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The Ultimate Financial Wellness Terms Glossary: The Best Terms to Know

By Chris Phelan, August 24, 2021 8 min read

Whether you’re new to the world of financial wellness terms or just need a refresher, we’re here to help.

It can be very overwhelming to research financial wellness terms. There are a lot of phrases and words that are unique to the world of financial wellness that you may not be familiar with – and oftentimes there hasn’t been an easy way to familiarize yourself with these terms. Luckily, we’re here to guide you through this process and make things easily understandable and digestible!

Annual Percentage Rate (APR)

The yearly interest charged on any money you borrow is called the Annual Percentage Rate – or APY for short. Expressed as a percentage, an APR tells you how much interest you will pay yearly. The logic is simple: the lower the APR, the less you pay.

Annual Percentage Yield (APY)

The distant cousin of APR, the Annual Percentage Yield (APY) shows how much interest you’ll earn in your savings accounts. Again, the logic behind APY is simple: the higher, the better. A higher APY means that your financial institution is putting more money in your account than if it had a lower APY.

Asset

An asset is anything that holds value. Basically, anything that can be converted into money that you can spend is an asset. Generally, assets refer to more expensive purchases, like homes and cars. If you ever need to apply for things like government programs, you might be asked about your assets. They will generally specify if they are looking for specific assets (like homes and cars) or if they only want appreciating vs. depreciating assets (meaning if it increases or decreases in value over time).

Budget

Essentially, a budget is a financial plan! It’s a plan that takes into account how much income you are taking in and compares it against how much of that income you need to use for your expenses, savings, and other financial goals. On its most basic level, it is an incredibly useful tool to make sure you are bringing in enough money to meet your financial goals.

Checking Account

This is an easy one: a checking account from a financial institution (bank) gives you direct access to your funds, whether you’re depositing or withdrawing money. A debit card and a checkbook are usually included so that you can access your money without having to go to the bank or ATM to withdraw cash. If you’ve never had a bank account, you’ll want to start by opening a checking account.

Credit Card

A credit card allows you to make purchases even if you don’t have the funds you need in your bank account. Using a credit card is sort of like borrowing money from yourself. Just don’t forget that you’ll have to pay it back at the end of the month! If you are unable to pay back your entire credit card balance at the end of the month, you’ll owe an APR (annual percentage rate) which can be as low as 4% and as high as 36%.

Credit Report

A credit report is a complete record of every time you’ve had a relationship with a lender. Whether it’s a loan you’ve taken out, an auto loan or mortgage, or even if you’ve been late with paying a credit card or other bill, it’s going to be all there in the report. Credit reports are used to assess your creditworthiness and help lenders determine whether or not they can trust you to pay back a loan. A bad credit report can lead to high interest rates when you try to loan money.

Credit Score

A credit score is a number from 300 to 850 that tells lenders how to  assess your creditworthiness, and it appears at the top of your credit report. A higher credit score tells lenders that you are capable of paying back loans of larger sums of money (pro-tip: this article lists great ways to improve your credit score).

Creditworthiness

Creditworthiness is one of the most important concepts to learn as you travel down the road of complete financial wellness: it’s the extent to which a person or company is considered suitable by lenders to receive financial credit or loans, based on their responsibility of paying back money in the past.

Debit Card

A debit card is a physical card that is used for purchases, and immediately withdraws funds from your checking account. Often used in place of cash, you can generally only spend what you have in your account, ensuring that it is less likely to contribute to a lot of debt – unlike credit cards (as you’ll read below).

Direct Deposit

There are a lot of payments that can be electronically transferred to your bank account – but in most cases, you’ll be dealing with your paycheck from your employer. Most employers give you the option of having your paycheck automatically deposited into your bank account for maximum convenience and flexibility – it’s definitely a better way to get paid than a paper check that you have to deposit or cash yourself!

Fixed Interest Rate

Over the course of the loan, sometimes the interest rate never changes – despite changes in the market, economy, and other factors. This is called a fixed interest rate – it is locked in for the duration of the loan.

Interest

Interest is money that you pay regularly towards your lender(s). It’s sort of like a fee for loaning the money. You may owe interest on your credit card, your car loan, your mortgage, or any other loans that you incur. In some cases, like with most credit cards, you can avoid interest altogether if you pay your bills in full every month.

Loan

A loan is any time you borrow money from a lender. This money is intended to be paid back with strict guidelines on APR and a repayment timetable. Loans can be for many different purposes, from auto loans and mortgages to smaller personal loans. All in all, being responsible with loans – whatever kind they may be – is one of the key components to having total financial wellness.

Overdraft/Overdraft Protection

This term “overdraft” typically applies to checking accounts and debit cards. Basically, it’s what happens when you use your debit card to make a purchase and you don’t have enough money in your checking account to cover it – this is called an overdraft, and it usually is accompanied by a fee owed to your bank.

Overdraft protection, contrary to popular belief, is NOT what protects you from overdrafts. If you have overdraft protection on your checking account, that usually means that when your balance hits zero, you’ll still be able to withdraw. When you do withdraw past $0, you’ll owe an overdraft fee which can be as high as $30. It may actually be better to keep overdraft protection turned off so that when your account hits $0, you can’t withdraw anymore and you won’t owe any overdraft fees. In those cases, if you have access to use Rain, you can withdraw some of your paycheck early to bring your bank balance back up and avoid needing to overdraft altogether.

Principal

In the context of a loan, the principal is the initial amount issued to the borrower – not including any interest owed during repayment. If you take out a loan for $10,000, the principal amount is $10,000. However, when you’re paying back the loan, you’ll see that your payments are going towards both the principal amount and the interest. That’s why if you put $100 towards your $10,000 loan, you might see on your statement that the principal only went down by $80 instead of $100. In this example, the other $20 would have gone towards the interest.

Savings Account

A savings account is a bank account where you can store money for the future. Many savings accounts accrue interest over time. This is the good kind of interest – it means the more money you have in your account, and the longer you keep it there, the more interest you will earn. It’s better to keep your extra money in a savings account than a checking account because you can earn interest on it and because if something happens to your debit card (for example, if it is lost or stolen), you’ll still have money in your savings account. Since your debit card is connected to your checking account, only your checking account would be affected and you’d still have your savings. You can always move money between your checking and savings accounts.

Variable Interest Rate

A variable interest rate can change based on certain economic conditions. The interest rate could go up or down after certain evaluation periods, and it is a sharp contrast to a fixed interest rate. Whenever you take out a loan or make a large purchase that requires financing, make sure you find out if the interest rate is fixed or variable.

Tags:Financial Wellness

About the Author

Chris PhelanFinancial Wellness Copywriter

Chris Phelan is a copywriter who has taken his own credit score from a 580 to an 850. With a mixture of personal experience and thorough research, Chris can help anyone achieve their financial goals.

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