Are you confused by money jargon? Finance sound like a foreign language? Understanding commonly used words and terms will help you successfully plan for your future needs. Some terms are important for everyone to know, some are relevant depending on your circumstances, and others are just plain interesting. Finance Expert Bruce Sellery is giving you a primer on all of it.
We’re starting with the basics. These terms are universal, and everyone over the age of 10 can benefit from knowing them.
Cash Flow Positive
You’re in the green, baby! This is the financial term for when your income exceeds your expenses. On the other end of the spectrum, “cash flow negative” means you’re losing money.
Annual Interest Rate
This is how much interest you pay on your outstanding balance per year. This can apply to a loan, a mortgage, a credit card or a number of other things. As an example, if you have $3500 outstanding, and the interest rate is 20%, you’ll pay $700 in interest per year.
Interest upon interest. This is where you save and deposit a certain amount of money every month, which collects money at an accelerating rate because the sum you’re earning interest on is growing. If you save $300 from age 45 to age 65, you’ll have $160K. But if you start at age 25 and save the same amount every month you’ll have $800K. Why? Compound interest.
It’s not just for celebrities! Your net worth is what you own, minus what you owe. Assets like a house, belongings and savings add you your net worth. Liabilities like a mortgage, student loans or credit card debt subtract from it. The balance could be positive or negative, and it’s really interesting to see how it moves over time.
Now let’s get a bit more complex. If you’re an investor or looking to invest, these are the terms you need to know.
Management Expense Ratio
Often abbreviated to MER, this refers to the fee you pay on a mutual fund. The average MER in Canada is 2.3%, but some are higher or lower by a few decimals. The decimals add up too; if you save $1,000 per month at 2.3% for 25 years, that’s $85K in fees. If the fee were 3% however, it would cost you an additional $30K – an increase of a third! Conversely, you could save a third with a 1.5% rate.
This is widening the range of investments you have. You don’t want all your eggs in one basket. You want some Canadian companies, some US companies, some in tech, some in banking. If some investments are risky, you wan some that are super low risk.
These are the profits that a company returns to shareholders when they make money. When you buy a stock, you hope it will increase in value over time, paying bigger and bigger dividends. Some stocks will also pay you a dividend every quarter, which is really nice.
Our last definitions are very “moment-specific”. These are the trends we’re seeing in the financial world right now.
This currency gets a lot of press, but what actually is it? It’s a digital type of money that is not supported by a Central Bank. The Canadian dollar is both physical and digital, but it’s backed by the bank of Canada. Some people think Bitcoin is the next great thing, and some think it will go bust. Definitely do your research and talk to advisors.
Another buzz word, particularly around discussions of government. Like individuals, governments have revenue and expenses. When expenses exceed revenue, there is a deficit, which they have to borrow to cover. Essentially, this is governmental debt.
Okay, okay, it’s not technically a financial term, but the company Tesla is up in stock 700% in the last year. The brand designs and makes electric vehicles and is utterly booming right now. There’s a lot of interest in this stock, but be careful if you want to invest in it.
Now that you’re up to speed on what you need to know financially, what terms can you ignore? Anything related to the economy, for starters. You might be interested to know if the economy is growing or not, but you don’t need to know about the durable goods orders, consumer confidence, purchasing managers index. The details are not only a bit of a snore, but aren’t terribly relevant for the average consumer.
One exception to this statement is the consumer price index. It measures the cost of a fixed basket of goods. So if you went to the grocery store and bought exactly the same thing every single month, the price change would indicate the fluctuation of the consumer price index.
And that’s it! You’re good to go off into the world a bit more informed about how it works. Hopefully this guide gave you the information you need to make smart decisions around your finances.
Join the conversation