In honor of Financial Literacy Month, let’s go over some key money terms that everyone encounters at some point but that many don’t understand.
Compound interest is essentially interest on interest. It’s the interest earned on the combined total of the initial deposit, plus the interest payments you’ve earned over time, plus any additional deposits you make on the account. At a credit union, members earn dividends on savings instead of interest, but the benefits of compounding work the same. When it comes to saving or investing, the power of compounding helps your money grow.
Your net worth is the difference between your assets and liabilities, meaning the difference between the money you have—whether it’s in your deposit accounts, investments or the value of your home—and the money you owe. Many Americans have a negative net worth, especially those saddled with a large amount of student loan debt, but a high net worth is an indicator of strong financial health, so working toward raising your net worth is a good goal to have.
Your FICO score (short for Fair Isaac Corporation score) is the most common type of credit score lenders use to assess your creditworthiness. It’s determined by your payment history, the amount you owe, the length of your credit history, your credit mix (your different types of credit accounts, like mortgages and credit cards) and new credit (how many accounts you have opened or tried to open recently).
Diversification is the financial equivalent of not putting all your eggs in one basket. To illustrate, if you put all of your extra funds into a Money Market account, you may see some great dividends over time. But if you instead spread your money out across multiple types of accounts—like a certificate, IRA and other investments—you’ll reap the various benefits of these different accounts, and your money will likely grow more steadily than if you put all of it into one type of account.
Understanding the language used by financial institutions helps you know what you’re getting into when you take out a loan, open an account, invest or otherwise manage your money. If you ever need help understanding the terms you encounter when managing your finances, your neighborhood credit union is here to help. Set up a free financial check-up with a staff member at your local branch to discuss your finances at any time.
Editor’s note: parts of this article were sourced from MyFico.com and NerdWallet.