5 Misunderstood Financial Terms Explained
Are you confused by financial jargon? If we’re being honest, sometimes we are, too. The first step towards financial independence is knowledge, and we’re all about empowerment! Keep reading for a breakdown of five easily misunderstood financial terms.
#1 – What’s the difference between APY & APR?
These two may seem similar with only one letter difference, but they are actually opposites.
APY stands for Annual Percentage Yield. It applies to savings and investments representing the percentage of interest you’ll earn in a year. Simply put, it’s how much you’ll earn on your money.
On the opposing side, APR stands for Annual Percentage Rate. It applies to loans and credit cards, representing the rate of interest (plus any fees) you’ll pay on what you borrow. Simply put, it’s the measurement of how much it costs to borrow money. Which brings us to interest.
#2 – Understand how to take interest into account.
Interest is the price you pay for borrowing money or the reward you get for saving it.
If your checking or savings account offers an APY (see above!), you will earn interest on the money you save. That interest is calculated by multiplying the amount in your account by the percentage assuming the money stays put for a year.
When it comes to interest when borrowing money (that’s your APR!), it's calculated based on the loan type. If your loan has a fixed interest rate, you’ll owe the same monthly amount for the life (known as term) of the loan. However, adjustable-rate loans are subject to interest rate changes over time, affecting how much you owe from month to month.
#3 – What does high yield mean?
High yield refers to an account offering higher returns (money in your pocket!) than you may typically see. You can find these higher returns on special savings accounts, certificates, or investments. We’ll focus on high-yield options that don’t involve the stock market.
Savings accounts like BHFCU’s Premier High-Yield offer a higher interest rate (APY!) earned daily based on your account balance. The advantage of these accounts is access to your money whenever you want it. Similarly, certificates offer an even higher interest rate when you leave money in the account for a fixed amount of time (known as a term.)
The most important thing to remember is that a high yield means more money back in your pocket!
#4 – What is equity, and do I actually need it?
Equity is the value of your ownership in an asset or property after subtracting what you owe. The most common source of building equity is owning a home, but it’s not the only way! Collectibles, certificates, vehicles, and investment accounts are all great ways to build equity.
If you do own a home, you can build equity by improving your property and as market values increase. Equity is important because it can serve as a safety net to borrow against in financial emergencies and helps bolster your future financial independence.
#5 – Defining dividends and their benefits.
Dividends are profits that a company shares with its stakeholders – in the case of credit unions, that’s members! In the credit union world, dividends may be returned to members through services like higher returns on savings and lower rates on loans, saving you money in the long term.
Outside of the credit union, you may also see dividends returned from investment accounts like stocks. To earn dividends, you need to own shares in a dividend-paying company. The company usually announces these payments periodically, depending on its profitability.
Understanding financial terms is key to smart money management on your journey to financial independence. At BHFCU, we're here to help you navigate the world of finances. Stay tuned as we continue to break down financial barriers together!
