5 Common Financial Terms - You Should Know
If you’re just starting to take charge of your financial future, it can be stressful approaching financial planning with confidence. Do you ever talk to your bank or financial manager and think that they’re speaking a foreign language?
Between acronyms, money talk, and words longer than my arm, it’s no wonder that sometimes going to the bank is similar to going to the dentist - but hopefully not as painful. We wanted to help with that. Here are a few financial terms you should know by heart before consulting a financial professional. After all, you worked hard for your money, don’t let ignorance stand in the way of you and financial success.
The easy ones:
1. 401(k) - I feel like this is something everyone earning a regular paycheck is familiar with but doesn’t 100% get. According to the Wall Street Journal, a 401(k) is, “a retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn from the account.1”
2. Roth IRA - An individual retirement plan similar to a traditional IRA. The biggest difference is how they are taxed. While traditional IRA's offer a reduction to your adjusted gross income with contributions made, Roth IRA's are funded with taxable dollars. Because of this distinction, qualified distributions taken from a Roth IRA are tax free (According to current tax code).2
3. Diversification - Of course, if English is your primary language, you probably understand the gist of this term. But when referring to financial actions, Investopedia defines diversification as, “a risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio constructed of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.3”
4. Amortization - Amortization, “is an accounting term that refers to the process of allocating the cost of an intangible asset over a period of time. It also refers to the repayment of loan principal over time.4”
5. Bear market and bull market - Although it might feel like the stock market is a jungle sometimes, terms such as the “bear market” and “bull market” have quite reasonable meanings behind them. “The ‘bear market’ and ‘bull market’ are both terms to describe the stock market and investing. They’re easy to tell apart when you consider the animal's characteristics. In a bullish market, everything’s moving forward: investors are confident making a lot of buys, more companies are entering the stock market, and more money is being invested in the stock market overall. In a bear market, investors pull back (like bears hibernating). Prices start to hover and go down, and people wait and see more before investing additional money into stocks and bonds.5”
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2023 Advisor Websites.