20 June 2022

15 Financial Terms That Everyone Should Know

15 Financial Terms That Everyone Should Know

Studies show that nearly one-fourth of Canadians are uncomfortable talking about money. Not only is this topic often taboo, but it can be difficult to talk about things if you get confused by the terminology.

One way that you can become more comfortable talking about money and banking is by learning more about common financial terms. Do you want help learning more about finance basics?

Keep reading this article for the top 15 essential financial terms to help you learn to talk the talk!


1. Simple Interest

One of the first financial terms you should learn about is simple interest. This type of interest is calculated on the principal amount of a loan or the first deposit in your savings account.

Because this type of interest does not compound, you will never have to pay more interest on the previously accumulated interest. Instead, you will only pay interest on the initial amount that you owed.

This fixed percentage interest rate will be the same for the lifespan of the loan and is much easier to compute.

2. Compound Interest

Compound interest is a bit more complicated than simple interest. Not only is it calculated based on the initial amount, but it also takes into account previously accumulated interest.

Compound interest is beneficial when you are investing, as it will increase your returns and significantly multiply your money. However, it can do the same with debt.

Loans with compound interest will end up costing more and more the longer it takes for you to pay them off.


3. Diversification

Diversification is a technique to lower your risk when you are investing. Rather than investing in a single asset, diversification recommends that you spread your investments through several different asset classes.

These include things like real estate, stocks, bonds, and more.

If the market experiences an issue, diversification will prevent a total loss of your investments! It is unlikely that all of these asset classes will be affected at once, so having several different types of investments will keep you from risking your entire portfolio.


4. Risk Tolerance

Risk tolerance is another term that you need to know if you are interested in investing. Because investing always has some level of financial risk and uncertainty, risk tolerance is how much risk you are willing to take when you invest.

Determining your risk tolerance can depend on many features. This includes your investment background, financial capacity, and how long you want to invest.

High-risk tolerance has the potential to give you huge returns, but it also is much riskier. Low-risk tolerance is a more conservative approach with lower returns and less risk.


5. Liquidity

Liquidity is an important term to understand when it comes to your assets. Having a liquid asset means that it is able to quickly turn into cash without losing its value.

Typically, liquidity will depend on others in the market and how ready people are to buy your specific asset. Having a highly liquid asset will ensure that you are always able to get your money when you need it.

Some of the most commonly known liquid assets include cash or currency, stocks, bonds, and more.


6. Market Volatility

Another important investment term you must know is market volatility. This references when a market has unpredictable or sharp movements in price.

While most people think of this term in regards to prices falling, it can also be used to describe sudden rises in price. Market volatility, especially in the stock market, is influenced by inflation rates, changes to interest rates, and other national or global events.


7. Credit Report

A credit report is important to understand, especially when you want to qualify for a loan. Essentially, a credit report provides a summary of your credit usage. This includes things like credit cards, mortgages, and other personal loans.

It will tell organizations whether you make your payments on time or not, if you miss your payments, and more. They will use this report to determine whether you are a reliable person when it comes to loan applications.

You can get a free credit report each year to learn more about your credit standing.


8. FICO Score

Similar to your credit report, you need to learn more about your FICO credit score. This score is a three-digit number that will show your creditworthiness and can range from 300 points up to 900 points.

If you have a higher credit score, you will have a better chance of qualifying for new credit, better interest rates, and more.


9. Liability

A liability is a debt that you have that you owe to another organization or entity. This includes things like bank loans, credit card debts, and more.

Liabilities are typically a sum of money and are settled over time, whether this is through money, services, or other economic benefits. They are also generally listed in opposition to your assets.


10. Asset

An asset is a resource that has economic value. As an individual, you own an asset because it will provide you with some type of future benefit and can generate your cash flow, reduce your expenses, or provide other benefits.

There are many different types of assets that you can have as an individual. This includes things like cash, your car, equity in a property, or anything else of value. They can be tangible or intangible.

Assets are an important component of your financial stability. You can also have current assets or fixed assets. Current assets are things that are already cash or things that are convertible to cash within a year.

Fixed assets include things that are tangible, like cars or your home. These are more likely to depreciate in value and are less easily convertible to cash.


11. Net Worth

Net worth has to do with both your assets and your liabilities. It is the value of your assets minus your liabilities.

For example, your assets may include things like your house, cars, cash, and other investments. Liabilities may include things like credit card debts, mortgages, and other loans.

Often, net worth is used as an indicator of your financial health.


12. Inflation

Inflation is defined as a decrease in the purchasing power of money. This happens as the price of goods and services rises in an economy and makes the cost of living higher. Currently in Canada, the annual inflation rate hit 6.7%.

Inflation can be caused by a higher production cost, a surge in demand for products, and other world events.

Because inflation affects purchasing power, it means that a dollar today will not be worth as much as a dollar in several years.


13. Income

Income is the amount of money that you earn from working and other investments. When you are working, the total income you receive is your revenue.

However, this is not the total money that you will actually take away. Your net income is the profit you make after you have subtracted your expenses or costs.


14. Expenses

To calculate your net income, you need to know your costs. This includes anything that goes into the cost of living for you or your family.

When calculating your expenses, you must include both your fixed expenses and your variable expenses.

Fixed expenses stay the same each month. These include your rent or mortgage payments, insurance premiums, utilities, and other types of loan payments that you have.

Variable expenses can change each month. It is also known as discretionary spending and includes things like groceries, travel, entertainment costs, and any other miscellaneous costs in your budget.


15. Taxable Income

Finally, you need to learn more about your taxable income. This is your CRA-approved income adjustments subtracted from the total income from your wages and investments.

Some income adjustments include things like interest on your student loans, contributions to your retirement accounts, and other work expenses you might have.

Your taxable income will affect whether or not you are able to qualify for tax deductions or credits.


Want to Learn More About Basic Financial Terms?

Money and banking terms can be confusing to understand and may make you feel uncomfortable talking about finances. By learning more about each of these basic financial terms, it will be easier for you to discuss money and other similar topics with others.

Do you need help learning more about financial definitions or other financial topics? Credito can help! Our team provides fast and easy loans and offers expert financial advice on our website.

Contact us today to learn more about our services and to get help understanding other financial topics!

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