Glossary of Financial Terms

Talking to a financial expert can sometimes feel like you’re speaking another language. It’s ok to feel confused—we’ve all been there. And while you should never feel embarrassed to ask questions, it can also be intimidating when you’re in the middle of a discussion to pause and ask for clarification.

We want to make your next financial advice discussion a little less baffling, so we’ve prepared a helpful list of financial terms—everything from basic to complex. Think of it as kind of a financial Rosetta Stone. A helpful guide so you can be talking accounts, amortization, and assets with zero hesitation.

Account
An arrangement made with your financial institution where you can hold, deposit, or withdraw your money.

Amortization
The set period of time it takes to pay off a loan or mortgage (assuming all of the regularly scheduled payments are made on time). This is often shown in months or years.

Annual Percentage Rate (APR)
All of the yearly interest, costs, and fees paid on a loan or mortgage shown as a percentage. This may not be the same as the actual interest rate charged on a loan. For example, if you borrow $100,000 for 1 year at an interest rate of 5%, you would end up paying back a total of $105,062.50. The annual percentage rate of this loan would be 5.0625%.

Annual Fee
A fee that is charged on a yearly basis. Credit card companies often charge an annual fee for holding their credit card.

Automated Teller Machine (ATM)
An electronic terminal that lets you make financial transactions, such as paying your bills, taking out cash, or depositing cheques.

Asset
Simply put, this is anything that you own. An asset can be a physical item, like a house or a car or it can also be less tangible, like investments or certain types of insurance.

Cash Advance
Money withdrawn from an ATM or teller directly from a credit card. This is often an expensive way to get cash because unlike regular credit card purchases, interest is charged from the day you take the money out until the time you pay it back in full.

Cheque
A written instruction that tells a financial institution to pay a set amount of money from a specified account.

Cost of Borrowing
The total amount that it costs to borrow money. For example, if you were to take a loan of $10,000 for 1 year at 5% interest, you would pay a total of $10,272.90.

Credit Card
A payment card that lets you buy things on credit terms. Credit cards have specific limits and charge interest on any purchases that are not paid off in full within a set timeframe.

Credit History
A record that shows your demonstrated ability to repay debts you owe. Your history will show if you’ve made your scheduled payments on time, will show any outstanding balances you owe, and will also show limits on applicable products.

Credit Rating
This score is based on your credit history and helps financial institutions determine how risky it is to loan you money. This score is based on how you’ve repaid your debts in the past (do you pay on time or are your payments behind?), how much money you owe, and how you manage credit with limits, such as credit cards (are your credit cards constantly maxed or do you pay off your balance each month?).

Credit Report
This is the actual document that shows your credit history and credit score. In Canada, this is provided by two agencies, TransUnion and Equifax.

Debt
Simply put, money that you owe.

Direct Deposit
Money that’s transferred electronically directly into your account.

Down Payment
An initial payment that needs to be made when something is purchased using credit. A down payment is usually required on bigger purchases, such as a vehicle or a home.

Electronic Funds Transfers (EFT)
Moving money from one account to another using a computer system or mobile device. This can refer to money that moves between two accounts at the same financial institution or can mean money that moves from an account at one financial institution to another. 

Financial Institution
A credit union, bank, trust company, brokerage, or any other organization that participates in financial transactions that involve cash or other financial products, such as loans, mortgages, or investments.

Financial Plan
A detailed picture of your current financial situation, current and future goals, and a detailed action plan of how your money can help you accomplish your plans. This type of plan is provided by a certified or professional financial planner.

Financial Planner
A professional who looks at all aspects of your current financial situation (your income, tax situation, insurance needs, and long term goals) and helps make a detailed, personalized plan to help you achieve your goals.

Fixed Rate Loan or Mortgage
A loan or mortgage where the interest rate is locked-in for a specific period of time. This means that during that set period of time, if interest rates in the market change, the interest rate on your loan will stay the same.

Gross Debt Service Ratio (GDS)
This represents the percentage of your before-tax income that is used to cover housing-related expenses. Housing-related expenses include mortgage payments, property taxes and sometimes include heating and a percentage of condo fees, if applicable. It is generally accepted that your housing expenses should not exceed 32% of your gross income.

Guaranteed Investment Certificate (GIC)
A type of investment that pays you an agreed-upon rate of return over a fixed period of time with the promise that your original amount invested will not decrease. Since the rate of return and the original investment do not fluctuate, GICs are considered low risk.

Homebuyer’s Plan (HBP)
A federal government program that allows first time homebuyers to borrow money tax free from their own Registered Retirement Savings Plan (RRSP) to use toward a down payment or other home related costs.

Interest Rate
A percentage that’s used to determine how much interest needs to be paid. This can mean interest that you need to pay back on money you borrow, or it can mean interest you earn on an investment that needs to be paid to you.

Investment
Something that is bought with the hope that it will generate income or grow in value in the future.

Joint
Account An account with a financial institution that belongs to more than one person.

Liability
A financial or debt obligation.

Lifelong Learning Plan (LLP)
A federal government program that allows full time students to borrow money tax free from their Registered Retirement Savings Plan (RRSP) to fund post-secondary studies.

Line of Credit (LOC)
A type of loan that you can use to borrow funds when needed and as needed up to a pre-determined limit.

Liquidity
This is how easily you can turn an investment into cash. A savings account is considered to be very liquid, whereas a house is not very liquid because it is difficult to turn it into cash.

Loan
An arrangement where a financial institution lets you borrow a sum of money and pay it back, plus interest, over an agreed-upon period of time.

Minimum Payment
This is the least amount of money that you have to pay back toward an outstanding balance (usually on a credit card).

Mortgage

A mortgage loan is a loan that helps finance the purchase of a property by an individual or company. The borrower then has to repay their loan according to a predetermined schedule.

Mutual Fund
A professionally managed investment that pools the money of many investors in order to put together a portfolio of various kinds of securities (stocks, bonds, etc.).

Net Worth
What you own (your assets) minus what you owe (your outstanding debts).

Non-registered Investment
An investment, such as a Guaranteed Investment Certificate (GIC) or a Mutual Fund that is not held in a savings plan that is registered with the Canada Revenue Agency (CRA), like a Tax Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP). Growth on a non-registered investment is considered taxable income.

Overdraft Protection
A service that allows you to temporarily make purchases up to a preset limit even if there aren’t sufficient funds in your account to cover the purchase.

Power of Attorney (POA)
The authority to act on behalf of another person in some (or all) financial or legal matters. This is different than a joint account, as somebody who has power of attorney does not necessarily own the accounts that they’re making decisions about.

Pre-authorized Payment
A payment that comes out of an account automatically at a scheduled time as per written permission from the account holder.

Prime Rate
This is the lowest interest rate that your financial institution can use when lending money.

Principal
This is the original amount of money either borrowed from a lender, or the original amount of money you put into an investment.

Registered Education Savings Plan (RESP)
A savings plan tracked by the Canada Revenue Agency that is designed to help save for a child’s post-secondary education. Money that goes into an RESP can grow tax free until the money is withdrawn.

Registered Investment
An investment, such as a Guaranteed Investment Certificate (GIC) or mutual fund, that is held inside of a savings plan that is registered with the Canada Revenue Agency (CRA). Examples include a Tax Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP). Growth on registered investments is not taxable.

Registered Retirement Income Fund (RRIF)
An option available to use a Registered Retirement Savings Plan (RRSP) to provide an income (by way of regular payments) after retirement.

Registered Retirement Savings Plan (RRSP)
A savings plan registered with the Canada Revenue Agency (CRA) that is designed to help build money for retirement. Money that is put into an RRSP, along with any income it earns, grows tax free until it is withdrawn.

Savings Account
An account that lets you deposit money and often pays a small amount of interest on any money that stays in the account. You can withdraw money from a savings account at any time, but there are often transaction fees after a certain number of withdrawals. Some savings account packages, such as High Interest Savings Accounts, pay a slightly higher rate of interest, but may offer less no-fee transactions.  See you credit union to find out what kind of savings account is right for you.

Tax Free Savings Account (TFSA)
A savings plan that is registered with the Canada Revenue Agency (CRA) that allows you to hold cash or other investments (ex. GICs, mutual funds). You can only put a certain amount of money into a TFSA each year and this limit is determined annually by the government. Any money held inside of a TFSA grows tax free and the growth is never taxed, even once it’s taken out.

Total Debt Service Ratio (TDS)
This is the percentage of your before-tax income that is used to cover housing costs and all other debt repayment obligations (ex. loan payments). This is often used to help determine your capacity to afford more debt. Typically, no more than 40% of your gross income should go toward debt and housing combined.

Variable Rate Loan or Mortgage
This is a loan or mortgage where the interest rate can increase or decrease over the life of your loan.