Key terms for Financial Literacy Month

Key terms for Financial Literacy Month

Given that April is Financial Literacy Month in the States, I thought we should go over some key financial lingo you may want to use or better understand.


  • Assets and liabilities
  • Balance sheet
  • 401(K) / RRSP
  • Amortization
  • Bear and bull markets
  • Expense Ratio
  • Variable and fixed interest rates
  • FICO score / credit score
  • Capital gain vs. capital loss
  • Garnishment
  • Gross income vs. net income
  • Collateral

How many terms from the list above are familiar? If you don’t know them all, you’re not alone. A study by the Global Financial Literacy Excellence Center measures financial literacy as basic knowledge of four fundamental concepts in financial decision-making: knowledge of interest rates, interest compounding, inflation and risk diversification. Worldwide, only 1/3 adults are financially literate! In North America, 57% of Americans and 68% of Canadians are considered financially literate; this puts the US 14th and Canada 2nd. Financial Literacy Month is a good opportunity to start conversations about money and your family’s finances and to start broadening your understanding of those four finance fundamentals.

Here are the definitions of the terms listed above:

‣ Assets and Liabilities: Assets refer to the things you own that have monetary value and could be converted into cash (ie. car, house, equipment). Liabilities, on the other hand, are your financial obligations, so amounts you owe (ie. loans, credit card bills).

 Balance Sheet: A balance sheet is a financial statement that shows all your assets and liabilities at a particular point in time. When’s the last time you looked at your family’s balance sheet?

‣ 401(K) / RRSP: A 401(K) is a retirement savings plan offered by American employers to their employees. Similarly, RRSPs refer to the Canadian government’s retirement savings plan for employees and the self-employed. These plans allow you to hold your investments in a tax-sheltered account for retirement. How is your retirement planning coming along?

‣ Amortization: The process of allocating the cost of an asset (ie. mortgage, security investments or life insurance) over a period of time. Ie. you repay a loan or your mortgage over an amortized period over time.

‣ Bear and Bull Markets: A bear market refers to when the stock market prices are continuously dropping. During this time, a country’s economy is considered weak and unemployment rises. In contrast, a bull market is when market prices are on the rise. In this case, a country’s economy is strong and employment levels are high. Likewise, when someone is ‘bullish’ about a certain stock, it means they’re feeling positive about it going up in value, and vice versa for ‘bearish’.

‣ Expense Ratio: This is the annual fee that investment companies charge their investors. It is the percentage of assets subtracted each calendar year to cover the expense of managing your investments, like their management fees, operating costs and administrative fees.

‣ Fixed and Variable Interest Rates: A fixed interest rate remains the same and doesn’t change over the agreed upon period of time despite market conditions, for example a fixed mortgage rate would stay the same for the duration of the mortgage period, let’s say 5 years. Variable interest rates can rise or fall during that same 5 year period depending on market conditions and the interest rate at the time.

‣ FICO Score or Credit Score: These are numbers used by lenders (ie. banks) to help assess the risk of lending you money. A FICO or credit score of 700+ is good in America while 600+ is considered good in Canada. Do you know what your credit score is? How about your spouse’s? Try one of the many tools that let you check your credit score for free without damaging your score – this a good number to know when you apply for any loan or credit card.

‣ Capital Gain and Capital Loss: A capital gain is the profit you make from the sale of a property or investment when the sale price is more than the purchase price, while capital loss is the amount of money lost from the sale of a property or investment. For example, if Anna bought a house for $300,000 and sold it for $500,000, her capital gain (profit) would be $200,000. But if Anna sold her house for $250,000 her capital loss would be $50,000.

‣ Garnishment: This is a court order requesting your money or properties to be redirected to lenders to pay your debt. For example, if John owes $10,000 in unpaid taxes, the IRS (like the CRA) can garnish his wages and John’s employer would have to give a portion of his salary to the IRS instead of him to pay the government what he owes.

‣ Gross vs. Net Income: Gross Income is your total pay before taxes and other deductions. Net Income, on the other hand, is your total earnings after taking taxes and other deductions (ie. EI, pension) out of the picture.

‣ Collateral: This is when something of value (an amount of money, belongings or property with a monetary value) is given to a lender as security to ensure you’ll repay your debt. Let’s say you want to borrow $25,000 to pay for your daughter’s university education. In order to ensure you don’t violate the terms of the loan and pay back the money you borrowed, the bank may require collateral (ie. car and house) for security. If you violate the loan agreement, the bank has the right to take possession of and sell off that collateral to pay for your debt.

Starting to better understand financial terms like these is a great first step towards improving your financial literacy. There are many free online resources you can take advantage of like this and this to help boost the financial knowledge of both you and your family.

Let me know on Twitter @onistplatform or Facebook what other financial terms and concepts you think make for a good financial foundation – it’s never too late to start learning and talking about money as a family!