5 financial terms everyone should know

1. FICO score

The company that developed the formula for determining a credit score is called Fair Isaac Corp., or FICO. Your credit score is determined by a number of factors, such as the amount owed, length of credit history, and payment history.

The higher your FICO score—which runs from 300 to 850—the better terms you might be offered on your subsequent credit card or loan.

A person may find it more difficult to obtain credit at a favorable interest rate if their score is less than 620.

2. Asset allocation

Where you decide to invest your money is known as asset allocation. Bonds, cash (or cash equivalents), and stocks are the three main asset classes.

Make sure to select the ones that best fit your objectives, risk tolerance, and time horizon because each of these responds to market and economic conditions in a different way.

3. Capital gains

The difference between an item’s current value and its original purchase price is known as a capital gain. However, until the asset or investment is actually sold, the gain is only realized on paper.

On the other hand, a capital loss is the drop in value of the investment or asset since you bought it.

4. Defined-contribution plans

Defined-contribution plans are retirement schemes that employers may provide as a benefit. Since the funds deposited into these accounts are deducted from your pretax income, the annual contribution amount is tax-free.

5. Umbrella Insurance

In excess of what your house, car, or boat insurance may offer, umbrella insurance offers additional liability coverage.