Whether you’re planning to develop an investment portfolio or are trying to get a grasp on your retirement plan options, this list of common financial terms will help give you a better understanding of how your money can be made to work for you:
Compound Interest – Compound interest is your best weapon for generating passive wealth and getting “free” money. The easiest way to think about this is it’s the interest your past interest accrues. So if your savings account received $1.00 in interest last month, your overall savings balance has increased by $1. Next month, your interest will be calculated on your total balance that includes that extra buck. Whatever interest accrues next month will be added to the total balance for the month after that, and so on.
FICO Score – FICO scores are relatively new, having been launched in 1989. FICO stands for Fair Isaac COrp, the company which created the FICO score. Your FICO score will be anywhere from 300 – 850 with 850 being the best. Your score is based on things like the amount of debt and how quickly you pay off debt. The higher your score, the better rates you’ll get for credit cards, loans, and mortgages.
Net Worth – Net worth is a simple calculation that lets you know how stable your current situation is. To find your net worth, combine all assets (cash, equity, retirement accounts, etc.) and subtract the total amount of debt you owe. Whatever is leftover is your net worth.
Inflation – You may often hear financial analysts running around terrified of inflation, but it’s actually a common thing that happens. Inflation is calculated based on the overall cost of goods and services that are similar in quality. Most central banks try to keep their country’s inflation rate at around 2% per year, but these can change based on swings in the economy. Bad times like the Great Depression created negative inflation, which meant prices decreased over time while economic booms like the 1950s can see rising prices due to positive inflation.
Asset Allocation – Asset allocation means the intentional places you’ve put your money. If you put $500 towards YOLO stock market investing like WallStreetBets, then you’ve allocated $500 of your assets towards that. It’s best to allocate your assets to different places so that you’re not bankrupt because of a bad investment.
Capital Gains – Capital gains are a tax levied against the profits you’ve received from the sale of something like your home or stocks. The tax rate is different for short-term gains which were acquired less than one year after purchase and long-term gains (1 year+). Short-term capital gains are higher than long-term.
Rebalancing – When your portfolio shifts due to market fluctuations, rebalancing sets your percentages back to the original allocations. This could mean doing things like selling stocks, buying bonds, or holding more cash. Doing this helps lower risk and is a good thing to do at least once per year.
Stock Options – If you’re employed by a company, you may have the chance to receive stock options. These are just the right, but not requirement, to buy company stock at a predetermined price during a specific period of time.
Defined Contribution Plans – These are 401ks or any other retirement plan a company offers where you and/or your employer make regular contributions. These are typically funded with pre-tax dollars.
Term Life Insurance – Term life insurance is essentially a gamble. It’s coverage provided by an insurance company over a set period that’s anywhere from 5 – 30 years. If you die during this period and are up-to-date with payments, your beneficiaries receive a payout. If you stay alive past the coverage period, your policy expires, and you don’t get a refund. But you’re still alive, so you know, it’s not so bad.
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