6 Financial Terms That You Need To Know!

by Kristina on August 31, 2011 · 1 comment

girls chattingHello Everyone.  Today we are discussing and learning about everyday financial terms. We may hear these words and phrases everyday in our financial lives, but we may not fully understand what they mean or what they mean for us.

Before we enter into a contract or an agreement we should definitely understand what we are signing. Hopefully this information will be helpful.

Here are 6 Financial Terms That We Should Know:

APR – Also known as Annual Percentage Rate.  This financial term is expressed as a number that indicates the annual (or yearly) interest rate that is charged on our Credit Cards, Loans, Lines of Credit, or Mortgages.  It is also sometimes used to express our annual investment rate of return.  As an example the APR on my VISA card is 19.99%.  The Annual Percentage Rate is a useful tool when we are comparing the prices, costs, and fees of Loans, Lines of Credit, and Mortgages between Financial Institutions.

Average Cost Base – Also known as ACB.  This term indicates the average price that we paid for our investments which are purchased in units such as Stocks and Mutual Funds.  The average cost is the average price we have paid for each individual investment unit plus any dividends that have been reinvested to buy more units. Investors often compare the ACB to the Current Market Value to determine our Capital Gain or Capital Loss.

Average Daily Balance – This financial term usually applies to Credit Cards. Our monthly interest charges are calculated on our Average Daily Balance, not on the current balance as of our last monthly statement.  If we have a $100 balance for 3 days of the month and a $500 balance for 2 days of the month our Average Daily Balance will be calculated as $100+$100+$100+$500+$500=$1300/30 days of the month.  Our monthly interest charges will be calculated on $43.33 which is our Average Daily Balance.

Dollar Cost Averaging – Is an investment strategy used to buy into the market on a regular basis.  When we buy into the market in regular intervals such as weekly, biweekly, or monthly we are purchasing our investments when the daily price is both high and low.  This helps lower the cost of our investments, when we have a lower average cost our gains will be bigger when the market rises.  Dollar Cost Averaging is the absolute opposite of trying to time the market.

MSRP – Also known as the Manufacturer’s Suggested Retail Price.  This financial term is often used on discounted items or negotiable goods.  When we compare the MSRP with the price that we actually paid for an item we can calculate our savings.  MSRP is often displayed on New Car Commercials because the price is negotiable in the dealership. MSRP is also displayed in discount stores such as Burlington Coat Factory, TJ Maxx, and Century 21 (or Winners for our Canadian friends).  The next time you go shopping look at the price tag on your item to find the MSRP; how much are you saving?

Pay Yourself First – This financial term refers to Pre Authorized Contributions into our Savings Accounts, Retirement Accounts, or Investment Plans.  We should think of our self as a bill payment and set up regular weekly, biweekly, or monthly automatic transfers into our Investment or Savings Accounts.  When we pay bills we are paying for a service already used, when we Pay Our Self First we are securing our financial future.  The expense of Paying Our Self now will be worth it (and pay off) in the future.

Photo by Duncan

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{ 1 comment… read it below or add one }

1 Jay V August 31, 2011 at 3:34 pm

Lucky for us the Good Faith and Reg-Z are being overhauled in part by the CFPB to help buyers of Real Estate compare programs and obtian a more accurate APR. Many lenders in the past would manipulate APR’s to get deals. Borrowers need to make sure that when they are looking over their loan options, they are looking at the best rate and cost option for them. Getting the lowest rate is not always the best option. In fact it could cost you thousands more.

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