Five financial terms to know – and why
When it comes to the world of finance, the jargon is endless. You’re faced with technical concepts and complicated terminology – much of it shortened to acronyms you have to Google to find out what it stands for. Many of these are terms none of us use on the daily, unless we are in the biz, of course. But there are a few we all should aware of, and I’m going to give you a quick overview:
- Compound interest: This one is usually at the top of everyone’s list – and with good reason, since it equates to what you’re earning on your money. This is the interest you earn on the amount you deposit, plus any interest you’ve accumulated over time. You can think of it as “interest on interest.” It will make your savings grow faster than simple interest, which is calculated on the principal amount alone. Conversely, compound interest when borrowing money is the interest charged on the original amount loaned, as well as the interest charges added to your outstanding balance over time.
- FICO: You see this acronym on countless commercials for free credit reports, and we often think about it when we start car shopping. FICO stands for the Fair Isaac Corporation, the company that came up with the methodology for calculating credit scores. This score is based on several factors, such as payment history, length of credit history, total debt owed and more. Typically a FICO score ranges from 300-850, and the higher the score, the better terms you might be able to take advantage of on your loan or credit card.
- Five C’s of credit: It’s essential to know there is more to it than just a credit score. Character, capacity, capital, collateral and conditions all play a part in what lenders evaluate to determine a loan. These come into play heavily depending on the type of lending situation you’re looking at. An online lender might look more at capacity – that is, your credit score and ability to pay – whereas a local bank will also take character and collateral into consideration.
- Cash flow: According to some, this is one of the most important terms in finance. Cash flow refers to the amount of money “flowing” through your personal finances. Money comes in and then goes out when paying expenses; whatever is leftover is your net cash flow. A positive net cash flow means you have money left after expenses. Negative net cash flow means your expenses are more than your income, which can result in debt.
- Assets and Liabilities: These are the basic building blocks of your personal balance sheet. Assets are what you own that can provide you future economic benefit. Liabilities are what you owe to other parties. Basically, your assets can put money in your pocket, and liabilities take money out.
Emily Mays is vice president/chief administrative officer at Community Spirit Bank in Red Bay, working in finance for 15 years. She is an enthusiastic social media marketer, financial literacy advocate and go local supporter. She lives in East Franklin and has one daughter, Lola.