It’s Halloween! What better time to discuss financial words that give you the heebie jeebies.

Though these words may seem like an alien language to you – I promise they come in peace! Plus, they are words you should know to keep your financial house in order.

Scary Financial Words

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Net Worth

This first one most people actually know the meaning of and have heard several times before. However, majority of people have no clue what their net worth is.

Being blind to what your net worth is and whether it is growing or shrinking is the equivalent to the recreational gambler that doesn’t keep track of their wins and losses. When you ask them how they have doing they say – “I’m probably about breakeven.” Uhm, no. I can assure you, you are not breakeven. You are down money and the only question is how much.

Net Worth is simple – take all your assets (everything you own) and subtract it from your liabilities (anything you owe)

Example:

Your home is worth 200k and you owe 150K on it. The 50K in equity you have would go toward your Net Worth.

The reason we care about net worth is because you want assets for retirement.

However, if you plan to work until Jason or Freddy Krueger come get you, well then you don’t need to worry about net worth.

Inflation

Another word most people have heard. And all it really means is that the cost of the items you buy will be higher in the future than it is now. More expensive stuff, cause for fright indeed!

On the flipside, your wages should rise with inflation as well. Many jobs offer a “cost of living” increase as a basic wage increase. This is related to the rate of inflation.

The target rate of inflation by the powers that be (the Federal Reserve) is currently 2%. That is how much per year you can expect goods to increase and or see wages increase. Now whether that target is actually met is another horror movie in itself.

APR vs. APY

Oh, how one letter can make a scary difference!

APR = Annual Percentage Rate
APY = Annual Percentage Yield

If you’ve never noticed - The banks advertise APR for items like loans and credit cards, but use APY for things like savings accounts.

Ever wonder why?

APR is the interest rate you will pay on a loan for a given year. Simple as that.

APY takes the interest rate you pay plus any interest that has already accumulated to derive you annual percentage yield.

APY is going to be higher than APR because of this. So when an investment is being advertised it makes sense they bank would promote the APY can earn as opposed to the APR.

On the flipside, when debt instruments (loans) are being advertised APR is the number often used because it is lower.

Conclusion

You should be more afraid of not knowing these financial words as one does not know what financial goblins and ghouls are out to get you on Fright Night!

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Happy Halloween!
Mitchell J

Thanks pixabay for the pic!