4 Financial Terms Everyone Should Know

Unsecured debt. Compound interest. Net worth. The financial world has its own language, and that can leave you feeling unsure when making decisions. Whether you’ve never heard these terms before or just want a refresher, here’s a look at the financial language everyone should know.

Understanding a personal budget

In its simplest form, a budget is a written plan that helps outline how you spend money. It shows what funds you have available, what you’re purchasing and how much you can comfortably save. On top of that, budgets are also a great tool for financial visibility: Can you cut back in one area to give yourself more breathing room in another? 

 When starting your own budget, remember there’s no single “right” way to format this information. You can download templates from the Internet, use spreadsheets, pull up your favorite word processor or just jot things down on a scrap of paper. As long as you have enough space to track and visualize everything, you can do whatever makes the most sense for how you think about money. 

Bolstering your financial vocabulary

When saving for a big purchase, navigating lending options or planning your future, it’s important to know exactly what you’re dealing with. You’re sure to run into these terms somewhere along the line — but could you define them off the top of your head?

Here are a few words and phrases to add to your financial vocabulary:

Credit score

Perhaps one of the most familiar terms in the world of money, a credit score is a measurement of how you handle debt. It’s based on factors such as the types of credit you have, the length of your credit history, your consistency in repayments and any missed payments. Organizations called credit bureaus keep track of this information and may weigh factors differently, so you may have three separate scores.

Revolving vs. non-revolving debt

Revolving credit is money you can borrow from indefinitely, up to a certain amount (called a credit limit). Credit cards are a common example. Say your credit limit is $5,000; that means you can spend up to that amount with your card — and as soon as you pay it off, you can spend another $5,000.

Non-revolving credit is the opposite. You have a set amount of money that you get once — for example, a car or home loan — and you pay this off over time. When your balance reaches $0, the loan is closed; you would have to open another line of credit to get access to more funds.

Secured vs. unsecured debt

When you take on unsecured debt, the lending organization is essentially “taking your word” that you’ll pay the money. This is often based on the amount you’re borrowing and your credit history. If you don’t pay, the organization would have to file a lawsuit to get their funds back.

A secured debt, on the other hand, requires collateral. That means the lender can take something like your car or home to fulfill the debt if you fail to pay. Fortunately, this kind of agreement often comes with lower interest rates to balance things out.

Net worth

Net worth is an estimate of how much you’re “worth” in the financial world. To calculate it, you’ll need two things:

• Assets: These are all the things you have that are worth money, including real estate, life insurance policies and more.
• Liabilities: These are the opposite of assets and can include bank debt or unpaid taxes.

Take the total dollar value of your assets and subtract the value of your liabilities. This is your net worth.

Want to brush up on more financial literacy topics? Contact a Vectra Bank professional today for all the help you need.