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Financial Terms Explained

Financial Terms Explained

By Matt Diehl • April 18, 2018

The bank called my house a liability. Huh?

My boss asked me to pull Q1 statistics. Q-what?

A lender asked for my net income. Come again?

Banking and finance terms can be confusing. In recognition of National Financial Literacy Month, here are some financial terms explained:

Net worth

Have you ever read about a celebrity’s net worth and thought, “Wow, that’s a lot of money. But what does it mean?” It’s a fair question because net worth isn’t just how much money a person has made, it’s the difference between what they own and what they owe.1

To find out your net worth, add up the value of everything you own (house, car, bank accounts) and subtract the amounts that you owe (mortgage, credit card debt, student loan debt). Finding out where you stand can give you a snapshot of your financial situation and help inform future goals for saving and retirement.

Home equity

So, you’ve been paying down your mortgage for years, but it’s not paid off. How much of the home do you actually own? The dollar amount or percentage of your home that you own is called home equity.2 To find the dollar amount, try this equation:

Home’s current value (ex. $300,000) - total debt against the home (ex. $200,000) = $100,000 in home equity

To determine your home equity percentage, just divide your home equity ($100,000) by the market value ($300,000): 33%.3

Quarter - Q1, Q2, Q3, Q4

You may have heard someone at work talk about Q1 earnings or Q3 projections. Although “quality” is a good guess, the “Q” stands for quarter, which references three months of a calendar year.4 The numbers represent each group of months.5 Here’s how the standard four quarters break down:  Q1 - Jan, Feb, Mar; Q2 - Apr,May, Jun; Q3 - Jul, Aug, Sep; Q4 - Oct, Nov, Dec.6

Inflation

If you’ve noticed your budget getting tighter, it might not be your weakness for collectible garden gnomes. The cost of some goods and services, such as clothing, food and housing, increases 1-3% each year.7 This slow but steady rise in price is called inflation.8

To get a clear understanding, picture a balloon. The balloon is the cost of certain goods and services. Then, imagine the balloon inflating 1-3% year after year.   

Fixed and floating interest rates

You’ve been approved for a loan. Awesome. Then the lender asks if you’d prefer a fixed or floating interest rate. You answer them with a blank stare.

This is another situation with a useful analogy. If you want an interest rate that’s anchored down and won’t change throughout the life of a loan, a fixed rate might be good for you.9 This might also be a good choice if you’d like to pay the same amount each month. If you’d like a rate that floats up and down with the market, a floating rate could be the answer.10 However, when considering a floating rate, be aware that it can dip below and also rise above the original fixed rate offer.11

Financial liability

At first glance, “liability” sounds like a serious and scary word. When you find out it’s just a fancy way of describing money you owe to creditors, it’s not so bad.12 Common liabilities include credit card debt, mortgages and car loans.13 The next time someone asks if you have any personal financial liabilities, you shouldn’t have to start your answer with, “Umm….”

Gross and net income

No, this doesn’t mean your income is smelly or nasty. Gross income refers to your total income before taxes or deductions are taken out.14 So if you made $1,000 in one week, your gross income is $1,000. Net income is the money you take home after taxes and deductions.15 To help you remember the difference, think of carrying your take-home pay in a net over your shoulder on pay day. 

Now you’re speaking my language

Understanding terms like these can help you make smart decisions about saving, investing and basic money management. To take your knowledge to the next level, check out these 10 common credit terms defined.

  1. Investopedia. “Net Worth.” Investopedia.com. https://www.investopedia.com/terms/n/networth.asp (accessed April 5, 2018)
  2. Ross, Sean. “How do I calculate how much home equity I have?”. Investopedia.com. https://www.investopedia.com/ask/answers/070715/how-do-i-calculate-how-much-home-equity-i-have.asp (accessed April 6, 2018).
  3. Ross, Sean. “How do I calculate how much home equity I have?”. Investopedia.com.
  4. Investopedia. “Quarter - Q1, Q2, Q3, Q4.” Investopedia.com. https://www.investopedia.com/terms/q/quarter.asp (accessed April 5, 2018).
  5. Investopedia. “Quarter - Q1, Q2, Q3, Q4.” Investopedia.com.
  6. Ibid.
  7. Payne, David. “Moderate Inflation Returns.” Kiplinger.com. https://www.kiplinger.com/article/business/T019-C000-S010-inflation-rate-forecast.html (accessed April 9, 2018).
  8. Payne, David. “Moderate Inflation Returns.” Kiplinger.com.
  9. Investopedia. “Floating Interest Rate.” Investopedia.com. https://www.investopedia.com/terms/f/floatinginterestrate.asp (accessed April 9, 2018).
  10. Investopedia. “Floating Interest Rate.” Investopedia.com.
  11. Ibid.
  12. TheFreeDictionary. “Liability.” Thefreedictionary.com. https://financial-dictionary.thefreedictionary.com/liability (accessed April 6, 2018).
  13. TheFreeDictionary. “Liability.” Thefreedictionary.com.
  14. Investopedia. “Gross Income.” Investopedia.com. https://www.investopedia.com/terms/g/grossincome.asp (accessed April 6, 2018).
  15. Investopedia. “Gross Income.” Investopedia.com.

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