Have you ever found yourself in a financial-related conversation that leaves you feeling more confused than when you started? You're not alone; understanding banking and financial terminology can be overwhelming. But don't let the topic of money intimidate you.
Whether you are new to the banking world or a veteran with multiple accounts, understanding these 12 terms will empower you to effectively navigate your way through critical financial decisions.
Just looking at these acronyms can make you want to close your computer or lock your phone, but they are not as scary as they may seem. The Federal Deposit Insurance Corporation, or FDIC for short, is an independent agency of the United States government that protects against the loss of deposits if an FDIC-insured bank or savings association fails.
What this means is that the money you deposit into your bank account(s) is protected by the government for up to $250,000 per owner. To ease your mind, since the establishment of the FDIC, every depositor has retained their FDIC-insured money.
In some form or another, we have all encountered the phrase “liquid” regarding finances. But what does that mean? Liquid assets are the possessions you have, whether monetary or physical, that can be easily transferred into cash. When people talk about having liquid assets, they are referring to the ability to quickly move their possessions of value into physical money.
Bonds, in simple terms, are an “I owe you.” Corporations, banks, municipalities, and governments are some of the most common entities that leverage bonds to fund projects with the agreement that the funds will be paid back later.
Examples of projects that may require one of these entities to issue a bond includes, but is not limited to, funding a stadium for a city or town, a corporation funding a new piece of infrastructure, or funding a new highway or airport.
Another way this could be looked at is that the bond distributor is giving out a loan that will be paid back in time.
When receiving a bond, the terms in which the bond is distributed will be discussed before accepting it. The terms include how long an issuer has to pay the debtholder and the interest that will accrue on it over a period of time.
Bonds are also subject to risk based on the state of the economy. When there is high inflation, the interest rates will rise, and therefore the payments on the bond will go up. On the other hand, when the economy is in good standing, interest rates will drop, and the fees due will also lessen.
Securities are a form of tradable financial assets. Securities can also be broken down into a few subcategories, including:
Understanding the securities that one has will help to manage expenses and set you up for financial freedom.
Short for The Federal Reserve System, the Fed is the central banking system of the United States. The Fed is responsible for making policies regarding the economy and combating inflation, which is done by raising interest rates.
Interest rates have a direct impact on the price of goods and services. When the prices for goods and services go up, people are less incentivized to go out and spend their money. This, in turn, helps slow down the economy and prevents inflation from rising.
Another way to think about this is in the context of the value of the dollar. When the Fed recognizes the dollar's value has decreased due to goods and services being priced so high, they are responsible for correcting this.
Capital is defined as the assets available that can be used to pay day-to-day expenses and to fund the growth of an individual or business's financial future. Capital can be financial or physical, and can include an office or factory, equipment, or the existing financial assets of an individual or the business held.
When thinking about capital, it is essential to distinguish that these assets are used to generate more income and are not necessarily the income itself.
Capital can also come from various sources, such as venture capitalists, private loans, business operations, and personal savings.
Fixed rates and variable rates are as simple as they sound. A fixed rate is the interest rate on a loan or mortgage that is fixed for the entire loan term. This means that the interest rate does not change and will stay at the same rate as it was when the loan or mortgage was initially received.
Variable rates, on the other hand, are subject to change. These loans or mortgage rates are tied to either the London Interbank Offered Rate (LIBOR), or the prime rate. The variable rate, in most cases, is calculated as the benchmark rate plus a predetermined margin.
When deciding whether selecting a fixed or variable rate is more financially sound, consider how long it will take to pay off the debt. If the debt takes a long time to pay off, signing on for a fixed rate over ten years may be beneficial since interest rates rise over time. On the other hand, if the debt is paid off quickly, signing for a variable rate may be wise depending on the economy's standing and current interest rates; those rates may drop below the initial market rate.
Loan-to-deposit ratio, or LDR, is a measurement used to determine a bank's liquidity. This ratio is determined by comparing the number of funds it is lending to the funds being deposited into it. This formula determines whether a bank is lending too much compared to what they hold over time.
When the ratio is not balanced, banks can correct the rate at which they are distributing funds and taking on new business to level out if their loans are higher than the deposits they are receiving. The ideal ratio for this is 80% to 90%.
Low vs. high returns relate to investments being made. In practice, you do not want to see low returns since this means your investment is not a strong asset. The goal is to see high returns on what you invest, meaning having a positive ROI (return on investment).
When choosing what to invest in, it is crucial to understand the risk behind the investment. A high-risk or increased risk investment is one in which you put your money in something volatile that does not have a predictable trend that can be followed. An example of this is investing in cryptos or high-interest return bonds.
Good credit is a staple of financial freedom and something everyone wants. But what does having good credit mean? A credit score is a prediction of how likely someone is to pay back a loan on time. This prediction is made based on your credit reports which show the history of your loans and the time it took you to pay them off.
A good credit score, ranging from 670-800, means that you are reliable in paying your loans back on time and, as a result, are more likely to be approved for a loan. The closer you are to the 800 mark, the more a bank will trust you as a borrower.
It is valuable to start building your credit as soon as possible to add value to your stock as a potential borrower.
A lender gives a borrower money on the agreement that it will be paid back within a predetermined time.
Lenders can be banks, friends, companies, or even government branches. Rockland Trust Bank has a team of highly qualified loan officers available to consult on finding the suitable mortgages that fit your lifestyle and help you make the best decisions based on your financial situation.
Balance sheets are a helpful tool for keeping track of your assets, liabilities, and capital. These sheets are used to highlight the expenses one has compared to the income they receive over a period of time.
Creating a balance sheet is a great way to keep track of your cash flow to ensure you’re not spending more than what is coming in. Balance sheets are also vital for corporations and companies in need of a loan. Most lenders will require that a business provides a balance sheet outlining its assets and liabilities when determining whether or not to approve a loan.
Talking about money can elicit a variety of feelings, especially when you may not necessarily understand every banking or financial phrase. Now with a deeper understanding of some of the more commonly used phrases, you can be more confident in taking ownership and action over your financial decisions.
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