The world of finance, much like the world of healthcare, can be confusing. These disciplines have their own language and can feel intimidating if you don’t have any background, education, or training.
Managing your money is an essential life skill. However, many adults in the U.S. struggle to pass financial literacy tests, with only 50% of adults correctly answering financial literacy questions from the 2022 TIAA Institute-GFLEC Personal Finance Index.
If you find managing your finances stressful or complicated, especially as they may have become more complex the longer you practice, you're not alone. Gaining a better understanding of some common financial terms can benefit you and serve as a starting point for your financial literacy journey.
Adjusted gross income (AGI) is the total income you earn in a year minus certain allowable deductions or adjustments. It is calculated by starting with your gross income, which includes wages, self-employment income, interest, dividends, capital gains, etc., and then subtracting eligible deductions such as:
Your AGI is an important number the IRS uses to determine your taxable income and tax liability.
Amortization is the process of paying off a loan through regular installment payments over a set period of time. An amortization schedule outlines the repayment plan, showing how each periodic payment is divided between interest and principal.
In the early stages, a larger portion goes towards interest, but as the loan matures, more of the payment is applied to the principal balance.
The annual percentage rate is the yearly interest rate charged on borrowed money expressed as a percentage. It indicates how much interest a borrower will pay over the course of a year.
An asset is any resource (tangible or intangible) that holds value and can be converted into money, such as cash, investments, real estate, or intellectual property. Common assets include:
A budget is a plan for managing your income and expenses over a specific time period, typically a month or a year. It involves estimating your expected income from various sources and allocating that income toward different categories of expenses.
Capital gains refer to the profits earned from selling a capital asset, such as stocks, bonds, real estate, or other investments, for a higher price than the original purchase price.
When we reference cash flow, we're really referencing the movement of money. Cash or money typically flows in one of two ways: into or out of your bank account. The most common inflow is your income; typical outflows are your living expenses and debt payments.
Compound interest is the interest earned not only on the initial principal amount but also on the accumulated interest from previous periods. In other words, it's calculated on both the principal amount and any previously earned interest.
A credit score is a three-digit number that rates your creditworthiness and predicts how likely you are to repay borrowed money and pay bills on time. It's calculated based on information in your credit report, which includes details about your payment history, amounts owed, length of credit history, types of credit used, and new credit applications.
Lenders use credit scores to evaluate risk and determine loan eligibility, interest rates, credit limits, and required deposits. The higher the credit score, the more likely you will qualify for better terms when borrowing money or obtaining services.
Diversification is an investment strategy that involves spreading your money across different types of investments and asset classes to reduce overall risk and volatility in your portfolio.
Equity in finance refers to the ownership interest or stake in an asset or business after all debts and liabilities have been paid off. It represents the net value that would be returned to the owners or shareholders if all assets were liquidated and liabilities settled.
An emergency fund is a dedicated savings account set to cover unexpected expenses or financial emergencies, like job loss, unexpected expenses, or medical bills. It serves as a financial safety net to help you avoid going into debt or dipping into other savings when faced with unplanned costs.
A financial statement is a report that summarizes the financial activities and performance of a business over a specific period of time. There are four main types of financial statements:
Income is the money received through sources like employment, investments, or business transactions. It can be measured as gross income (before expenses) or net income (after expenses).
An interest rate is the amount charged by a lender to a borrower for the use of borrowed money, expressed as a percentage of the principal amount. It represents the cost of borrowing money or the compensation for lending money.
A lien is a legal claim or security interest against a property or asset used as collateral to satisfy a debt. It gives the creditor or lienholder the right to seize and sell the property if the debt is not repaid.
Liquidity refers to the ease with which an asset can be converted into cash without affecting its market price. It measures how quickly and efficiently an asset can be bought or sold on the market.
Net worth is the value of assets you own minus the liabilities you owe — so, in a nutshell, what you own minus what you owe.
If your assets exceed your liabilities, you have a positive net worth. If your liabilities exceed your assets, you have a negative net worth.
Negative net worth does not necessarily indicate that you are financially irresponsible; it just means that you have more liabilities than assets right now. It's common for early-career medical and dental professionals to experience negative net worth because of student loan debt.
Financial literacy is something that everyone needs. Understanding concepts like credit scores, net and gross income, and taxes will help you manage your own finances.
We work with doctors daily who want a centralized point of advice to help eliminate financial confusion and worry and strengthen the foundation from which you build your life and profession. If you're interested in speaking with one of our financial planners, schedule a discovery call to learn more.
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Joannah is the Director of Marketing at Spaugh Dameron Tenny. She enjoys helping brands tell their unique story through innovative digital marketing and communications initiatives to grow brand awareness. Feel free to send any blog ideas her way.
