Financial terminology can be overwhelming, and it can be embarrassing to talk to a financial advisor and not be aware of the vocabulary they’re using.
Here are four common financial terms and their definitions.
FOUR Common finance terms and what they mean
- FICO score. The first term you need to know is what your FICO score means. FICO stands for Fair Isaac Corporation, which is the company that came up with a methodology for calculating your credit score. Your score is based on several factors, including payment history, length of credit history, and the total amount of money you owe. The score ranges from 300 to 850, and people who have a score below 620 may have a harder time securing a good interest rate.
- Capital gains. Capital gains are the difference between what something was purchased for and how much it is currently worth. This is most commonly seen in home purchases, but the gain is only on paper until the asset or investment is sold. The other side of capital gains is capital loss, where there is a decrease in the asset value since its purchase.
- Compound interest. Compound interest is interest on an amount of money that you have deposited or borrowed. When you are investing or saving money, the compound interest is earned on your deposit and the interest after that. When you are borrowing, compound interest is charged on the original amount you were loaned and on the interest charges added to your outstanding balance.
- Asset Allocation. Finally, asset allocation is where you choose to put your money. There are three major asset classes, and they are stocks, bonds, and cash. Each of these things responds differently to the market and the economy, and it’s important to pick the ones that line up the best with your goals, risk tolerance, and timeframe.
If you’re new to the financial world, all financial terms, such as FICO score, capital gains, and asset allocation, can seem overwhelming. Still, it’s important to understand these terms to make the best financial decisions for your future. These four terms can help you navigate your finances and understand what you’re doing with your money.