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One of the first steps in taking control of your finances is being able to speak the language. Understanding some key financial terms and concepts will come in very handy when you’re speaking with your bank, a financial advisor, a credit counsellor or another debt professional like a Licensed Insolvency Trustee.
Here are some of the financial terms that you should study up on:
Amortization refers to making regular payments on a loan or paying off your debt through instalments. It includes the principal amount of money you owe plus the interest. Mapping out an amortization schedule can help you calculate how much extra to pay if you want to pay down your credit card debt or student loan debt quickly.
An annuity is a financial arrangement where you get paid a sum of money every year after you’ve invested a certain amount of money over a period of time. A good example to use here is pension plans. Your pension plan is an annuity, because over many years you pay money into your pension fund every month and once you retire, your plan will pay money to you.
APR stands for annual percentage rate. It’s the total amount of interest plus fees that you’ll pay on a loan for the entire year. APR is expressed as a percentage, and it can be very helpful in helping you decide the loan you’re thinking about taking on is worth it or if it’s not a financially responsible decision.
Compound interest is interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods on a loan. In other terms, it’s the interest you pay on your interest.
Let’s break that down a bit further. If the principal amount you borrow is $100 and the interest rate is 10%, at first the value of the loan will be $100 + $10 (which is 10% of $100) = $110. Then it will become $121, because 10% of $110 is $11, so $110 + $11 = $121. Compound interest can increase your debt very quickly if you’re not careful.
A credit report is a summary of your use of credit and debt including credit cards, personal loans and mortgages. The statement has information about your credit activity and current credit situation such as loan paying history and the status of your credit accounts. Lenders use these reports to help them decide if they will loan you money and what interest rates they will offer you. You’re entitled to a free credit report from Equifax or TransUnion once a year.
Your credit score is a 3-digit number that represents 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 the better the chance you have at qualifying for new credit at lower interest rates.
An Emergency Fund is money that you set aside each month to be used when an emergency arises that significantly impacts your finances, such as a job loss, a large vet bill, or your car breaks down. Most experts agree that you should have at least 3 months’ worth of your normal monthly living expenses tucked safely away in a savings account that’s easily accessible in case of emergency.
Inflation refers to how prices rise over time—a sustained increases in prices of goods and services over time. A high inflation rate means that things become more expensive more quickly, so that your dollar won’t stretch as far in the future as it does today. You need to take inflation rates into account when you’re budgeting for long term financial goals.
Interest is the additional money you agree to pay for the privilege of borrowing money from a lender.
Your net worth is your assets (anything you own that has financial value such as money in the bank, your home, your car, your investments, etc.) minus your liabilities (debts that you owe).
In other words, your net worth statement is simply a listing of all that you own and all that you owe. The difference between what you own and what you owe is your net worth.
When you’re talking about your finances, principal means the amount borrowed at face value, without interest. The faster you can lower the principal amount you owe, the less you’ll be paying in interest.
If you’re struggling with your debt and need some help understanding your financial situation, a LIT at Smythe Insolvency can help. We’ll discuss your options with you and provide you with clear next steps on how to move forward and take back control of your money. Give us a call or book your free financial consultation with us now.
Licensed Insolvency Trustee
Greg Best enjoys working with clients to create solutions for their financial needs.
CPA, CA, CIRP
Licensed Insolvency Trustee
Chris Sinclair believes a practical approach is required to solve serious financial difficulties.
Cynthia’s goal is to ensure that every client feels respected and understood and to instill hope that they can get their life back by giving them the fresh start they deserve.