The Pythagorean Theorem is cool and all, but I can’t remember the last time I needed to calculate the area of the square whose side is the hypotenuse…
Sound foreign to you? Yeah, me too!
We didn’t learn the fundamentals of finance in school, so I figured I’d put together a guide of 50 terms EVERYONE should know and understand.
It is essential to understand what these words mean to manage your finances well. Here are some financial literacy terms that can help children and adults alike understand the different terms.
1. Traditional IRA
Traditional IRA stands for Traditional Individual Retirement Account. Individuals can direct their pre-taxed income directly to the account and have their taxes deferred to a later date. You will be taxed when you withdraw the amount from your IRA.
2. Roth IRA
Roth Individual Retirement Account is similar to a traditional IRA, but it has one key difference. All contributions are taxed, and the account is funded with after-tax dollars, but the qualified withdrawals are tax-free. Individuals may also get some tax credit for their investment.
3. Self-Direct IRA
A Self-Direct IRA allows individuals to take charge of their investment. They can invest in stocks, bonds, and mutual funds, but also invest in other options like real estate and private market securities.
4. SEP IRA
SEP stands for Simplified Employment Pension, and it is designed for self-employed professionals and business owners with full-time employees. The employer gets a tax deduction for contributions and can contribute towards their employee’s SEP IRA as well.
5. Solo 401k
Solo 401k is a retirement plan for self-employed professionals or small business owners who have no full-time employees. The business is run only by the owner and their spouse. The account mimics a traditional employer-sponsored 401k option but is suitable for self-employed individuals who don’t get employer contributions.
FSA stands for Flexible Spending Account or Arrangement. It is a tax-advantaged savings account that is set up for an employee by their employer. Employees can contribute a portion of their income to the account to pay for future qualified expenses.
7. Bull Market
A Bull Market is when the securities prices in the financial market are expected to rise or are rising. Bull Markets often refer to extended periods where the market shows an upward trend. It can last for several months or years.
8. Bear Market
A bear market is when the prices of securities fall by more than 20%. The general investor sentiment during this period is negative and pessimistic. People are less inclined to invest in the market. Bear Market periods can last for months at a time and cause substantial damage to the market value.
Commodities are essential goods in commerce that live up to a particular established standard in terms of quality. Commodities from the same category have similar value and quality with minor differences. These products are often used in the production of other items. Common examples are iron, oil, gold, grains like rice, etc.
10. No-Loads Funds
No-Loads funds are specific types of mutual funds where the shares held can be sold without any sales fee or commission. The investment company distributes the shares directly to the investors, so there’s no third-party involvement in the transaction.
11. Investment Sectors
Sectors are different parts of the economy that produce the same or similar goods. Some of the most significant sectors are the energy sector, basic materials sector, healthcare sector, consumer goods sector, financial sector, and information technology sector.
12. Risk Tolerance
Risk tolerance is the degree of risk or variation in returns an investor is willing to accept from their investment. Individuals make critical decisions based on this factor, and they need a good understanding of how much loss they can take.
13. Dollar Value Averaging
Dollar Value Averaging is an investing strategy where the investor sets a target amount for their asset base and makes monthly contributions towards it. The monthly contributions are adjusted based on the previous month’s gain or shortfall.
14. Year to Date Rate of Return
The year-to-date rate of return is an assessment metric that allows investors to track the performance of their portfolios. Investors track the amount of profit made from the first date of every calendar year.
15. Aggressive Growth
Aggressive growth is an investment fund that focuses on getting the highest possible capital gains. Investors place their money on growth stocks or stocks with high growth potential. These stocks usually belong to successful startups and unicorns.
This is the style of investing that involves medium to large businesses that still experience an upward movement. They move with the market but appreciate over time. These stocks aren’t as risky as aggressive growth stocks, but they can still have some risk.
17. Growth and Income
These are the most stable assets in a portfolio and will provide consistent income. They are some stable, well-established companies that have been around a long time. These companies often offer goods and services that are essential and aren’t severely affected by market conditions.
These are stocks of foreign companies in international markets. Investors use it as a way to stabilize their portfolio against market downturns in their own country. For example, an investor might invest in some Japanese or Australian companies and get gains even if the US market is facing a downward trend.
Leverage is an investment strategy where individuals borrow money to strengthen their portfolio or expand their asset base. Investors use leverage because it can amplify the returns on their investment and generate profit.
20. Blue Chip Companies
Blue-chip companies offer products and services that are always in demand and sell well. They have a reliable growth record and have been around for many decades. Blue-chip stocks are valuable because they generate a steady income. These stocks can handle market changes well.
Equity is the number of money shareholders will get if all of the company’s assets were sold, and its debt was cleared. It is a significant financial metric that helps investors understand the financial health of a company.
22. Vesting Schedule
Employers offer a vesting schedule program to employees to retain them. It is an incentive program where the employer invests in an asset like a retirement fund or stocks and gives their employee full ownership of it.
23. Passive Income
Passive income is income that requires little active work and comes from various ventures or investments. Activities like peer-to-peer lending, rental properties, or even starting a blog with user-generated content.
24. Capital Gains Tax
Capitals Gains tax is a tax levied on Capital Gains, which is the difference between the original purchase price and the current sale price. For example, if you buy a home for $150,000 and sell it for $250,000, the $100,000 profit you gain is subject to capital gains tax.
25. Mega Backdoor Roth
Mega Backdoor Roth is an investment strategy that allows you to contribute $36,000 to your Roth account without facing any income restrictions. Investors contribute their after-tax money to their 401k and then roll it into their Roth IRA later. This money is never taxed.
FI/RE stands for Financial Independence/Retire Early, and it is an aggressive savings and investment program that allows people to gain financial independence early in life. It involves saving around 70% of your income and making small withdrawals after retirement.
27. Debt-to-Equity Ratio
The debt-to-equity ratio is the ratio of the company’s liabilities divided by shareholder’s equity. This metric is used by investors to understand the company’s financial leverage. It is also known as leverage or risk gearing.
28. Company Matching
Company or employer matching is the strategy used by employers while contributing to their employee’s 401k. The employer matches whatever elective deferral contribution the employee makes to their retirement account. Most employers will only contribute up to a certain dollar amount.
29. Withdrawal Rate
A withdrawal rate is the amount of money a retired individual can withdraw from their retirement accounts without depleting it completely. The safest withdrawal rates range between 3% and 4.5% every year.
30. Tax-Advantaged Accounts
A tax-advantaged account is a type of account, plan, or investment option that offers some tax benefit. It can be tax-deferred, exempt, or tax credit. Plans like IRA, municipal bonds, annuities are tax-advantaged accounts.
31. Compound Interest
Compound interest is the interest on the sum of principal amount and added interest. If you add the interest gained to the principal instead of withdrawing it and get interest on the total amount, you have compound interest.
32. Time Cost of Money
The time cost of money is a financial concept that shows that the money you have now is more valuable than the equal amount of money you will have in the future because of its earning potential.
ROI stands for Return On Interest. It is the difference between the net profit earned from an investment and the original cost of the investment. High ROI indicates that you have made a good investment and are getting good profits.
34. Mutual Funds
A mutual fund is a collection of stocks, securities, and assets financed by a pool of money from several investors. The profits from the funds are distributed equally among all of the investors based on their investment.
35. Asset Classes
An asset class is a collection of assets or instruments that behave similarly in the market and can be grouped. Some of the most significant asset classes include stocks, bonds, and money market instruments.
Capital is a board term for different kinds of financial assets. It can indicate buildings, facilities, machinery, liquid funds held in accounts. Capital is wealth that you can actively use to manufacture products or generate more wealth.
Volatility is the study of variation in returns for a given market in a set period. This metric is used to understand just how risky investment can be. Investment with high volatility is often riskier but can also offer higher gains because it is more mobile.
38. Capital Gains
Capital gains are the difference between the original purchase price and the final sale price. If you buy an asset for $20,000 and sell it for $70,000, your capital gains are $50,000.
39. Securities and Exchange Commission
The SEC is an independent agency of the United States Government. It is responsible for monitoring the market, protecting the investors, regulating practices, and ensuring the market remains fair and in order.
A consumer is an individual who buys goods and services from a business. They buy goods for personal use and not for resale or use in manufacturing.
A producer is an individual or organization that produces items for sale or to be used in manufacturing.
APR stands for Annual Percentage Rate is the total annual charge for borrowing money. This calculation provides a standard number for borrowers to compare when they’re looking for loans.
APY stands for Annual Percentage Yield. It helps individuals calculate the annual return rate while taking compounding interest into account. This system is similar to APR, but it allows people to account for variable interest.
Credit is a broad financial term that can be applied to different situations. It usually is a contractual agreement between two parties where a lender agrees to lend a borrower something of value and the borrower pays them back with interest at a later date.
45. Deferred Compensation
Deferred compensation is a system where a fixed portion of an employee’s income is set aside and paid to them at a later date in the form of retirement funds, pensions, and other such plans.
Bond is also known as a fixed-income security. It is used by companies to raise capital for their processes. The company must pay a certain fixed sum at regular intervals to the investor in return for their investment.
47. EE Bond
Series EE bond is a savings bond provided by the US government. It isn’t marketable and bears interest over the investment period. This bond is guaranteed to grow consistently and become at least double in size by the end of the investment period.
48. Fixed Expenses
Fixed expense is a cost that doesn’t change even if the company’s volume of production changes. A business has to deal with these fixed expenses even if it produces no goods for a set period.
A budget is a financial plan that is set for a specific time. It includes factors like cost, revenue, profits, cash flows, different kinds of expenses, etc.
Liquidity indicates how quickly an asset can be dissolved or sold off in a market at a price that stays true to its value. This usually shows how quickly the asset can be converted into cash.
Finance flashcards for kids is a great way to get them started on their financial journey. These terms will help them understand the basics of various finance concepts. The cards provide simple definitions and can be used for people of all ages.