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Understanding finance terms

Confusing Finance Terms Explained in Plain English

Let’s be real! All of the titles, phrases, and acronyms of the finance world is just downright confusing. Sometimes it feels like you are reading a completely different language, which makes understanding what you need to do so much harder than it needs to be. That is why we have created this glossary of confusing finance terms explained in plain English to make it easier for you! Our glossary of finance terms is simple: we have the confusing word, the dictionary definition, and then what that means to a normal person.

We are continually adding to this glossary as we go, so if you happen to notice some confusing finance terms that we have yet to list, please let us know so that we can add it in!

Note: This article contains affiliate links. This means that if you purchase a product or sign up for a company through one of our links, Thrive Oak will make a small commission (at no extra cost to you).

Understanding finance terms

After-Tax:

Dictionary Definition: Remaining after payment of taxes and especially of income tax.

Plain English Definition: The amount of money left over after you have paid your taxes.

Post: For a more in-depth explanation, read our article “What does Pre-Tax and After-Tax Mean and How Does it Apply to Me

Annual Percentage Rates (APR):

Dictionary Definition: The measure of the annual percentage cost of consumer credit (as in installment buying or a charge account) that is required by law to appear on statements of credit accounts and is variously computed but always takes into consideration the amount financed, the amount of the finance charges, and the schedule of repayment.

Plain English Definition: The full amount of money that a lender charges each year for funds (including all costs and fees).

Asset Class:

Dictionary Definition: An asset class is a group of securities that share similar characteristics, perform comparably in the marketplace, and are governed by the same laws and regulations.

Plain English Definition: The different kinds of investment options like stocks, bonds, commodities, etc. that have similar laws and regulations. You use these different asset classes to create a diverse portfolio. 

Average Age of Accounts (AAoA):

Dictionary Definition: The sum of the ages of your credit accounts divided by the number of accounts you hold.

Plain English Definition: The average age of your credit.

Example: One account is 4 years old, and another is 2 years old. The AAoA is 3 years. ((4 years +2 years )/2 accounts = 3 years)

Compound Interest:

Dictionary Definition: Interest computed on the sum of an original principal and accrued interest.

Plain English Definition: The amount of money your money earns/loses by being in an account that has interest.

Formula:

Compound Interest Formula

Example: A 5-year loan of $20,000 with an interest rate of 5% that compounds annually (i.e. once a year)

$20,000 loan amount left [(1+5% interest)⁵ years – 1] OR $20,000 [(1+.05)⁵ – 1] = $5,525.63 of added on to the loan.

Note: As your principal decreases (i.e. as you pay off the loan) the formula changes, meaning that the amount of interest will also decrease.

Due Diligence:

Dictionary Definition: Reasonable steps taken by a person in order to satisfy a legal requirement, especially in buying or selling something.

Plain English Definition: Doing your homework before making a financial choice.

Hedge Fund:

Dictionary Definition: An investing group usually in the form of a limited partnership that employs speculative techniques in the hope of obtaining large capital gains.

Plain English Definition: A type of investment option where investors pool money together and take significant risks with the hope of big rewards. 

High-Interest Debt:

Dictionary Definition: (of a loan, mortgage, etc.) to be repaid at a high rate of interest (of an account, share, etc.), paying interest above the average.  

Plain English Definition: Debt that costs more than any investments can make. Read more HERE!

Net Loss:

Dictionary Definition: Net loss, also called loss, refers to a company’s financial position when total expenses exceed total revenues.

Plain English Definition: The amount of money lost at the end of a specific time period.

Net Profit:

Dictionary Definition: The excess of revenues over outlays in a given period of time.

Plain English Definition: The amount of money gained after all expenses have been deducted, at the end of a specific time period. 

Pre-tax:

Dictionary Definition: Existing before provision for taxesbefore taxes are deducted.

Plain English Definition: The amount of money (usually earned) before the government takes the taxes out.

Post: For a more in-depth explanation, read our article “What does Pre-Tax and After-Tax Mean and How Does it Apply to Me

Rate of Return:

Dictionary Definition: the amount of profit that an investment earns calculated as a percentage of the money that was originally invested.

Plain English Definition: The percent of the money earned on an investment. 

Formula: ((Current value – original value) / original value) x 100 = Rate of Return

Example: You invested $1,000 into the stock market and now have $1,100. (($1,100-$1,000)/($1,000) x 100 = 10% Rate of Return

Real Estate Investment Trust (REIT):

Dictionary Definition: An investment trust that owns and manages a pool of commercial properties and mortgages and other real estate assets; shares can be bought and sold in the stock market.

Plain English Definition: Similar to mutual funds, REITS allows people to invest in real estate without having actually to buy and manage a property. You are just buying a “share” of the property. 

Return on Investment (ROI):

Dictionary Definition: Measures the gain or loss generated on an investment relative to the amount of money invested. 

Plain English Definition: It is a percentage calculated by the formula shown below to determine how much money you made or lost on an investment. The bigger the percentage, the better the investment did.

Formula: ROI = (Net Profit / Cost of Investment) x 100

Example: You bought $1000 of a stock in the market. Six months later, you sold it for $1500. To determine the ROI, we take the net profit ($1500-$1000 = $500) divided by the cost of investment ($1000) and times it by 100. Like this: ($500 / $1000) x 100 = 50%. You made a 50% ROI!

Tax-Advantaged:

Dictionary Definition: An advantaged bestowed by government legislation that allows any type of investment, financial account, or savings plans to receive tax exemption, tax-deferment, or other tax benefits.

Plain English Definition: A financial account where you pay no tax or less tax than normal.

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