The Sunday Mail
Net Worth: The difference between your assets and liabilities. You can calculate yours by adding up all of the money or investments you have, including the current market value of your home and car, as well as the balances in any checking, savings, retirement or other investment accounts. Then subtract all of your debt, including your mortgage balance, credit card balances and any other loans or obligations.
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Asset Allocation: The process by which you choose what proportion of your portfolio you’d like to dedicate to various asset classes, based on your goals, personal risk tolerance and time horizon. Stocks, bonds and cash or cash alternatives (like certificates of deposit) make up the three major types of asset classes, and each of these reacts differently to market cycles and economic conditions. Stocks, for instance, have the potential to provide growth over time, but may also be more volatile.
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Bonds: Commonly referred to as fixed-income securities, bonds are essentially investments in debt. When you buy a bond, you’re lending money to an entity, typically the government or a corporation, for a specified period of time at a fixed interest rate (also called a coupon). You then receive periodic interest payments over time, and get back the loaned amount at the bond’s maturity date. Bond prices tend to move in the opposite direction of interest rates — that is, when interest rates rise, bond prices typically fall.
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Capital Gains: The increase in the value of an asset or investment — like real estate or stock — above its original purchase price. The gain, however, is only on paper until the asset is actually sold. A capital loss, by contrast, is a decrease in the asset’s or investment’s value. You pay taxes on both short-term capital gains (a year or less) and long-term capital gains (more than a year) when you sell an investment. By contrast, a capital loss could help reduce your taxes.
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Rebalancing: The process of buying or selling investments over time in order to maintain your desired asset allocation. For example, if your target allocation is 60 percent stocks, 20 percent bonds and 20 percent cash, and the stock market has performed particularly well over the past year, your allocation may now have shifted to 70 percent stocks, 10 percent bonds and 20 percent cash. If you wanted to return to that 60/20/20 asset allocation, you’d have to sell some stocks and buy some bonds.
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Amortisation: This is the process of paying off your debt in regular installments over a fixed period of time. Your mortgage is amortized using monthly payments that are calculated based on the amount borrowed, plus the interest that you would pay over the life of the loan.
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Escrow: An account held by an impartial third party on behalf of two parties in a transaction. During the homebuying process, the buyer will deposit a specified amount in an escrow account that neither party can access until the terms of the purchase contract, such as passing an inspection, have been fulfilled and the sale is completed. An escrow account can also hold money that will later be used to pay your homeowners insurance and property taxes. You can put money in escrow every month, so that when your premiums and taxes are due, you have enough to cover those bills.
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Compound Interest: When you’re investing or saving, this is the interest that you earn on the amount you deposit, plus any interest you’ve accumulated over time. When you’re borrowing, it’s the interest that is charged on the original amount you are loaned, as well as the interest charges that are added to your outstanding balance over time. Think of it as “interest on interest.
