Ever get overloaded with financial jargon that leaves you thinking WTH while pretending to nod along like you understand everything? You wouldn't be the first, and you won't be the last either. If you're new to the world of finance or simply don't understand every term you hear, worry not. We've got you covered.
25 Financial Terms Everyone Should Know
1. Permanent life insurance
Most people think of life insurance as a single entity where you buy coverage, and your loved ones receive a payout when you die. While that may be true, permanent life insurance offers much more, including tax-free cash accumulation that you can access while you're still alive and fixed premiums.
2. Term life insurance
A term policy is more commonly associated with traditional life insurance. It provides your loved ones with a death benefit should the worst happen. However, it only lasts for a specific amount of time–often between 5 and 30 years–and, unlike a permanent policy, doesn’t offer any benefits while you’re still alive.
3. Liquidity trap
A liquidity trap is when everyone keeps hold of their money instead of investing or spending it. It typically happens when interest rates hit zero or during a recession. The last time there was a fear of a liquidity trap was during the early stages of the coronavirus pandemic.
4. Dead cat bounce
You’ll encounter a dead cat bounce when there’s a temporary and short-lived recovery of asset prices from a prolonged decline, quickly followed by a continuation of the downtrend.
Riders are add-ons for life insurance policies. They allow you to customize your policy, adding benefits or amending terms in the process. With a rider, you can get more coverage or change terms of how the death benefit is paid out.
6. Compound interest
Compound interest is where you earn a percentage of the principal amount plus any previously earned interest. Essentially, it accrues and is then added to the accumulated interest in previous periods.
7. FICO Score
A type of credit score, potential lenders use a FICO score to evaluate whether or not they want to enter a contract with you or your business. FICO scores are made up of a substantial part of the credit report used by lenders to determine credit risk.
This is the process of paying off debt in regular installments over a fixed period of time. For example, a mortgage is amortized with the monthly payments calculated based on what you owe, plus the interest due over the loan course.
Brokers are individuals or organizations that act as an intermediary between you and the lender or insurer. Some brokers are free, though others charge a fee.
Cryptocurrency is a form of decentralized digital currency without any ties to a nation or industry standard. Bitcoin is the most well-known cryptocurrency.
11. Cash value
Cash value is associated with permanent life insurance and lets you build wealth while you're still alive. It runs alongside your death benefit and can be accessed when you're still alive.
Bonds are an investment in debt. For example, when you buy a bond, you're lending money to the entity for a period of time at a fixed interest rate. In return, you receive periodic interest payments over time while getting back the loaned amount at the bond's maturity rate.
Escrow is when you set aside money for a larger expense, such as property taxes. It's an account often held by an impartial third party on behalf of two parties in a transaction.
14. Umbrella insurance
If you’ve got umbrella insurance, then you’ll receive additional liability coverage beyond what your home and auto insurance provide. It’s also handy if you’re at risk of being sued for things like property damage or other people’s injuries.
15. Net worth
Net worth is the difference between your assets and liabilities. It’s determined by calculating all of the money or investments someone has and subtracting all of the debt owed. The result is your net worth.
16. Money-market account
A money market account is a deposit account that pays you interest based on current interest rates in the money markets. They're insured by the Federal Deposit Insurance Corp and the National Credit Union Administration.
This is an employer-offered contribution plan where you contribute money straight from your paycheck (usually pre-tax). It then goes into a tax-advantaged account for retirement. There are several types of 401(k)s available.
18. 529 plan
Getting a 529 plan allows you to take advantage of state-specific tax-beneficial savings so you can save for college expenses.
With a robo-advisor you use an online service that provides financial planning and automatic investing. It’s operated by an algorithm and usually costs a significantly lower fee than if you were to employ the help of a human.
20. Short selling
Short selling is when an investor borrows shares from a lender and sells them straight away because they believe the stock price will go down. If that happens, the investor can buy shares at lower prices and keep the difference.
An index is a tracker measuring the market performance in any given sector, using a group of different securities to represent a theoretical investor portfolio. The S&P 500 and the Dow Jones Industrial Average are the primary indices.
Market volatility is a measure of how fast and how impactful the price of something like stock changes over time. The higher the volatility, the more risk involved for lenders.
This is a term used in business finance that defines a creditor's legal claim to any collateral pledged as security for a loan.
24. Index fund
An index fund is made up of investments reflecting a market index, giving investors built-in diversification.
The premiums are the amount you pay each month for insurance. For example, with a permanent life insurance policy, you pay a premium when you first sign up, and it stays the same throughout the entirety of that insurance.
In conclusion: becoming a financial expert
It’s easy to get overwhelmed with all the financial terms out there, but really, you just need to take your time and ensure you understand the particular details to do with the financial matters that relate to you. Do that, and you can spend less time worrying about jargon and more time focusing on your money goals. You may even want to grow your wealth with a permanent life insurance policy.