you could retire a millionaire!

10. Credit Limit: 

Simply put- the maximum amount that a lender will let you spend on a revolving line of credit or credit card.

11. Credit Report: 

The report generated for you based on what information lenders, creditors, & the government give to the credit reporting agencies -based on your social security number. There are 3 credit reporting agencies: Transunion, Equifax, and Experian. It is crucial that you look at your report to ensure all information and reporting is correct. A great place to start is annualcreditreport.com.

12. FICO Score: 

NOT the same as your credit score or credit report, FICO is a data analytics company, that takes information provided by all 3 credit bureaus and turns it into your FICO score by a changing set of algorithms. It’s become super popular as more lenders are relying on the FICO score to make lending decisions. Learn more about what goes into the FICO score and how it’s used at fico.com.

13. DTI (Debt to Income): 

This is a simple formula used by lenders to analyze how much of your income you use for debt repayment each month. Typically your DTI should be about or under 40%. For example, if you’re looking for a new mortgage your minimum credit card payments = 200, auto payment = 200, new mortgage payment = 1200. Your monthly income is 3000. In this case your lender would see your DTI is 1600/3000= 53%. Doing this calculation before making a big purchase can help determine if you are ready to take on any new debts!

14. Debt Utilization: 

The amount of money you use on your revolving accounts divided by your credit limit. This Debt Utilization, also called your Debt Ratio makes up about 30% of your credit score, so it’s important to keep it in line. 0%-15% = a great debt ratio, 15%-30%= a good debt ratio and anything over 30% can be viewed as poor depending on the lender and/or product. Expert tip- calculate 30% of each credit card or line of credit you use and make sure you don’t go over that limit. Example: Credit card limit= $5,000 x 30% debt ratio= $1500 maximum spend on this credit card.

15. Co-Signer: 

The 2nd borrower on a loan or line of credit, who is equally responsible for the payment. Yes, equally. It’s a big myth that if you co-sign a loan that you are only partially responsible for payments and that it will not affect your credit….false! Co-signers are generally used when: a couple is generally applying jointly for a product or someone who has little or no credit history needs someone with more experience to get approved. Beware when co-signing, especially for someone who has poor credit. If the bank won’t take the risk, why should you?

16. Amortization: 

Is an accounting technique used to space out the interest and principal payments throughout the life of a loan. Typically lenders will require borrowers to pay more interest up front and pay more principal towards the end of the loan. This is an important concept to keep in mind if you are borrowing for a big purchase. You can find my favorite amortization calculator at bankrate.com.

Ok, I'm going to pause here. The last 8 terms were allllll lending related! Maybe you're looking to purchase or refinance your home. I just posted an awesome video blog detailing the how to know if refinancing your mortgage is right for you-- find it here.

17. Roth IRA/ 401k: 

This is a POST- tax retirement account. So your income is taxed, you put your money in to fund the account afterwards. At retirement time (Age 59.5+) you can take out the principal amount tax free (yay!)and any capital gains will be taxed. If you think you’ll make more money at 60 than you do now…this is for you!

18. Traditional IRA/ 401k: 

This is a PRE- tax retirement account. So you put money in, then your income is taxed. At retirement time (59.5+) you will have to pay income tax on both the principal and the appreciation of the account. If you think you’ll make less money at 60 than you do now… this is for you! Side note — — it’s totally OK and normal to have a mix of both Roth and Traditional funds!

19. Compound Interest: 

The easiest way to think of compound interest is the calculation of ‘interest on interest.’

Albert Einstein called compound interest the most powerful force in the universe, and if you’ve ever seen a compound interest calculator- you’d agree!

It’s how someone who invests 500 every month for 40 years can retire a millionaire! The magic in these calculations… time! If you want to build your own calculator, you will multiply the initial principal amount by one plus the annual interest rate raised to the number of compound periods minus one…. or just play around with this moneygeek.com calculator to see how to get to your goals. Utilizing compound interest is the biggest way to generate wealth! Note — - I typically use a rate of 6% for investment growth. Although slightly lower than overall stock market returns, it’s a conservative estimate that takes into account diversification of assets.

20. Health Savings Account (HSA): 

An awesome way to save for future health expenses, with an added tax benefit! It’s no surprise to anyone that healthcare costs are not decreasing anytime soon. A HSA is for anyone who is covered under high-deductible health plans (HDHPs) to save for qualified medical expenses that are over and above an HDHPs coverage limits and/or exclusions. So, not for everyone. However, if you are relatively healthy and have a low amount of yearly health costs, this could be for you! So what are the tax benefits? You contribute using PRE tax dollars (lowering your taxable income), money you don’t use stays in the account and grows tax deferred year after year, the withdrawls you make — as long as they are qualified — can be taken out TAX FREE — wow! That’s a big one. Side note on this one — the definition of ‘qualified’ is ever changing, so it’s important to keep tabs on these changes and always keep your receipts. For example, during Covid19 the CARES act restored the ability to HSA dollars for certain over the counter drugs and pain medications along with making menstrual care products eligible for the first time ever!

21. Term Life Insurance: 

Life insurance where the premium (cost) and the benefit (what your beneficiaries get if you pass on) are set for a specific amount of time. Typical terms are 10, 20, and 30 years. Although one of the least fun things to think about, it is crucial if your income helps provide for others. It’s one of the first things I ask my clients about because I’ve helped too many people navigate the passing of someone close to them who didn't have a policy or estate plan in place. Some employers offer discounted life insurance- which I would always take advantage of. Otherwise, shop around and make the investment. My best bet on where to start shopping is policygenius.com.

Thanks for taking the time to read through these 21 terms- I hope you learned something new!

If there is a term you want to chat more about, I'd love to hear from you.