So, you’re not a bean counter. That’s OK. It’s not like everyone can be like the financial wizards at Norton!
No one is born knowing everything and sometimes, the language used in the world of finance can be bewildering – even alienating.
In this episode of New Jersey Bookkeeping Basics: 6 key financial terms everyone should know, you’ll increase your dollars and cents vocabulary. So, the next time one of these terms arises, you’ll be the know-it-all in the room with the definition.
Clue: Nothing to do with a guy named Mort. Amortization happens when you take on a long-term debt like a house mortgage or car loan. It refers to a schedule of payments and how those payments affect the debt you’ve incurred.
The amount includes both the amount borrowed (principal) and the interest owing on that amount (basically a fee you pay the lender for giving you the loan).
Having an amortization table is useful, as it’s the key to understanding how you can pay off your debt more quickly and for understanding the amount of equity you have in (for example) you home.
When you buy a stock, the amount payable to you as a shareholder is a dividend. If you’ve invested in a high-yield stock (one that pays larger dividends each quarter), then you’ll be taxed on that amount as income.
Your money may be better off in a retirement account, which offers more favorable tax benefits, allowing you to more fully benefit.
3. Compound Interest
Here’s one you’ll like. Compound interest refers to aggregated value from interest which grows your initial investment. Basically, it’s the time-honored concept of value held over long periods of time, allowing your money to grow.
4. Net Worth
Net worth is a key metric of your actual wealth. This amount represents the difference between what you hold in savings and investments and what you owe (debt).
Net worth is a great barometer for how you’re really doing. While you may make a lot of money, if you have a lot of debt your net worth will suffer. It lets you know where you’re really at.
5. Credit Score
Your credit score is how financial institutions decide you’re worth the risk of loaning money to. US credit bureaus collect this information to share with those who inquire about your credit history when you apply for a loan. It details your history of lines of credit, loans and how you handle payment.
This factor can make a tremendous difference when seeking a mortgage, but it can affect everything from renting an apartment to getting cable service, especially if your score is poor.
6. Capital Gains/Losses
When you sell something, you either make money or lose it. If you sell something for more than you paid, you gain. If you sell for less than you paid, you lose.
Capital losses represent an income tax deduction, while the converse is true of capital gains.
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