Simplifying Financial Terminology Part 1

Amortize, Liquidity, and Capital Gains & Losses


With new technologies come new terminology like “hangry,” “selfie,” and “binge watch.” As consumers, we hope to catch on quickly so that we can understand and communicate across generations. However, when discussing finances or financial topics through websites, books, magazines, and television shows, there are many decades-old terms that haven’t been fully explained in the context of everyday life. This monthly series will explore some of these terms so that you can include them in your various life hacks.


We’re kicking off our educational series with the term amortize. At its core, amortize means to reduce or pay off something over time. Mortgage brokers, banks, and accountants use this term when their clients and customers take out loans to buy homes, cars, or equipment for their businesses. Amortization schedules help set the terms of the loan to determine how long the payments should last, as well as how much of the payment will be interest vs principal.


Another term used by financial advisors, analysts and tv pundits to discuss a wide array of topics is liquidity. I like to define it as simply meaning “readily accessible.” Liquidity allows you to have options and make decisions that put you in a better position for some type of gain.

Capital Gains and Losses

Capital gains and losses is a phrase we start to hear around this time of year as well as during tax season. This refers to money you’ve made and money you’ve lost on assets such as stocks, bonds, mutual funds, real estate, cryptocurrency, and businesses. Understanding how this concept works and discussing strategies with your financial advisor and accountant may help you efficiently navigate an ever-changing tax world.

Why these Terms are Important for You

Most people see and use the concept of amortize every month without actually knowing it. If you have a mortgage on your home, you have used an amortization schedule to determine how many years it will take to pay down your mortgage and what your monthly payment will be. Another example is your monthly car payment, where amortizing came in the form of a salesperson asking you what monthly payment you could afford.

How long a loan is amortized can have a huge effect on the overall repayment of the loan. For example, if you have a $200,000 mortgage loan with a 30-year fixed rate of 4%, the monthly payment is $954. After 30 years you will have paid back a total of $343,739. That same loan over a 15-year period, while costing $1,479 per month, will only have a total cost of $266,287 after 15 years. This boils down to a savings of $77,452.

At first glance, it would seem that it’s always better to amortize over a shorter period of time. However, there are some cases where the opposite can be true. If you own a rental property and your focus is on current cash flow, you may want to amortize a loan over a longer period to reduce your outlay and maximize your net income. For some, the cost of the loan may only be affordable with a longer amortization period. Lastly, the savings you gain by spreading out the loan payments over a longer period of time may be used elsewhere with greater return potential. To continue with the $200,000 mortage example, if you could earn 5% interest on your money, it may be beneficial to amortize the loan over a longer period of time and save the monthly difference, while also factoring in tax implications during the process.

Liquidity is something you use every day. If you buy a cup of coffee, you are agreeing to pay upon ordering. When driving to work, you know that when it is time to fill up the gas tank you’ll have the money to pay for the gas to keep driving. Liquidity allows you to know that when it is time to pay rent or the mortgage bill, you will have the money readily available.

Liquidity can come in different forms and carry certain risks and costs. Cash or savings generally provides a low-risk and low-cost option for liquidity because they’re usually accessible without any fees or penalties and generally carry lower historical investment returns than stocks, bonds, or real estate. Home equity loans can also provide liquidity where a specific amount is easy to access, but a fee—in terms of interest—is assessed to withdraw funds. Stocks can also be liquid in that you can receive the proceeds from a sale within 2-3 days; however, fluctuations within the stock market may affect how much money will be available.

Being liquid, or having liquidity, can protect you in the event of an unforeseen expense or provide you with the means to invest in an opportunity to further your career or grow your assets towards financial independence. Losing a job may prompt withdrawal of savings to meet expenses that don’t change while transitioning employment. There are guidelines used for how much liquidity you should have, but it is not fair to project those on you when they may not fit your specific situation. What allows you to sleep at night is a good place to start.

Capital gains and losses are usually discussed in terms of time. “Short term” is used when an asset has been held for less than one year and “long term” when assets are held longer than one year. Both gains and losses can be short term or long term. These assets are taxed differently, so it is important to review your overall tax situation with your financial advisor and tax professional.

When determining if there are going to be capital gains or losses in a given year, there are deadlines to consider. If you sell an investment (e.g. stock) within a taxable account, the sale must be completed by December 31st for the transaction to count in the current year. Mutual funds are slightly different in that they may distribute capital gains at various times throughout the year, but most will make their final distributions (and usually their largest distributions) during November and December. It is important to work with your financial advisor and accountant to determine if there are ways to minimize activities that could increase your tax liability.

Occasionally, there are situations where an unfortunate investment eventuated in a large capital loss. If the loss occurs in the same year as gains from other investments, you may be able to use some or all of the loss to offset some or all of the gains. If there are additional capital losses left over, the IRS allows you to use up to $3,000 of that loss in the next tax year. This, in theory, could continue until all of the losses have been exhausted.

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