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Consumer Tips for Fiscal Fitness

Know your financial vocabulary
Thursday, February 21, 2019

While the financial world is full of acronyms and other terms that can be confusing, it’s important to be well versed. Below is a list of common financial terms that you’ve most likely heard, some more frequently than others, but may not understand their meaning. 

401(k) Plan: A qualified retirement plan through an employer in which eligible employees can make salary deferral contributions on a post- or pre-tax basis.

Adjustable-Rate Mortgage (ARM): A type of mortgage with an interest rate that periodically changes. There may be an initial “teaser” rate, which will go up after a specified period. 

Amortization: A schedule of paying off debt, including the principal and interest, in regular payments over a period of time.

Annual Percentage Rate (APR): The cost of credit, including all fees and interest, expressed as a percentage.

Bear Market and Bull Market: These describe stock market conditions related to investing. In a bear market, securities are falling and investors have a pessimistic outlook on the market as a whole. In a bull market, securities rise faster than historic averages and investors are confident making buys.

Bond: A debt instrument used by corporations, governments and others to generate capital. The issuer owes the holder's debt and is obliged to pay them interest as well as repay the principal at the maturity date. 

Credit Report and Credit Score: A credit report is a summary of a person’s financial history, specifically related to their ability to repay. A credit score is a measure of credit risk based on activities such as credit use and late payments. The higher number, the more creditworthy the person is considered.

Diversification: Spreading risk by investing in a range of investment tools such as securities, commodities, real estate, bonds, stocks, etc.

Fixed-Rate Mortgage: A type of mortgage with an interest rate that remains the same through the term of the loan.

Individual Retirement Account (IRA): Another type of retirement savings account. Unlike 401(k)s, IRAs can be opened by individuals instead of being sponsored by an employer. Individuals can contribute income up to a set maximum dollar amount in a traditional IRA, Roth IRA, Simple IRA or SEP IRA.

Liquidity: The ability of an asset to be converted to cash quickly without sacrificing value or giving a discount on the price.

Mutual Fund: An investment – operated by money managers who invest capital and try to create gains for the investors – made up of a pool of funds from multiple investors who want to invest in securities like stocks, bonds, money market accounts and other assets.

Prime Rate: The prime rate is the best rate available to a bank’s most credit-worthy customer.

Recession: An economic condition defined by a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters. During a recession, the stock market generally drops, unemployment increases and the housing market declines.

Stock: A type of security that signifies proportional ownership in a corporation and represents a claim on part of the corporation's assets and earnings.

Listed above are 15 of the most common financial terms, but there are many more. If you would like in-depth information on any of these (or others not listed) or guidance about the financial impact of one of these terms in a specific situation, your local community banker would be happy to talk with you. 

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Christopher Williston is the president and chief executive officer of the Independent Bankers Association of Texas, the largest state community banking association in the nation. The information above is provided with the understanding that IBAT is not engaged in rendering specific legal, accounting or other professional services. This information is intended to be a helpful guide. If expert assistance is required, the services of a professional person should be sought.