Common Financial Terms

In today’s economy, you need to make sure you understand every aspect of your financial health. This means that you need to understand the common financial terms that most lenders use. There are a few terms that are used over and over, and could make a huge difference in your financial practices.

When looking at your personal finances to see where you can cut back or save more money, you need to look at fixed verses variable expenses. Fixed expenses are expenses that will not change each month. Your mortgage or car payments are examples of a fixed expense. Food costs or utilities bills are examples of variable expenses. These amounts can fluctuate according to how warm or cool you keep your house, how much you buy at the grocery store, etc. Another number you’ll want to calculate is your breakeven point. This is the point where your income exactly equals your expenses. Any income over your breakeven point is extra money to either save or use as discretionary funds. If your income does not equal your expenses you know you need to either reduce your expenses or increase your income somehow.

When you are looking at borrowing money, the terms you need to understand are capital and the interest rate. Capital, or the principal is the amount of money you want to borrow. The interest rate is the amount that it will cost you to borrow that money. Interest rate is usually expressed as a percentage of the capital or period of time (usually a year). Sometimes you’ll hear it expressed as the APR (annual percentage rate). When you are borrowing money, you want that to be as low as possible. When you are investing money, you want that to be as high as possible.