15 Important Financial Terms Everyone Should Know

15 Important Financial Terms Everyone Should Know

Taking control of your finances and your life includes understanding some of these financial terms and concepts you will come across now and again.

1.Annual Percentage Rate (APR): Is the total amount of interest plus fees paid on an annual basis on a loan expressed as a percentage. APR is a broader measure of the costs of borrowing money and is also referred to as “Effective interest Rate”.

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2. Annuity: A financial arrangement where you make one or multiple payments in return for fixed regular payouts for a specified period of time in the future. Annuities can be utilized as part of a retirement investment planning.

3. Amortization: Regular installment payments of a debt over a period of time.

4. Balance Sheet: Also known as Statement of Financial Position. Is another financial statement produced by a firm that gives us a snapshot of the company’s financial position at a specific point in time. It summarizes the company’s assets, liabilities and equity at a specific point in time.

A balance sheet works around the formula: Total Assets = Total Liabilities + Owner’s Equity

Liabilities: Are the financial obligations or debts owed by a person or business to creditors or suppliers for products or services.

Assets: Is anything of economic value (tangible or intangible) that is owned or controlled by a person or business including cash, inventory, equipment and receivables.

Equity: Is an owner’s or shareholder’s stake in a business.

5. Expense: Is the total cash outflows from a business.

6. Cash Flow Statement: Also known as Statement of Cash Flows. Describes a company’s cash inflows and cash outflows over a specified time period. It is one of the financial statements produced by a company.

7. Credit Report: Is a summary of your use of credit and debt including credit cards, personal loans and mortgages. It details when you opened your credit facilities, how much you owe, whether you make payments on time or miss payments, how much you use from the credit available to you, credit enquiries on your accounts, and much more. A credit report is used to assess a person’s creditworthiness. You can order a free credit report from Equifax Canada and Transunion Canada once a year. The free report will not include your credit score.

8. Credit Score: Is a 3 digit number that captures your creditworthiness and is based on your history of managing credit and debt. In Canada, credit scores range from 300 to 900 points. The higher your credit score, the better your creditworthiness and you may have a better chance at qualifying for new credit at more competitive interest rates.

9. Emergency Fund: Is money set aside to be used when emergencies arise such as a job loss, medical emergency, or a major expense. It is advised that you have at least 3 months worth of your normal monthly living expenses stashed away in an emergency fund. Emergency funds should be saved in an account where it is readily accessible at short notice such as in a savings account.

10. Inflation: Is sustained increases in prices of goods and services over time. Inflation results in loss of purchasing power meaning that a dollar may not be able to purchase in one year what it can purchase today. The higher the rate of inflation, the lower your purchasing power.

11. Interest: Is the money you pay for the privilege of using money borrowed from a lender or the money earned for taking on risk by giving others the opportunity to use your money either via loans, investments in stocks, bonds, etc.

12. Income Statement: Also known as “Profit and Loss Statement”. It is one of the financial statements produced by a company and shows the company’s revenues and expenses over a particular period. The difference between revenues and expenses reflect the profitability of the firm over that specified period of time.

13. Principal: Can be used in various ways. A popular use is in reference to the initial amount borrowed through a loan, not including the interest owed on the loan. It can also refer to the initial funds you invest in the markets, not including interest or returns earned on your investment. It may also be used to refer to the face value of a bond.

14. Net Worth: What is left after you deduct your total liabilities from your total assets.

Net worth = Total Assets – Total Liabilities.

15. Revenue: Is the total cash inflow into a business.

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