
This is a long post, so it’s going to run in 2 parts. Part 2 will run next week. This is a young blog and I feel it is right to set some proper foundation. It will not be presumptuous of me to assume that my main target audience for this blog have minimal interest in personal finance. To be fair, the majority of Americans really don’t pay attention to their finances. But someone who was born and bred in America has probably heard some of the numerous common financial terms often used, even if they don’t know their full meanings. However, to the immigrant, especially one that is still relatively new in this country, most of these financial jargon will inspire confusion.

Most just give up even trying to learn and know what these terms mean. People don’t want to read books on personal finance and investing because most are truly boring and some authors already assume some level of understanding on the part of the reader. Individuals who have a bit of money circumvent this problem by hiring a “financial advisor”. They would tell you they have a “guy” that handles all their money issues. But like Rihanna’s ex-accountant fired back in 2014 when the singer accused him of losing $9 million on his watch, “Was it really necessary to tell her that if you spend money for things you will end up with the things, and not the money?”. He also called Rihanna a financially impaired moron. See what I mean folks? You can’t delegate this stuff, no matter how rich you are. You need to take ownership even if you have a “money guy” helping you out. And it doesn’t have to be hard to learn some of the basics of personal finance so you can manage your money better, and live a more fulfilling life. Managed money behaves better.
Money transcends almost every aspect of our lives and it makes sense to master it. And you will be surprised to learn that when you take control of your finances like a boss, you tend to take control of other areas of your life: spiritual, physical, social, career, intellectual and family. My financial moniker is this: “Debt is dumb, simple is beautiful”. So let’s keep it simple. Here are some of the common financial terms and their meanings. This list is by no means exhaustive.
ACH (Automated Clearing House): This is a national network that allows for transferring funds electronically between businesses, consumers and financial institutions
AGI (Adjusted Gross Income): Your AGI is calculated as your gross income (e.g., what you earn from your job, a pension or from interest on investments) minus certain IRS-specified deductions. You calculate your AGI on Form 1040 when you file your taxes. Your AGI serves as the basis for helping to determine your taxable income (the total amount of your income you pay taxes on) as well as whether you qualify for certain credits or deductions.
ARM (Adjustable Rate Mortgage): This is a mortgage loan where the interest rate is changed periodically based on a standard financial index. ARM’s offer lower initial interest rates with the risk of rates increasing in the future. In comparison, a fixed rate mortgage (FRM’s) offers a higher rate that will not change for the length of the loan. ARMs often have caps on how much the interest rate can rise or fall.
Amortization: This is the process of gradually repaying a debt with regularly scheduled payments over a period of time. Most commonly used in mortgage debts.
Annuities: This is a contract between you and an insurance company in which you make a lump sum payment or series of payments and in return obtain regular disbursements beginning either immediately or at some point in the future. The goal of annuities is to provide a steady stream of income during retirement. Funds accrue on a tax-deferred basis, and like 401(k) contributions, can only be withdrawn without penalty after age 59.5.
Assets: These are things you own which have cash value. Includes things like homes, cars, jewelry, savings and investments. This is the opposite of Liabilities.
Asset Allocation: The process by which you choose what proportion of your investment portfolio you’d like to dedicate to various asset classes, based on your goals, personal risk tolerance and time horizon. Stocks, bonds and cash or cash alternatives (like certificates of deposit) make up the three major types of asset classes, and each of these reacts differently to market cycles and economic conditions. Stocks, for instance, have the potential to provide growth over time, but may also be more volatile. Bonds tend to have slower growth, but are generally perceived to have less risk. A common investment strategy is to diversify your portfolio across multiple asset classes in order to spread out risk while taking advantage of growth
Bankruptcy: A proceeding that legally releases a person from repaying a portion or all debts owed. Bankruptcy damages your credit for 7-10 years and should only be considered as a last resort if you cannot repay your debts. The two commonest types are Chapter 7 bankruptcy (where your responsibility for your debts is cleared entirely; with this kind of bankruptcy you are not required to pay back debts you owe from before your filing) and Chapter 13 bankruptcy (where the consumer must pay off some of their debts over time; the filing records remain on your credit report for 7 years from the discharge date or 10 years from the filing date if it is not discharged; each account included in the filing will remain on your report for 7 years)
Borrower: A person who incurs a loan or debt
Bonds: Commonly referred to as fixed-income securities, bonds are essentially investments in debt. When you buy a bond, you’re lending money to an entity, typically the government or a corporation, for a specified period of time at a fixed interest rate (also called a coupon). You then receive periodic interest payments over time, and get back the loaned amount at the bond’s maturity date. Bond prices tend to move in the opposite direction of interest rates — that is, when interest rates rise, bond prices typically fall. See meaning of Stocks in the part II of this series for comparison.
Budget: This is a spending plan that accounts for your sources of income, all of your monthly and/or annual expenses as well as your future needs and possibilities
Capital Gains: The increase in the value of an asset or investment — like real estate or stock — above its original purchase price. The gain, however, is only on paper until the asset is actually sold. A capital loss, by contrast, is a decrease in the asset’s or investment’s value. You pay taxes on both short-term capital gains (a year or less) and long-term capital gains (more than a year) when you sell an investment. By contrast, a capital loss could help reduce your taxes. Short term capital gains are taxed at your ordinary income tax rates (highest income tax rate is 39.6%) while long-term capital gains are taxed more favorably (maximum tax rate of 20%). Uncle Sam definitely wants people to invest for the long term!
Cash Advance: A cash loan requested from your creditor, usually by using your credit card at an ATM machine or through a loan advance on your paycheck. These loans include special interest rates charged on the amount of the advance
Cash-Out-Refinance: A new mortgage for an existing property in which the amount borrowed is greater than the amount of the previous mortgage. The difference is given to the borrower in cash when the loan is closed.
Charge-Off: This is when a creditor or lender writes off the balance of a delinquent debt, no longer expecting it to be repaid. A charge-off is also known as a bad debt. Charge-off records remain on your credit report for 7 years and will harm your credit score. After a debt is charged-off, it can be sold to a collections agency. To clean your financial history, it’s worthwhile to take care of all your debts including those that have been charged off.
Closing Costs: The amounts charged to a consumer , usually by a lender (bank), when they are transferring ownership or borrowing against a property. Closing costs include lender, title and escrow fees and usually range from 3-6% of the purchase price.
Collections: When a business sells your unpaid debt for a reduced amount to a collection agency (a company that recovers funds owed on a debt that is past due) in order to recover the amounts owed. Credit card debts, medical bills, cell phone bills and utility charges are often sold to collections. Collection agencies attempt to recover past-due debts by contacting the borrower via phone and mail. Collection records can remain on your credit report for 7 years from the last 180 day late payment on the original debt. Your rights are defined by the Fair Debt Collection Practices Act.
Compound Interest: This is interest earned on previously accumulated interest as well as the principal. When you’re investing or saving, this is the interest that you earn on the amount you deposit, plus any interest you’ve accumulated over time. When you’re borrowing, it’s the interest that is charged on the original amount you are loaned, as well as the interest charges that are added to your outstanding balance over time.
Think of it as “interest on interest.” It will make your savings or debt grow at a faster rate than simple interest, which is calculated on the principal amount alone. This is the single most important concept in investing.

Co-Signer: An additional person who signs a loan document and takes equal responsibility for the debt. A borrower may want to use a co-signer if their credit or financial situation is not good enough to qualify for a loan on their own. A co-signer is legally responsible for the loan and the shared account will appear on their credit report. Financial wisdom is that you should never co-sign a loan unless you’re ready and willing to repay the full debt.
Credit Bureau: Also known as credit reporting agencies, these companies collect information from creditors and lenders about consumer financial behavior. This data is then provided to businesses that want to evaluate how risky it would be to lend money to a potential borrower. There are three national credit bureaus – Equifax, Experian and TransUnion.
Credit Report: The individual records of consumer financial behavior kept by credit bureaus and provided to businesses when they want to evaluate potential borrowers. Credit reports include records on: consumer name, current and former addresses, employment, credit and loan histories, inquiries, collection records, and public records such as bankruptcy filings and tax liens. According to the Federal Trade Commission, you are entitled to one free copy of your credit report every 12 months from each of the 3 nationwide credit reporting agencies (mentioned above). You can order online here
Credit Score: A numerical evaluation of your credit history used by businesses to quickly understand how risky a borrower you are. Credit scores are calculated using complex mathematical formulas that look at your most current payment history, debts, credit history, inquiries and other factors from your credit report. Credit scores usually range from 300-850, the higher the score, the better. There are thousands of slightly different credit scoring formulas used by bankers, lenders, creditors, insurers and retailers. Each score can vary somewhat in how it evaluates your credit data. The commonest one people often hear is the FICO score, a specific credit score developed by the Fair Isaac Corporation (FICO). Check your free credit score online. I personally use Credit karma to check my free credit scores monthly
Debt-To-Income-Ratio: The percentage of your monthly pre-tax income that is used to pay off debts such as auto loans, student loans and credit card balances. Lenders look at two ratios: The front-end ratio is the percentage of monthly pre-tax earnings that are spent on house payments. In the back-end ratio, the borrower’s other debts are factored in along with the house payments.
Default: The status of a debt account that has not been paid. Defaults are a serious negative item on a credit report.
Delinquency: A term used for late payment or lack of payment on a loan, debt or credit card account. Accounts are usually referred to as 30, 60, 90 or 120 days delinquent because most lenders have monthly payment cycles. Delinquencies remain on your credit report for 7 years and are damaging to your credit score
Dependent: A person who is financially dependent on your income, typically a child or an adult relative you may support. You may be able to claim certain tax credits or deductions for these dependents on your taxes.
Defined-Benefit Plans: Employer-sponsored retirement plans, such as pensions, in which the employer promises a specified retirement benefit based on a formula that may include an employee’s earnings history, length of employment and age. The employee may or may not be required to contribute anything to the plan. Because of their high costs, many companies no longer offer this type of benefit.
Defined-Contribution Plans: A retirement plan companies may offer as a job benefit, which lets employees contribute some of their own money into an account for retirement. The employer may also choose to match a certain amount of those contributions. The 401(k), 403(b) and 457(b) are the most common forms of defined-contribution plans. The money that goes into these accounts also typically provide a tax benefit, as long as you don’t make withdrawals prior to retirement age (age 59½ or older).
The concluding part of this series (Part II) can be found here.
Were you familiar with all these terms? Did you learn a new term here? Which common ones did I miss? Comment below.
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Wow that was a lot of information. You really should consider writing a book. You have a gift😀
Thanks for stopping by. Make sure to check out the concluding part next Tuesday
Great job as always! I am looking forward to the conclusion
Thanks.
Just like learning other subjects and languages, one should know as much finance terms as possible. Thanks for putting this together. Keep up the awesome job. Looking forward to part 2. I agree with writing a book. Perhaps we can write one together after a year worth of content?
Hmmm, now that’s something to think about. Let’s see how things go after 1 year of blogging…