6 Important Financial Terms and Their Meanings

We all know that it's of extreme importance to be smart with our money, our personal finances, and our net worth. But the world of personal banking, financial services, and investments can be so confusing, as there's so much to learn and keep in mind! There are so many different terms and conditions to keep track of, with words like an accredited investor, conventional lenders, private lending, exchange commission, and private money loan, everything can seem very overwhelming.

To make things simpler for you, here are 6 important financial terms and their meanings.

1. Compound Interest

Investing is one of the easiest ways to build your wealth over time. The best part about it is that once you spend some time working with an investment adviser, you can set up your investments and forget all about them as they will compound and grow. Compound investment means that when interest is originally calculated on the principal amount invested, the added interest it earns can also accrue interest. Simply put, this is when your profits earn a profit. It may seem a bit complicated to understand now, but this is why investment companies are here to help you and walk you through specific numbers one by one.

2. Qualified Investor

A qualified investor, which is also known as an accredited investor, is an individual who is legally able to invest in hedge funds, capital funds, venture capital funds, and other private equity offerings. In order to become a qualified investor, you have to meet specific criteria set by the national U.S. Securities and Exchange Commission.

3. 401(K)

This is a retirement investment account that takes advantage of a specific tax code that allows for before-tax deductions. This means that you are able to put money aside into your 401(k), and you won't be taxed on this money. So for example, you get paid $1,000 per paycheck and you choose to allocate $100 to your 401(k). Due to the specific tax laws, you will then be taxed on $900 per paycheck, instead of the gross amount of $1,000.

401(k)s are quite commonly provided by many employers, and most companies will also make a contribution to the savings account. It's important to note that you will not be taxed on anything additional your employer adds on your behalf.

4. Hard Money Loans

A hard money loan is an asset-based loan financing option. So this means that the borrower will receive money that is backed by something tangible, aka hard money. Most commonly, hard money loans are backed by either a vehicle or a real estate property as a way of collateral in case the borrower is unable to pay back their loan. Hard money loans tend to be used as a last resort, so if this is something you would be interested in, ensure that you work with a knowledgeable hard money lender so they can walk you through the process. To find one near you, simply search something along the lines of "hard money lender Oregon".

5. Money Market Account

These are bank accounts offered by credit unions as a way for their users to benefit from higher interest rates. Money market accounts are savings accounts that pay high-interest rates in exchange for higher minimums and withdrawal limits.

6. Liquidity

Liquidity is the ability to cash out your investment early. Most investment loans tend to have restrictions for when the owner can cash out. This is because, in order to sell a stock, you need to have a buyer ready to take it off your hands. When an investment is liquid, this means there are plenty of buyers available to sell your investments too, so you can cash out without a problem.

Hopefully knowing these financial terms will help you get on your way to being a financial wizard in no time at all!