Finally Decipher Common Financial Jargon: 12 Financial Terms You Need to Know
Admin • July 7, 2023
Are there financial terms you’ve heard so often that you think you understand them but would have a hard time defining? As we navigate financial waters, we often find that we have opportunities to grow our understanding of common financial terms.
While you certainly don’t need to get a finance degree to be successful in your personal finances, you can become well-versed in common terms so you can make informed and educated decisions.
Whether you want to brush up on common financial jargon for yourself, or want to share these with a young adult starting their financial journey, we hope you’ll find value in this easy to understand definitions.
Top 4 Financial Buzzwords in 2023
Since the COVID-19 pandemic, there have been many financial buzzwords flying around in the news. And while you may have a vague understanding of what’s happening, it’s best to clearly understand these financial terms so you can confidently navigate the economy.
- Shrinkflation . This refers to downsizing the amount of product in a particular package (such as a bag of chips) while the price remains the same. Companies know that savvy consumers will notice if the price of an item increases. But consumers may be less likely to notice a smaller amount of the product. This strategy is a response to the rising prices of goods. As a consumer, you can try a different, less expensive brand, compare products per ounce instead of per package, and try shopping at different stores.
- The Fed. Interest rates have starkly risen this year, and we often hear it’s “the Fed” who’s raising them. The Federal Reserve System is our country’s central bank. They are responsible for creating the United State’s monetary policy, regulating banks, operating the country’s payment systems, and maintaining the stability of our financial systems. To combat inflation and avoid a recession, the Fed has consistently risen interest rates ( 10 times since March 2022). This makes it more expensive to borrow money, but more financially beneficial to save money in an interest-bearing account.
- Risk Assessment. The market volatility in the past couple of years has left many consumers concerned about their finances, leading many to reach out to financial advisors for a comprehensive risk assessment. Financial advisors can help determine your level of risk (more on that below!), asset allocations, investment diversification, and risk management strategies.
- Recession. This word has definitely been thrown around this year and last. An official recession is typically declared after the economy is already in one, thus making it hard to predict. Recessions are marked by significantly prolonged periods of decreasing economic activity. Officially speaking, two consecutive quarters of negative gross domestic product. Recessions are typically marked by a decrease in the stock market, high unemployment rates, low consumer confidence, and general fear and apprehension. A great antidote for the uncertainty that can accompany a recession (or talks of a recession) is having a solid financial plan in place with an advisor you trust.
Credit and Loan Terminology
Loans can be a powerful provision for both individuals and businesses. Mortgages often help families buy a home, auto loans help people secure their transportation, credit cards offer flexibility and convenience, and business loans help entrepreneurs start and grow their businesses.
Unfortunately, however, the terminology surrounding credit and loans can make them feel intimidating and overwhelming. Familiarize yourself with these terms so you can be confident and empowered the next time you need to apply for a loan or chat with your credit card company.
- Annual Percentage Rate. This is simply the total annual cost of your loan (including any accompanying fees!) . This comprehensive number allows you to easily shop around for the best price and understand exactly what your annual cost will be. Coupled with the loan’s interest rate, the APR is a powerful piece of data to help you understand the total cost of your borrowed funds.
- Amortization . This is the process of repaying your loan over a period of time. An amortization schedule shows exactly how much of your payment is going toward interest, and how much is going toward the principal. There are handy amortization calculators you can use to show you the total cost of your loan, and even how making extra payments impacts your total cost throughout the loan.
- Secured vs Unsecured loans . There are different requirements for obtaining different types of credit and loans, and a large part of that depends on the type of loan. Secured loans are backed by collateral such as your home, car, or even a cash deposit. These can include personal loans, credit cards, mortgages, home equity loans, auto loans, and business loans. Secured loans typically offer lower interest rates than unsecured loans and have longer repayment terms. Unsecured loans are not backed by collateral and instead are established based on the borrower’s creditworthiness (e.g. income, credit history, and debt-to-income ratio). These can include student loans, credit cards, signature loans, personal loans, and business loans. These types of loans typically have higher interest rates and shorter repayment terms.
- Credit utilization ratio . This ratio, displayed as a percentage, refers to the amount of credit you have available to you versus the amount you actually utilize. For example, if you have a total of $50,000 in credit card limits spread amongst your credit cards, but only use $10,000 of it, your credit utilization ratio would be 20%. A lower credit utilization ratio shows that you can handle having access to a lot of credit while only utilizing a small portion. On the other hand, a high credit utilization ratio shows that you use most or all of the credit available to you (something lenders don’t like to see). Your credit utilization is periodically reported to the major credit bureaus, so it’s important to pay attention and keep your ratio as low as possible.
Investing Terminology
Investing can be an effective tool in personal finance to grow and preserve your wealth. To make wise and prudent investment decisions, you should understand these common investing terms.
- Dollar-cost averaging. This investment strategy involves regularly investing a fixed dollar amount regardless of how much the asset costs or how the markets are performing. It’s a popular strategy for long-term investments and promotes discipline and eliminates the need to continually think about your investment choices. For example, you invest $600 every month into a chosen fund, regardless of how many shares it buys you. In some months, your $600 will buy a lot of shares, and in other months, it might buy you very few. The idea of dollar-cost averaging is that over a long period, your fund purchase prices will even out. Think of it as the opposite of “timing the market”.
- Capital gains. This is the difference between what you bought an asset (real estate, stocks, cryptocurrency, etc.) for and how much you sell it for. Short-term capital gains are when you held the asset for less than a year before selling and long-term capital gains are when you held an asset for more than a year before selling. Most capital gains are subject to taxation. The amount of tax depends on the asset, the holding period (short-term versus long-term), and your tax bracket. A tax professional can help you determine your capital gains tax rate.
- Risk tolerance. All investing carries a certain level of risk and everyone has their own level of risk tolerance. Your financial ability, your mental willingness, and your time horizon (how long you plan on holding your investment) all play into your risk tolerance. A well-balanced, personalized investment plan can help you feel comfortable with the amount of risk you’re taking with your money.
- Rebalancing. When you and an advisor put together your investment strategy, you will allocate your portfolio to reflect your risk tolerance and desired returns. As the market changes, the value of your assets will increase or decrease, causing your desired allocation to become unbalanced. Periodically rebalancing your portfolio to your original allocations will help you maintain your original investment preferences.
Decipher Your Finances with Five Pine Wealth Management
At Five Pine Wealth Management, we love educating our clients so that they can feel empowered in their finances. We know that not everyone has a finance degree but that doesn’t mean you can’t know what’s going on with your portfolio.
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Key Takeaways Teaching financial literacy and family values is often just as important as passing down money. A thoughtful estate plan can help reduce family conflict and support future generations. Starting your estate planning early, before you feel like you need to, puts you in the best position to protect your family and your legacy. A trust can help you control when and how your children receive inherited assets. At some point, the question stops being "do I have enough?" and becomes "what do I actually do with all of this?" For a lot of families, that includes figuring out how to pass wealth to their kids without creating a mess. Leaving money to your children doesn't have to be an all-or-nothing decision. A thoughtful estate plan can help you transfer wealth in a way that reflects your values while giving your children the support they need at different stages of life. The most effective plans usually combine smart legal structures with ongoing conversations about money, responsibility, and family goals. Will vs. Trust One of the first decisions many families face is whether to use a will or a trust. A will outlines how you want your assets distributed and who will oversee the process. It’s an important estate planning document and serves as the foundation of many estate plans. A trust, however, can offer additional control and flexibility. Assets held in a trust can often pass to beneficiaries more efficiently and allow you to establish specific instructions for how and when assets are distributed. Depending on your goals, a trust may also help provide privacy and additional protection for heirs. For example, rather than leaving a child a large lump sum at age 25, a trust could allow distributions over time or for specific purposes such as education, housing, healthcare, or starting a business. That doesn't mean a trust is automatically the right solution for everyone. Some families have relatively simple estates and may find that a will adequately accomplishes their objectives. If you have younger children or adult children who aren't quite ready to manage a large inheritance on their own, a trust gives you options that a will simply does not. The important thing to remember is that estate planning isn't just a decision about who gets what. It's an opportunity to decide how wealth is passed on and what guidance, if any, accompanies it. Structured Inheritance Strategies Many parents are uncomfortable with the idea of leaving a significant inheritance all at once. That concern is understandable. Most people can think of examples where a sudden influx of money led to poor decisions, strained relationships, or unrealistic expectations. Structured inheritance strategies can help address those concerns while still providing meaningful support. Some common approaches include: Distributing a portion of assets at specific ages, such as 30, 35, and 40. Allowing distributions for education, healthcare, or home purchases. Creating incentives tied to employment, entrepreneurship, or other personal goals. Establishing trusts that provide ongoing oversight from a trustee. Funding educational accounts for grandchildren as part of a multigenerational plan. These approaches allow wealth to be transferred gradually rather than all at once. There is no universally correct formula because every family is different. A child who is financially responsible at age 25 may require very little structure, while another may benefit from additional oversight for many years. Whatever structure you choose, the goal should be the same: to give your children a foundation, not a crutch. Legacy Planning is About More Than Money When people hear the phrase "legacy planning," they often think about legal documents, account balances, and beneficiary designations. Those items matter, but many families discover that the most valuable inheritance isn't financial. Your values, family traditions, work ethic, charitable priorities, and approach to money often have a greater impact on future generations than the dollars themselves. Consider this question: If your children received your wealth tomorrow, would they also understand the principles that helped create it? Many parents spend years teaching their children how to drive, prepare for college , choose a career, and raise a family. Yet conversations about investing, taxes, budgeting, and responsible wealth management are sometimes delayed until much later. Financial education doesn't need to be complicated. It can begin with simple discussions about spending decisions, saving goals, charitable giving , investing, and how money supports the life you want to live. The earlier those conversations begin, the more prepared future heirs often become. Preparing Heirs for Financial Responsibility Heirs are often better prepared when they understand both the opportunities and responsibilities that come with inherited assets. That preparation can happen gradually over time. Parents might involve adult children in family financial discussions, explain the purpose of trusts and estate plans, or share the reasoning behind major financial decisions. Some families even hold annual meetings where children learn about family values, charitable priorities, business interests, or long-term planning goals. These conversations are not about revealing every financial detail. Rather, they help create context and understanding. When children know why wealth exists and what it represents, they are often better equipped to manage it responsibly. For families with substantial assets, introducing adult children to trusted advisors can also be beneficial. Building relationships before an inheritance occurs can make future transitions smoother and reduce confusion during an already emotional time. Generational Wealth Transfer A successful generational wealth transfer involves much more than moving assets from one generation to the next. It requires balancing financial support with personal responsibility. Some parents worry about giving too much, while others worry about not giving enough. Most fall somewhere in the middle. The answer is rarely found in a single document or account balance. Instead, successful wealth transfers often combine: A well-designed estate plan. Appropriate use of wills and trusts. Clear communication among family members. Financial education for future heirs. A shared understanding of family values and priorities. When those elements work together, wealth has a much better chance of creating opportunity rather than confusion. Start the Conversation Now Many parents want their children to enjoy greater financial security than they had growing up. That's a worthy goal, but providing an inheritance is only part of the equation. The structure of the transfer matters, but so do the conversations surrounding it and the values passed along. A thoughtful plan can protect family relationships, reduce uncertainty, and increase the likelihood that your wealth will continue supporting future generations in meaningful ways. If you'd like help evaluating your estate plan, discussing inheritance strategies, or creating a comprehensive legacy plan, the team at Five Pine Wealth Management would be happy to talk it through with you. Call (877) 333-1015 or email us today to schedule a conversation. Frequently Asked Questions (FAQs) Q: At what age should I leave money to my children? A: There is no universal answer, but many families use a staged distribution approach, releasing funds at specific ages or milestones, such as completing college or reaching age 30, to give heirs time to build financial maturity before managing larger sums. Q: How can I prepare my children to manage an inheritance responsibly? A: Start having age-appropriate conversations about money, investing, saving, and family values. Introducing adult children to your financial advisors before an inheritance occurs is also worth considering; it makes the transition smoother and gives everyone more time to prepare. Q: Do all families need a trust? A: Not necessarily. Some families can accomplish their goals with a will and beneficiary designations alone. A trust is worth considering if you want more control over how assets are distributed, if your estate is more complex, or if your heirs would benefit from some structure around when and how they receive inherited funds.
