Financial Literacy Basics and Vocabulary

Amortization = The process by which loan payments are applied to the principal, or amount borrowed, as well as the interest on a loan according to a set schedule.

Annual Fee = The amount that credit card companies charge for the use of a credit card.

Annual Percentage Rate (APR) = The finance charge or total amount it costs per year to use credit, calculated as a percentage of the amount borrowed (percentage rate), including interest, transaction fees, and service charges.

Annual Percentage Yield (APY) = The actual interest rate an account pays per year with compounding included; calculated the same way by all banks/credit unions.

Appreciation = A rise in value or price.

Assets = What a person owns, such as cash, stocks, bonds, real estate, and personal possessions.

Automated Teller Machine (ATM) = An electronic machine that bank customers and credit union members can use to withdraw cash and make financial transactions.

Back-end load = A sales charge paid when investments are sold.

Bait and switch = An illegal sales technique in which sells advertise a product with the intention of persuading customers to buy a more expensive product.

Bank = A for-profit company that is owned by its stockholders and provides saving and checking accounts and other financial services to its customers.

Bankruptcy = Legal process for selling most of the debtor’s property to help satisfy debts that can’t be repaid, in exchange for (a) relieving debtors of the responsibility of paying their financial obligations or (b) protecting them while a plan is created and they try to repay debts.

Bond = A formal agreement where you lend money to a borrower who can then use that money for a set period of time. In exchange, you as the lender will get paid a specific amount of interest.

Borrower = an individual, business or government that has received and used something belonging to somebody else, with the intention of returning or repaying it - often with interest in the case of borrowed money

Budget = A plan for managing money, dividing up expected income and expenses among spending and saving options based on personal goals during a given time period.

Capacity = Ability to repay a loan from present income; one of three factors in credit scoring.

Capital = The value of personal items that one owns, including savings, investments, and property, one of three factors used in credit scoring.

Capital Gain = The difference between the purchase price and the selling price when an investor buys a sock and later sells it at a higher price.

Capital Loss = The difference when an investor ends up selling a stock at a lower price than the purchase price.

Cash Flow = Movement of the money you receive and the money you spend.

Certificate of deposit (CD) = a certificate issued by a bank to a person depositing money in an account for a specified period of time. A penalty is charged for early withdrawal from most CD accounts.

Character = Refers to trustworthiness; one of three factors in credit scoring (e.g., paying bills on time shows financial responsibility). Creditworthiness indicating a responsible attitude towards living up to agreements.

Check = Written order directing a bank or credit union to pay a person or business a specific sum of money.

Checking Account = A bank or credit union account that allows withdrawals by writing a check.

Compound interest = a situation in which interest is earned on previously earned interest in such a way that earnings accumulate more rapidly over time

Compounding, or compound interest, Rule of 72 = Earning interest on interest. Rule of 72-how long it takes money to double in value. Divide 72 by the interest to determine the number of years it will take money to double.

Consumer advocates = Individuals or groups that actively promote consumer interest in areas such as health and safety, education, redress, truthful advertising, fairness in the marketplace, and environmental protection.

Cost/benefit analysis, risk/reward relationship = Tool used to choose among alternatives involves weighing the cost of a product or service against the benefit it will provide.

Coverage Limit = The maximum amount an insurance company will pay if you file a claim.

Credit = Amount of money a creditor is willing to loan another to purchase goods and services, based on trust and the expectation that the money will be repaid as promised with interest.

Credit Card = Card that enables holder to charge expenses for purchases or to get money, often with interest; synonymous with “buy now, pay later.”

Credit Limit = The maximum amount of credit a lender will extend to a customer.

Creditworthiness = A measure of one’s ability and willingness to repay a loan.

Credit rating/score = A measure of creditworthiness based on an analysis of the consumer’s financial history, often computed as a numerical score, using the FICO or other scoring systems to analyze the consumer’s credit. A creditor’s evaluation of a person’s willingness and ability to pay debts as judged by character, capacity, and capital; a mathematical model used by lenders to predict the likelihood that bills will be paid as promised.

Credit report = a written record collected by a credit agency that tracks a borrower's credit payments, whether or not these payments are made on a timely basis, and how long the borrower has had various credit accounts

Credit Union = A financial institution owned by its members that provides savings and checking accounts and other services to its membership at low fees.

Debit Card = A card used to pay for goods and services directly from a checking account by transferring funds electronically from one’s checking account to the store’s account to pay for a purchase; also called check cards.

Debt = The entire amount of money owed to lenders.

Deductible = The amount of a loss you must pay out of your own pocket before the insurance company will step in and pay the rest.

Delayed Gratification = The willingness to give up something you want now in order to get something better in the future.

Depreciation = Decline in a product’s value that starts the moment a product is purchased (car).

Diversification = Distributing funds among different types of investments to minimize overall risk.

Dividend = The portion of the profits paid to the shareholders of a company.

Dollar Cost Averaging = The practice of investing a fixed amount into the same investment at regular intervals, regardless of what the stock market is doing.

Earned Interest = The payment you receive for allowing a financial institution or corporation to use your money.

Employee benefits = Additional benefits, beyond a paycheck, offered by employers (e.g., health insurance or pension plan).

Endorse = To sign the back of a check to make it payable to the specified payee.

Expense = An amount of money spent to buy something or do something.

Financial plan, financial planning = Personal financial planning is the process of (a) setting goals, (b) developing a plan to achieve them, and (c) putting the plan into action. Ongoing thinking process to develop an orderly program or blueprint for handling all aspects of one’s money, including spending, credit, saving and investing.

FICO score = a mathematical model that assesses a person's reliability in repaying borrowed funds

Finance charges = the interest paid on unpaid credit balances

Financial institutions = intermediaries that help channel funds from savers to borrowers

Financial literacy = basic financial knowledge, including an understanding of banks and the banking system, financial markets, credit and credit cards, and tax laws, as well as the ability to apply this knowledge in making decisions on how to spend, earn, or save money today to build wealth for tomorrow

Fixed Expenses = Expenses that cost the same amount every time.

Fraud = Intentional misrepresentation of information with the intent to deceive or mislead.

Front-end load = A sales charge paid when investments are purchased and sometimes when dividends are reinvested.

Grace Period = On a credit card, the length of time you have before you start accumulating interest on an unpaid balance.

Gross Income = The total amount of income from wages before any payroll deductions.

High balling = An excessively high offer for a trade-in vehicle.

Identity Theft = When someone uses your name, Social Security number, credit card number, and other personal information without your permission.

Implied warranty = Unwritten guarantee that a product is of sufficient quality to fulfill the purpose for which it was designed.

Impulse purchase = A purchase made on a whim, without using a decision making process.

Income = Any money an individual receives.

Information processing = Analyzing and organizing information for decision making.

Insurance = Risk management tool that limits financial loss due to illness, injury, or damage in exchange for its promise of protection and help.

Insurance premium = The payment a person makes to an insurance company in exchange for its promise of protection and help.

Installment plan = a closed-end loan for a specific product such as furniture or appliances

Interest = Payment for use of someone else’s money; usually expressed as an annual rate in terms of a percent of the principal (the amount owed).

Investment = Setting aside money for future income, benefit, or profit to meet long-term goal; using savings to earn a financial return.

Late Fee = A penalty on all types of credit for making a payment after its due date.

Lender = one who lends; may be an individual, a business or a government

Liabilities = Amount a person owes, such as unpaid bills, credit card charges, personal loans, and taxes.

Liquidity = The ease with which an asset can be converted to cash without serious loss.

Loan sharks = Unlicensed lenders who charge illegally high interest rates.

Loan Term = The length of time you have to pay off a loan.

Minimum payment = the smallest amount a per- son is required to pay in a given month on an open- ended credit account

Money market account = an interest-bearing ac- count that offers limited check-writing privileges. Deposits may be added at any time; some money market accounts limit the withdrawals depositors may make without paying a penalty. Money market accounts are low-risk investments that serve as a cross between saving and checking accounts. Money market accounts offered within the banking system are known as money market deposit accounts. Money market accounts offered by mutual funds are known as money market mutual funds.

Money order = a form of payment that a person can buy for a specific amount and sign over to the person or firm named on the money order. People must pay a fee to obtain a money order. A money order cannot bounce because full payment is needed before the money order is issued.

Mortgage = Loan to buy real estate, such as land or a home.

Mutual Fund = An investment security that is actually a diversified portfolio of equities, bonds, or other securities. Investors purchase shares and can sell them at any time.

Net Income = Also called “take-home pay”; it’s the amount of income left after payroll deductions.

Net worth = The difference between a person’s assets and liabilities.

Open-ended credit = a form of credit that allows a person to borrow funds to make purchases for which there is no predetermined repayment period

Opportunity Cost = Whenever choices are made, the cost of something expressed in terms of what had to be given up to obtain it. The resources used to satisfy one goal that cannot be used for another, i.e., weighing of one alternative against another rather than merely considering the cash price or value of a specific good or service.

Origination Fee = A charge for setting up a loan that is typically associated with home loans.

Payroll deductions = Amounts subtracted from gross income that are withheld by an employer for items such as taxes and employee benefits.

Pay Yourself First (PYF) = Disciplined saving or setting aside money as a regular part of the budget for later spending or investing.

Personal Identification Number (PIN) = The unique pass code number you use to get access to your savings and/or checking account.

Philanthropy = A personal or corporate interest in helping others, especially through gifts to charities or endowments to institutions.

Phishing = An identity theft tool that appears in the form of an E-mail or pop-up message; usually looks like it’s from a legitimate financial institution and prompts you to provide your personal information in order to fix a “problem” with your account.

Points-mortgage = A one-time service charge by mortgage lenders at closing to increase the return on the loan; each point is one percent to the amount of the principal.

Predatory lending = Lending practices which promise loans that are “too good to be true” and pressure borrowers to take loans on the spot. Lending practices include a variety of financial abuses such as excessive fees, penalties for early pay-off of the loan, balloon payments, loan flipping, high interest rates, monthly payments the borrower can’t afford, the unauthorized refinancing of loans. Examples of the practice include predatory mortgages, payday loans, overdraft loans, excessive credit card debt, and instant tax refund loans.

Profit = The difference between the costs required to create a product or supply a service that can be bought with it.

Principal = The amount of money someone is willing to loan you. Also, the amount that is still owed on a loan.

Resources = Human resources are those resources people have within themselves, such as working knowledge, skill, mental effort, motivation, energy. Non-human or external resources include money, time, and equipment.

Rate of return = How fast money in savings account or investment grows.

Return = earnings from an investment, usually expressed as an annual percentage rate

Reverse mortgage = An arrangement in which a homeowner borrows against the equity in his/her home and receives regular monthly tax-free payments from the lender. Also called reverse-annuity mortgage or home equity conversion mortgage.

Revolving credit = an open-ended account with a limit to how much can be borrowed but no time limit for repayment

Risk management = Deliberately and systematically using various strategies for controlling against potential personal or financial loss from pure risks.

Risk tolerance = The amount of uncertainty or possibility of loss the individual can bear.

Savings = Money set aside for short-term goals.

Savings Account = An account you have at a financial institution that helps you accumulate and save money and earn interest at the same time.

Share Account = The credit union term for a savings account.

Share Draft Account = The credit union term for a checking account.

Social security = The federal government’s basic program for providing income when earnings are reduced or stopped because of retirement, or disability. Income is also provided to families when the working parent(s) dies and underage children are a part of the family.

Spending = using income for current consumption

Stock = An investment that makes the investor a part owner of a company.

Stock Market = The place where stocks are bought and sold.

Taxes = A compulsory payment by individual/organizations to the government; fees placed on income, property, or goods to support government programs.

Time value of money = The relationship between time, money, and rate of return (interest), and their effect on earnings growth. The more time, money, and rate of interest, the more money yielded at the end of a period of time.

Traveler's check = a form of check that can be used to obtain cash; the buyer of the traveler's check pays a specific dollar amount to acquire these checks, which are issued in standardized packets by a traveler's check issuer. The checks are written to a person or firm and signed by the person writing the check. Often these come with protection against loss or theft. Traveler's check issuers usually charge a fee when they sell these instruments.

Variable Expenses = Expenses that are not fixed.

Wants = Items that a person would like to have but are not essential for life. Items, activities, or services that may increase the quality of life, but one can live without them.

Wealth-building = Increasing the total value of what one owns; one’s tangible assets using strategies to increase savings and personal asset accumulation, thereby promoting individual/family economic well-being and financial security.

Withholding = Employer deductions from employees’ earnings to pay employees’ taxes.

Yield = The profit from an investment.