20 Financial Terms Most Canadians Don’t Know (But Should)

Compound interest is the interest you pay or earn on interest. For example, if the principal amount is $100 and the interest rate is 10%, at first the value of the loan or investment will be $100 + $10 (which is 10% of $100) = $110. Then it will become $121, because 10% or $110 is $11, so $110 + $11 = $121. Compound interest can increase your debt or it can earn you money while you sleep.

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Amortization means making regular payments on a loan or paying off your debt through instalments. It includes the principal amount of money you owe as well as the interest you need to pay. With an amortization schedule, you can calculate how much extra to pay if you want to, for instance, pay off your student loan fast.

In financial terms, principal means the amount at face value, without interest. It can refer to the amount you’ve borrowed or the amount you’ve invested. The faster you can lower the principal amount you still owe, the less you’ll be paying in interest.

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APR stands for annual percentage rate. It’s the interest rate that you need to pay on a loan or that you earn on an investment for the whole year, expressed as a percentage, and can help you decide if that loan really is worth it or if it will just become one of your financial regrets. If you pay 2% interest per month on a loan, your APR is 2 × 12 = 24%.

The prime rate is the basic interest rate that banks and other lending institutions use for setting their variable interest rates. If you take out a loan with a variable interest rate, the amount of interest you pay will go up and down along with the prime rate.

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An annuity is a sum of money you get paid every year after you’ve invested a certain amount of money over a period of time. For example, your pension plan is an annuity, because for years you paid money into your pension fund every month and once you retire, your plan will pay money to you.

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A fixed annuity is one where you get paid a fixed amount at regular intervals. If you have a fixed-annuity retirement plan, you’ll know exactly how much money is coming in, and when it’s coming in, so it makes budgeting easier. You may also want to look at these things you need to know about RRSPs.

With a variable annuity, the amount of money you earn from your investment depends on market conditions. It can potentially earn you more money than a fixed annuity but there’s also the risk of it not earning you as much as you’d like.

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The accumulation phase is the time period during which you fund your annuity. For instance, it’s the time during your working life – and before retirement – when you contribute to a pension plan every month.

The annuitization phase refers to the time when you’ve stopped funding your annuity and instead, the annuity starts funding you. In other words, it can refer to the time after retirement, when you’ve stopped making contributions to your pension plan and now get payments from that plan instead.

To make your money last during the annuitization phase, you might want to consider moving to one of these cheap places for Canadian snowbirds to retire.

Asset allocation is a form of diversification, which in turn means that you’re putting your financial eggs in various baskets. It’s one of the daily habits that could make you a millionaire. With asset allocation, you spread your money across different forms of investment, for example a savings account, a money market account and stocks.

A bear market is the opposite of a bull market and describes pessimistic market conditions. During a bear market, people are more reluctant to invest and the value of the stock market drops. A bear market can indicate the start of an economic recession.

Bull market is a term that describes optimistic market conditions, where prices are either rising already or are expected to rise. In a bull market, more companies are entering the stock market and people are investing more, so it usually marks the beginning of an economic boom.

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A capital gain is basically making a profit. If you sell something for more than you paid for it, it’s a capital gain. Capital gains are taxable in Canada, so you need to list them on your tax return. Speaking of taxes: here are some of the most outrageous tax claims Canadians have made.

A capital loss is just what it says: you’ve lost money on your investment. In other words, you’ve sold something for less than you had initially paid for it. Capital losses affect how much income tax you will pay.

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Your credit report is a report of how much debt you have and whether you’ve been repaying what you owe. You can get a credit report for free. It includes your credit score. If you have a good credit score, financial institutions will be more willing to lend you money, so be sure to pay off your holiday and other debt.

A mutual fund is a collection of investments managed for you by an investment company. The company will buy and sell stocks, bonds and other assets on your behalf and you don’t have to keep track of each investment, making it a good choice if you’re just starting out as an investor.

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The expense ratio is what a mutual fund charges you for managing your investments. It includes management and administration fees and operating costs and is usually expressed as a percentage. The lower the expense ratio is, the less money you’ll lose on your investments.

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Inflation refers to how prices rise over time. A high inflation rate means that things become more expensive more quickly, so that your dollar won’t be buying you as much in the future as it does today. You need to take inflation rates into account when you budget for the long term. Meanwhile there are countries where the Canadian dollar is surprisingly strong.

Your net worth is an expression of how wealthy you really are. It’s your assets, in other words anything you own that has financial value – such as the money in your bank account, your home and car, and your investments – minus your liabilities, which are what you owe.

Want to increase your net worth? Here are some simple tips for getting rich.

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