Money has its own language. And it can be intimidating for many people. I understand. In fact, many out there don’t even give themselves a shot at trying to learn. They give up before they start.
But learning a few basic financial words can make a huge difference in anyone’s ability to make good financial decisions and be a better steward of God’s resources. And here’s the thing, I bet you can understand financial lingo better than you think you can.
Let’s start out with five financial words you need to know. Feel free to take your time reading through them until you grasp their basic concepts. You really can understand this stuff. And I promise you, it is worth the effort. Here are the five:
- Compounding. This is also referred to as compound interest. Compounding occurs when the percentage you earn each year is placed on your principal (the amount you contributed). So the next year, your gain is not just based on the principal, but the total amount of principal and whatever gains you had. For example, if you invested $10 and earned 10% over a year, you would earn $1 ($10 x 10%). Now you have $11. But if you earned another 10% the next year, you would not earn $1 but instead $1.10 ($11 x 10%). So after two years you have $12.10. You can check out another post on the power of compounding here.
- Net worth. This is the difference between your assets (the value of what you own) and your liabilities (how much you owe). Obviously, your goal should be to own more than you owe, resulting in a positive net worth. Calculate your net worth by adding up the value of your bank accounts, retirement accounts, home, automobiles, and anything else of significant value. Then, subtract any loans (including the mortgage) and credit card balances. The final number should give you a good idea of your net worth.
- ARM. This stand for “adjustable-rate mortgage.” This word is included because it can really mess up someone’s financial picture if they have an ARM but are unsure how it works. Unlike a fixed rate mortgage, where the interest rate remains constant throughout the entire loan, an ARM’s interest rate can fluctuate both up and down. This will effect your payment. So it is possible that you could find yourself with a monthly payment that is more than you can afford.
- FICO score. This is your credit report card. FICO stands for Fair Isaac Corporation. They are the company who came up with the way to determine a person’s credit score. FICO scores range from 350 to 800. The better score you have, the better deals you will get on items like mortgages. It is also important to note that some employers look at your score prior to hiring, especially if the job deals with finances. You can click here to find out how to increase your credit score.
- Mutual fund. Investing in an individual stock (which is a small slice of ownership in a company) is pretty risky. To reduce this risk, investors pool funds together (hence, “mutual fund”) so that a manager can buy and sell multiple stocks in an attempt to increase the funds’ value. If the mutual fund value goes up or down, your investment in the fund goes up or down as well.
If you still have questions about these money words, feel free to ask them in the below comment section below. Financial terminology can be intimidating. But just knowing some basic terms can improve your future financial decision-making and stewardship.
God has given each one of us something. Let’s steward well.