I don’t know about you…
But when I signed up for my first credit card, it went a little something like this:
APRs, fees, transactions, payments… reading all these terms felt like reading alphabet soup and hieroglyphics at the SAME TIME.
The same thing with reading the terms for bank accounts, mortgages, and car loans.
The thing is…
Not knowing what these terms mean can screw you over in the long run, especially if you’re signing long-term contracts for multiple years…
Leading to your DEAATTHHH and funeral in the Walmart frozen food section.
Let’s avoid that and make sure you’re not signing your life away by learning financial jargon you’ll see often:
General Finance 💰
- Net Worth
People get this mixed up all the time.
Net worth is NOT how much you have in the bank.
It’s the total value of what you own minus your debt.
So if you own a $50,000 car, a $500,000 home, have $20,000 in cash monies, and have $350,000 in debt, your net worth is… $220,000.
(Yes, Elon Musk doesn’t have $100 billion sitting in a bank account.)
Investing 📈
- Bonds
Bonds are investments in debt – meaning you let a company or government borrow your money for some time and they’ll pay you back with interest.
Most of the time, people buy bonds from the government.
- Capital gains
Capital gains are how much money you earn in an investment.
So if you invest in a stock at $10 and sell it at $50, you make $40.
A capital loss is if you lose money on an investment.
- Annual Percentage Yield (APY)
Annual percentage yield (APY) is how much interest you can make yearly from a savings account.
A high-yield savings account means it has a high yield or higher interest paid back to you.
Calculating how much you make can be a pain and confusing, so it’s best to look up a calculator on Google.
Debt (Credit Cards, Car Loans, Mortgages) 💳
- Annual Percentage Rate (APR).
Annual percentage rate is the cost of borrowing money every year. Brokers make it super confusing to understand how they’re calculated.
Variable APR means your rate can go up or down over time based on an underlying index like the federal rate.
Fixed-rate APR means your rate stays the same once you open the card.
Here’s how you calculate it:
DPR (Daily Period Rate) x Billing Cycle x ADP (Average Daily Balance) = Monthly Interest Charges
Let’s say you have a credit card with a 20% APR.
- To find the Daily Period Rate, divide 20% by 365, the number of days in a year: 0.2/365. You’ll get 0.0548% as a daily rate.
- Your billing cycle is normally the number of days in the month. Most of the time, it will be between 28-31.
- Your Average Daily Balance is your average balance on your card throughout the billing period. If you pay off your card, this goes down. If you spend more on the card, it goes up. For this example, you have an average of $2,000.
Put it all together and you get:
0.0548% x 30 x $2,000 = $32.88 in Monthly Interest Charges.
Yes, I know this is confusing and no one explained to you how it works.
That leads me to my next vocabulary word:
- Minimum Monthly Payment
Some credit cards enforce a minimum monthly payment, no matter how much you’ve spent on the card.
This is to make sure you’re making your payments on time and that you can cover the cost of the debt you’re borrowing.
- Amortization
Amortization is repaying debt in regular installments over a specified period – normally for a car, house, or personal loan.
- Credit limit
A credit limit is the maximum amount of money that can be charged to a credit card. A credit limit is also known as a line of credit, credit line, or spending limit.
- Credit utilization rate (CUR)
Credit utilization rate is a ratio between how much credit you’re using compared to how much you have available.
So if you have a $800 credit card balance and a $2,000 credit card balance, your CUR is 40%.
Man, that was a lot.
Felt like learning vocab words back in middle school and high school.
Thankfully, knowing these terms will help you a lot more than knowing what Ms. Johnson’s list of words means.
(When the f**k would I need to know what “edifice” means!?)
Anyways, there’s a lot more to learn when it comes to financial jargon – especially when there are like 8 types of APR.
But for now, understanding the terms I gave you should help a ton with your current finances and not getting bent over 🙂
Taquitos,
Caleb Hammer
If you’d like to understand more of the financial jargon you need to know. Checkout my class bundle.
With it, you get all three of my classes on budgeting, debt mastery and investing for over 15% off.
Sweet deal if you ask me.
