20 financial terms everyone should know

The world of finance can be confusing—especially for people who aren’t financial professionals. But a strong foundation of some financial literacy basics can clear things up.

Read on to learn about 20 common financial terms that everyone should know.

Key takeaways

• Anyone can benefit from an understanding of basic financial literacy concepts.
• A firm grasp of financial basics can help people to better manage their money and define their short-term and long-term financial goals.

Anyone can benefit from a strong foundation in financial terminology. This alphabetical list can serve as the starting point for your journey through financial literacy: 

1. Adjusted gross income (AGI)

Adjusted gross income (AGI) is helpful in understanding someone’s taxable income when filing taxes. AGI is an individual’s total gross income minus any tax deductions. Total gross income may include all types of income, including wages, capital gains and more.

2. Amortization 

Amortization refers to the process of paying off a loan over time on a set schedule. Each month, a borrower will typically pay off part of the principal amount and part of the interest until the total amount is paid back in full.

3. Annual percentage rate (APR)

Annual percentage rate (APR) represents the price you pay to borrow money. It includes the interest rate plus other costs, such as lender fees, closing costs and insurance. If there are no lender fees, the APR and interest rate may be the same.

4. Asset

An asset is anything that possesses economic value. Common assets include things like:

• Cash, including funds in checking and savings accounts
• Investments like certificates of deposit (CDs), stocks, bonds, mutual funds, pensions, and retirement accounts like 401(k)s and IRAs
• Property like homes, vehicles and land
• Jewelry, antiques, art and collectibles

5. Capital gains 

Capital gains are the profits, or “gains,” that an individual makes when they sell an asset for more than they initially paid. These gains can be subject to a capital gains tax, which is a tax levied when an individual sells an asset. 

6. Compound interest

Compound interest is interest earned on top of interest—it’s calculated on both the principal amount and any previously earned interest. Simple interest, on the other hand, is only applied to the principal amount. Compound interest can help someone build wealth and earn more on their investments over time. 

7. Credit limit

A credit limit is the maximum amount you can charge on a revolving credit account—like a credit card. This limit is determined by the issuer, and the borrower can spend up to that limit. Lenders may use a borrower’s credit report to help determine their limit.

8. Credit score

A credit score is a reflection of a person’s creditworthiness and how likely they are to pay back their debts on time. Credit scores are used in lending decisions and can affect other things, too—like rental applications and insurance premiums. FICO® and VantageScore® are the two credit-scoring companies that provide some of the most commonly used scores. The higher the credit score, the better.

9. Equity

Equity is the balance that remains after subtracting liabilities from all assets. It can be used to determine the profitability of a company or an investor’s ownership stake. Equity may also be referred to as net worth or capital.

10. Federal income tax

Federal income tax is a tax levied by the federal government on the income of individuals and businesses. Federal income tax collects revenue for national programs like defense, law enforcement and interest on the national debt.

11. Financial statements

Financial statements are the record of how a business made and spent money and where that money is now. There are four main types of financial statements:

• Balance sheets: Balance sheets give detailed information about a company’s current assets and liabilities.
• Income statements: Income statements give information about how much revenue a company has taken over a specified period of time. Income statements are sometimes called profit and loss statements.
• Cash flow statements: Cash flow statements report on the inflow and outflow of cash from a company.
• Statements of shareholders’ equity: Shareholder equity is what money would be left over after all assets had been sold off and debts had been paid. Companies may retain shareholder equity or pay it out in the form of dividends throughout the year. The statement of shareholders’ equity gives an idea of the changes in shareholders’ interests over a given period of time.

12. Interest rate

The interest rate is the percentage fee paid when money is borrowed or made when money is lent. Interest earned is like bonus money the bank pays you just for keeping money in an account, such as savings. You can also earn interest on investments. Interest owed, on the other hand, is the fee you pay when you borrow money—like when you take out a loan.

13. Lien 

A lien is the legal right to an asset in the settlement of a debt. For instance, a mortgage involves a lien because the house serves as collateral for the loan. If the homeowner fails to pay their debt, the house could be seized. Similarly, if a homeowner doesn’t pay their taxes, the IRS could place a tax lien on the property.

14. Liability

A liability is something that a company or individual owes—typically a debt of money. Common liabilities can include accounts payable, loans, mortgages and more. Liabilities are sometimes contrasted with assets, something that a company or individual owns. 

15. Liquidity

Liquidity is a way of measuring how easily a person can access and use their money. Cash is perhaps the most common liquid asset, but cash equivalents like Treasury bills, Treasury notes and CDs also exist. 

16. Minimum payment

A minimum payment is the lowest amount of money a borrower is obligated to pay back each month on a loan or line of credit. Minimum payments are typically calculated based on monthly balances and can be found on monthly billing statements. Paying the minimum on time keeps the account in good standing and helps the borrower avoid penalties and fees.

17. Money market deposit account

A money market deposit account is a federally insured account that pays a higher amount of interest than a traditional deposit account.

18. Mutual fund 

A mutual fund is a financial instrument that combines money from many investors to purchase stocks, bonds and other securities. Investors buy shares of the mutual fund and are entitled to a portion of the income it generates.

19. Net worth

Net worth is the market value of an individual’s total assets minus their total liabilities. Net worth can serve as an indicator of an individual’s financial health.

20. Peer-to-peer (P2P) lending

Peer-to-peer (P2P) lending uses online platforms to directly connect borrowers with individual lenders. Instead of taking out a traditional loan from a bank or credit union, you borrow money from individual investors who are registered on a P2P lending platform. These platforms typically rely on automated systems and algorithms to assess applicants’ creditworthiness, determine interest rates and set loan terms. P2P lending might have looser eligibility requirements for borrowers but higher fees and interest rates than loans from a traditional financial institution do.

The financial world can get complicated quickly. But when you learn the basics, you can develop a solid foundation for setting and achieving your financial goals.