Financial Literacy: Talk the Talk

Financial Freedom in 2021! Stay on Track: Day 18

There are a lot of vocabulary and buzz words associated with personal finance, and the lingo can sometimes shy people away from engaging in money conversations or asking important questions about their investments and debts.

The next few days will be focused on investing strategies. Here is a *short* list of basic key words related to investing so you can be ITK:

• 401K – A qualified plan established by employers to which eligible employees may make a salary deferral. Always invest up to at least the company match percentage. It’s free money!
• 529 – Tax-advantaged savings vehicle designed to save for the future costs of higher education. It can be used for the education of any family member, even yourself.
• Annual Percentage Yield (APY) – The real rate of return earned on an investment, taking into account the effect of compounding interest.

• Bond – A debt instrument where the issuer (borrower) promises to pay back the lender (bond purchaser) at a specific rate over a certain amount of time.
• Capital Gain (Loss) – The amount of money made (lost) between the purchase and sale of some investment.
• Certificate of Deposit (CD) – A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate, and can be issued in any denomination.
• Diversification – A risk management technique that mixes a wide variety of investments within a portfolio.
• Dividend – Sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits (or reserves).
• Inflation – A rise in the general or average price level of all the goods and services produced in an economy. (Average is 3% annually.) This is why not investing is riskier than investing, according to many experts.
• Investment or Brokerage Firms – A business whose main responsibility is to be an intermediary that puts buyers and sellers together in order to facilitate a transaction. Brokerage companies are compensated via commission.
• Index Fund – A mutual fund with a compilation of assets constructed to match the performance of a specific market index, such as the S&P 500.
• IRA (Traditional) – An account in which an individual may set aside earned income in a tax-deferred savings plan for his or her retirement.
• Mutual Fund – An investment fund that pools together investors’ money to purchase a diverse portfolio of holdings. These funds are actively managed.
• Opportunity Costs – Real or potential costs associated with missed opportunities based on choices made.
• Roth IRA – An individual retirement plan that bears many similarities to the traditional IRA, but contributions are not tax deductible and qualified distributions are tax free.
• Rule of 72 – A method used in finance to quickly estimate the doubling or halving time through compound interest or inflation, respectively. For example, using the rule of 72, an investor who invests $1,000 at an interest rate of 4% per year, will double their money in approximately 18 years.

Many of the definitions above came from https://financeintheclassroom.org/student/vocabulary.shtml. Another fabulous resource that goes more in depth is this glossary of terms.

In addition to the terms above, the following buzz phrases might come up during your personal finance journey:

• 4% Rule – States that you can withdraw 4% of your portfolio each year in retirement and not run out of money. It was created using historical data on stock and bond returns over a 50-year period.
• Financial Freedom – Control over finances instead of them having control over you.
• FIRE Movement – Acronym standing for Financial Independence Retire Early. Committed participants strive for a >50% savings rate, diverse investment portfolios, and retiring much earlier than expected, often in their 30s.
• Savings Rate – Measurement of the amount of money, expressed as a percentage, that someone deducts from their income to set aside as a nest egg or for retirement. Calculate yours here.

Today’s action step is to look up any additional terms related to finance or investing that you’ve heard but never fully understood. Also, calculate your savings rate and then answer the question, “What would financial freedom mean to me and my family?”