12 Financial Terms That Shouldn’t Intimidate You
Many of us are intimidated by personal finance. Financial terms can be confusing but they really don’t have to be. At some point, I froze at the thought of learning about investing but not anymore! You don’t have to turn your back and in doing so, give up on your financial literacy and financial freedom. Once you pick up these terms, you’ll be using them like a pro. Here are 12 financial terms that should not intimidate you
FIRE stands for Financial Independence, Retire Early. It is a movement dedicated to extreme savings and investments that allow people to retire way earlier than the conventional retirement age of 65. Think 30s or 40s! The FIRE movement came out of the book ‘Your Money or Your Life’ and is becoming even more popular as more millennials embrace the movement. Some may employ extremely frugal lifestyles to save up to 75% of their income. There are many variations of the movement such as Fat FIRE, Lean FIRE, Barista FIRE, Coast FIRE. The FIRE movement probably deserves its own blog post as I have my opinions about the movement and there’s so much more to unpack.
2. S&P 500
The S&P 500, or simply the S&P is a stock market index that tracks the stock performance of the 500 largest companies listed on the stock exchange. The S&P stands for Standard & Poor’s. The S&P 500 is widely used by investors as the benchmark of the overall market. The index was introduced in 1957 by Standard & Poor. Quarterly, a committee selects all 500 corporations based on their liquidity, size, and industry. As of August 31, 2020, the top 10 companies in the S&P 500 were Apple, Microsoft, Amazon, Facebook, Google, Johnson & Johnson, Berkshire Hathaway B, Proctor & Gamble, and Visa Inc.
A recession is a decline in economic activity lasting more than a few months. This decline is usually visible in GDP, employment, retail sales, and so on.
A depression is a severe version of a recession.
5. Mutual Fund
A mutual fund pools cash to invest in stock, bonds or other securities. Professional fund managers manage mutual funds. The fees of a mutual fund will depend on whether a mutual fund is actively or passively managed. Fund investors pay an annual fee for the running of the fund. Actively managed mutual funds cost more and these expenses can add up over time, and on the other hand, passively managed mutual funds like index funds cost significantly less.
6. Index Fund
An index fund is a type of mutual fund whose holdings (collection of stock, bonds, or other securities) are built to track or match a specific market index such as the S&P 500. There are thousands of index funds but regardless of the index a fund may track, the goal of an index fund is to match the performance of the underlying index. Index funds may save investors time and effort of researching individual investments and managing a portfolio themselves. Index funds have the advantage of costing less than other types of funds.
7. Exchange Traded Fund (ETF)
An Exchange-traded fund is similar to a mutual fund in many ways. However, ETFs can be purchased and sold throughout the day on stock exchanges while mutual funds cannot.
The Health Savings Account (HSA) is a tax-advantaged savings account to save for qualified medical expenses. The HSA comes with three main tax benefits. HSA contributions are not subject to federal income tax, and the earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free. You can roll forward any funds/investments leftover in your HSA indefinitely and even through retirement.
9. Custodial Account
A custodial account is an account set up and administered by an adult for a minor/child. Custodial accounts may be an excellent way to make a financial gift to your child – yours, a relative’s, or a friend’s. Funds and assets deposited into custodial accounts are immediately and irrevocably the property of the minor/child. You can’t take it back. The custodian has the responsibility to manage the assets for the minor until custodianship ends. In some states, a custodian can specify the age when the child will take control of the account.
Diversification is spreading investments around so that your exposure to any one type of asset is limited. It helps reduce the volatility of your portfolio over time by offsetting losses in one asset class with gains in another asset class. A way to balance risk and reward in your investment portfolio is to diversify your assets. Diversification is putting your eggs (investments) in multiple baskets.
11. Dollar Cost Averaging
Dollar-Cost Averaging means investing fixed amounts consistently over time in the same fund or stock at regular intervals. Dollar-Cost Averaging is a strategy that reduces the impact of volatility in stock prices. The method smooths purchase price out over time and ensures an investor isn’t investing at the highest points.
12. Brokerage Account
A brokerage account is a means for investors to invest in the stock market. You can buy stocks, bonds, ETFs, and mutual funds with your brokerage account. Licensed brokerage firms operate brokerage accounts. Some brokerage firms require initial deposits and others do not require a deposit. You can open a brokerage account online.
There you have it, 12 financial terms that should not intimidate you. Which of these twelve items were new to you?