20 Financial Terms Everyone Should Know

Quick Look

  • Understanding the financial terms in this article will enable you to educate yourself in personal finance and make better personal finance decisions.
  • We recommend bookmarking this page for quick reference.
  • This list includes the top 20 financial terms but there are many more you may need to look up from time to time and we recommend Investopedia’s dictionary).


If you want to get the most out of your finances, you need to understand these financial terms.

If you want to get the most out of your finances, you need to understand these financial terms.

Financial terms can be confusing. In fact, one of the most frustrating things about getting started with personal finance is reading an article relevant to your situation and realizing within a few paragraphs you’re lost because of jargon you don’t understand. Or worse, you think the author is saying one thing when she’s really saying something else entirely! 

Read through the list below to make sure you understand these top 20 financial terms. If you read it all in one go and completely understand everything, well done you! But don’t be afraid to refer back as you learn more. We’re confident it will all click into place.

The Top 20 Financial Terms

  • Asset Allocation: This is typically in reference to some kind of investment account that holds different types of assets (e.g. stocks and bonds). The allocation is simply referencing how much of that account is in a particular asset. For example an 80/20 stock/bond asset allocation means 80% of the value of the account is based on its stock holdings and 20% is based on its bond holdings.
  • Compound Interest/Growth: This is when you make interest on interest or when your money grows by using its previous growth. The result is that the money grows faster and faster. Simple example: If you deposit $100 in an account with a 10% interest rate, the first time the interest is paid you’ll get $10. But the second time, you’ll get 10% of your original deposit ($100) plus an additional 10% on the interest you already earned ($10). So you’ll be getting 10% interest on $110 which is $11. It doesn’t seem like a big deal early but given enough time, it can eventually become huge.
  • Credit: Any kind of loan. If you buy something “on credit”, someone else is actually paying and you’re agreeing to pay them back. With most credit cards, if you pay all of it back within 30 days of your credit statement, you don’t pay interest for the privilege of the “mini loan” the credit card company gave you.
  • Credit Score: This is a score meant to approximate your likelihood to pay back credit. It’s sometimes referred to as a “FICO Score” (“VantageScore” is another common reference.)  It’s based on a variety of factors (past credit history, your debt to income ratio etc.). Scores are reported from three agencies (TransUnion, Experian, Equifax – the score from each agency should be within a few points of each other), range from 300 to 850, and the higher your score the better (i.e. “lower”) interest rate you’ll get when borrowing money (e.g. to buy a car, house etc.).
  • Diversification: A way of describing how equally balanced your financial assets are. For example, if you have all your financial assets in a checking account, you have very little diversification. But if you have financial assets spread between checking accounts, real estate you own, stocks you own, bonds etc., you are “highly diversified” between assets. Note however you can also have diversification within assets. For example if you own stock but only own one stock (e.g. Apple) you have low diversification within stocks. But if you own 1,000 stocks, ideally spread out across different industries, you have high diversification within stocks. As a general rule, diversification is a good thing because it spreads risk around (e.g. “not having all your eggs in one basket” as the saying goes).
  • Fund (e.g. “Index Fund”, “Mutual Fund”, “Exchange Traded Fund”): A grouping of assets (typically stocks or bonds). For example a given fund may hold 100 different stocks. If you were to buy one share of that fund, you would own a portion of each of the 100 different stocks in that fund. A great benefit of a fund is that it can help you easily achieve diversification.
  • Gross Income: This is income you make before taxes are taken out. If a company offers you a job and says it pays “$40,000 a year”, they’re referencing the gross income for that job. The amount you actually get will be $40,000 minus taxes (and any other deductions you may have, like healthcare or retirement contributions).
  • Interest: This is money given to you just for putting money in the bank. (When you put money in the bank, in effect you’re actually lending the bank your money…and they like that, so they pay you.) Or if you’ve borrowed money, interest is the extra money you’ll pay for the privilege of borrowing from a lender (bank, credit card company etc.).
  • Interest Rate: The percentage of money given to you for your deposits, or the percentage of extra money you’ll pay if you’ve borrowed. In short, you want a high interest rate when you deposit money and a low interest rate when you borrow money.
  • Liquid Asset: Any type of financial asset that can easily be converted to buy something, or transferred to someone else. For example when someone says “Liquid Cash”, they’re referring to either actual physical bills and coins, or, money sitting in a checking account that could easily be used to pay for something or transferred somewhere else. “Illiquid Cash” might be money in an account that you might have to pay a sizable fee to get. For example, money to some types of retirement accounts can only be withdrawn if certain conditions are met. If those conditions aren’t met, you may have to pay a penalty. Another illiquid asset could be your car because it can’t be directly converted to pay for something else (e.g. you can’t go out to dinner and pay for it by giving the waiter your car’s steering wheel).
  • Minimum Payment: This is the smallest amount you have to pay back for money you have borrowed to be in compliance with the terms from the lender. The most common example would be for your credit card. When you buy $100 of stuff with your credit card, your statement will tell you that you don’t have to pay the full $100. You can simply pay the minimum amount, maybe $15 this month. In other words, the credit card company will be lending you the remaining $85. The catch? You’ll pay interest – often a very very high interest rate – on this lent money. Except in very specific circumstances, you should never just pay the minimum payment.
  • Net Income: This is the money you actually get and can use for your expenses after you’ve paid taxes. (“Net income” on a paycheck from an employer may also have taken out other things like retirement plan contributions etc.) For example, if 30% of your gross income goes to taxes, you may get a paycheck that shows $1,000 of gross income. But your “net income” will only be $700 ($1,000 – 30%).
  • Net Worth: This is the difference between all your assets and all your liabilities. If all your assets include $5,000 in your checking account and $3,000 in loans, your net worth is $2,000. It’s very common when you’re younger – particularly if you have student loans – to have a negative net worth.
  • Overdraft Fee: This is a fee charged by your bank for pulling out more funds from an account than are in the account. If you spend more than what is in your checking account, “overdraft protection” covers the purchase. The overdraft fee is what banks charge for this service. Unfortunately, if you don’t have the funds to quickly replenish the account – not only for what you just purchased but also for the fee amount –  this “protection” can set you on a vicious cycle. In short, call your bank and ask them to refund the fee if you accidentally overdraw it. If it’s the first time (or the first time in a long time) they will usually do it. This is particularly true if you’ve already added funds to the account to cover the overdrawn amount.
  • Principal: This is the “original amount,” typically in a loan. When you start to pay back an interest-bearing loan, some of what you pay goes toward the original amount, the “principal.” The rest of what you pay goes toward the interest. For example, if you have a loan for $1,000, you may “pay back” $100 in month one. But if only $90 went toward the principal and $10 went to interest, your “remaining principal” would be $910 ($1,000 – $90) and not $900.
  • Retirement Account: An account that has special rules (set by the government) regarding things like annual contributions, eligibility, and withdrawals. The most common examples are 401k, IRA, Roth IRA, 403b etc. Technically any account with assets can be used as a way to save for retirement. But special retirement accounts are often used as a primary savings vehicle because of their unique tax advantages.
  • Stocks: Stocks represent a company and are broken up into individual shares of that company. Stocks are also a type of asset class (the “asset” being a company). Anyone can purchase shares in a publicly traded company. When you own a share of a company, you are literally a part owner of that company. The price for a single share of a stock in a company may go up or down. But until you sell your share, you haven’t actually gained or lost anything.
  • S&P 500 Index: This is a grouping of companies that contains stock of 500 of the largest companies in the United States. Since it contains so many important companies, many look at the performance of this index as a gauge for how the broader market is doing. There are different index funds you can purchase shares of that closely mimic the S&P 500 Index.
  • Volatility: This typically refers to how much change there is in a particular asset (e.g. an individual stock), or asset class (e.g. stocks generally or bonds generally) over a given timeframe. For example, an individual stock may lose 10% of value one day only to gain 12% the next. In this sense it is incredibly volatile.

Special Note

If you’re a little surprised by all the “investing-related” terminology, know this: You will not need to become an investing expert to succeed financially. However, investing is a key component of growing your financial assets so it’s important to know the common terms. And don’t forget: MoneySwell has educational content on passive investing strategies that have historically driven incredible value. We’re more than confident you can do it!

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