Staying up-to-date on your financial terms is no easy task. There are so many words to keep track of, it’s almost impossible to keep it all organized. Here are a few defined words to add to your finance tool belt. Keep scrolling for links to our other ABC guides, or go ahead and click through now: A-C and D-L.
Market value: The price a given asset would earn in the marketplace. Market value is largely influenced by the business cycle, and it can fluctuate a great deal over time.
Maturity: The period of time when a financial instrument, such as an insurance policy or security, reaches an end and remains outstanding. When it reaches maturity, the financial instrument no longer exists after it is repaid with interest.
Money market account: An account that often pays higher interest than a typical savings account. It usually limits the account holder’s ability to write checks. This FDIC-insured account has the benefits of both checking and savings accounts but likely requires a higher balance.
Municipal bond: A debt security issued by a local authority, such as the state, county or municipality, to finance capital expenditures like road construction, bridges and schools. These bonds are exempt from most taxes, especially if you live in the state in which it is issued.
Net income: A company’s total profit, which is calculated by subtracting the costs of business from total revenues. This helps measure the company’s profitability over a period of time.
Net worth: The key measure of how much an individual or business is worth. Consistently increasing net worth signifies good financial health.
Options: A representation of a contract sold from one party to another. A call option gives the option holder the chance to buy a security at a certain price. A put option gives the option to sell at a certain price.
Payday loans: A short-term loan given to an individual at a very high interest rate. For a payday loan, the borrower typically writes a post-dated check in exchange for an advanced sum of money in cash. The lender then cashes the check on the borrower’s next payday. Payday loans are really not ideal – they're known to be predatory, with interest rates as high as 500% (yes, you read that right!). Practice sound budgeting skills, Avoid taking out payday loans at all costs, and contact your community bank or credit union before taking on a payday loan.
Prepayment: The payment of an installment or debt before its actual due date. A prepayment can be made for an entire balance or an upcoming payment, such as a monthly rent, credit card or loan payment.
Principal balance: The balance on a loan or mortgage that remains to be paid, not including interest or any other charges.
Private mortgage insurance (PMI): An insurance program that protects lenders if a borrower were to default on a mortgage. Most mortgage lenders require PMI for up to 80 percent of the loaned amount.
Refinancing: The revising of a payment schedule for repaying a loan or mortgage. This often involves replacing an old loan with a new one that offers better terms, such as a lower payment or lower interest.
Roth IRA: A type of retirement account that allows a person to set aside income after-tax. After you reach 59 1/2 years of age, earnings on the account and withdrawals are tax-free. Your employer should explain the different retirement account options.
Routing number: A numerical code that identifies a bank or financial institution to both clear funds and process checks. This number normally appears on a check, and specifies the bank that holds the account from which the funds should be drawn.
Terms: Refers to the lifespan of any investment. For a loan, the term refers to the time it takes for the borrower to make all payments back to the lender.
Traditional IRA: The traditional retirement account to which an individual can make pretax contributions toward investment and allow them to grow tax-deferred. Depending on your income and tax-filing status, these contributions may be tax-deductible.
Savings account: A bank account that allows your savings to grow at a moderate interest rate. Savings accounts often place a limit on the number of transfers and withdrawals you can make.
Stock: Represents ownership in a corporation or claim on a part of its assets and earnings. If you own stock in a company, you are a shareholder. For example, if a company has 5,000 shares of outstanding stock and you own 50 shares, you have a claim to 10% of the company’s assets.
Variable rate: An interest rate that changes or fluctuates over time. Variable rates are based on a benchmark interest rate that shifts periodically. If the underlying interest rises, your interest payment also rises. If the underlying interest rate falls, your interest payment falls, too.
See our other guides: