Shit You Should Probably Know: A Financial Glossary Best Served with Wine
I recently co-hosted a “Women, Wine & Financial Wisdom” night with a really awesome friend of mine who is a financial planning superstar. She and I share a passion for teaching financial literacy and empowering women with money, so we spent weeks planning and plotting our inaugural event. Would anyone even come? What are we going to talk about? How many glasses of wine should we drink before the guests arrive? How can we be funny and charming and informative and not a snooze fest? We resigned to the fact if all else failed, at least we provided free alcoholic beverages and appetizers on a Wednesday night.
Our goal for the evening was to find the most entertaining and educational ways to teach these lovely ladies about personal finance. Our hope was for each woman to leave feeling more empowered and motivated to handle their money like the confident women we already know them to be.
The idea of teaching financial literacy in a live event format is new to me. Typing witty articles is far easier than being engaging in real life. I can’t even get my dog to listen to me, much less a room filled with brain-wielding humans. This is why my 2017 resolution is to become a better public speaker. Ultimately, I’d like to be able to talk to large groups without breaking out into hives. #DreamBig
I’ve since reflected on what went well, what could’ve gone better, and that everyone is better off if I’m not the one providing the baked goods. The brownies I made for the party were so hard they should’ve registered as deadly weapons. Sorry about that ladies.
We received tons of helpful feedback I’m sure I’ll forget to implement in my next financial literacy seminar. One common theme among the women at the event (But probably also women in general?) was a sense of not wanting to ask “stupid questions”. Although there are definitely stupid questions in life, if it’s related to any sort of personal finance or money topic, it’s not. It’s not stupid, because your future depends on you actually knowing the answer. Unless you consider your future stupid, then ask the damn question.
For many people their “stupid question” is simply not knowing the definition of a financial term. I’m talking about terms you hear on the regular. Like when people talk about their 401(k), what’s the actual definition of a 401(k)? Is it different than a pension or a 403(b)? These aren’t stupid questions by any stretch and it’s important you ask or type it into the Google machine if you don’t know the answer.
So here’s what I’m going to do. I’m going to give you some of the most common financial terms. This is in no way a complete or comprehensive glossary. This is my attempt to provide you a basic understanding of SOME terms you should know. Print this article out, carry it with you, memorize it, or just give it a glance and maybe learn something new! You may know all of these terms, you may know none. I don’t know your life! I simply hope this moves your needle a tiny bit closer to financial independence and badassery.
This glossary is also not in alphabetical order because ain’t nobody got time for that. Also, I just wrote these words as they came to me. Sorry ‘bout it. I probably missed a gazillion common terms, so feel free to email me if you want me to explain a word/concept you don’t see here!
I dare you to read this entire glossary and then yell “I’m financially lit, bitch!”
Stock - If you own stock, you own a piece of a company. Companies need investors for various reasons so sometimes they issue “shares” of stock. If you buy 100 shares of XYZ Company’s stock, and they’ve issued a total of 1 million shares, then congratulations, you own .0001% of XYZ Company! To learn more about stocks: http://www.investopedia.com/terms/s/stock.asp
Bond - A bond is when you lend your money, for a certain period of time, to either a company or a form of government (could be local, state, or federal). In return, you’ll receive interest for being so nice and lending your money to them. Bonds are used to fund various projects and initiatives. Warning: Bonds are far more complex than this. This is the ultimate simplification and basic definition. If you want to learn more about the types of bonds, terms, taxation, etc. visit this site.
Mutual Fund - A mutual fund gathers up a big group of investors like me and you, pools their money, and uses that sum to invest in a bunch of different companies via stocks, bonds, etc. Why do this? Couple of reasons. First, it makes investing in several assets much cheaper. Secondly, It’s important not to put all your eggs in one basket in investing. We call spreading our eggs (money) into different baskets (investments) “diversification”. There’s all kinds of mutual funds out there. They all differ in goals, investments, minimums, expenses, etc. For more info on mutual funds, visit this site.
ETF - This stands for Exchange Traded Fund and they’ve gained a ton of popularity in recent years. “Exchange Traded” means you can buy and sell these funds like a stock on an exchange. The ETFs track indexes (S&P 500 for example), or commodities (think gold and grains), bonds, or index funds. ETFs are cool because they often have lower fees than mutual funds and are liquid (which means you can sell your ETF and quickly convert it to cash). Like the previous definitions, there’s more to it than this, but as of this writing I’ve had far too much coffee and need a bathroom break. Talk amongst yourselves.
Traditional IRA - Ok, I’m back. A Traditional Individual Retirement Account (IRA) is a tax-deferred way to save for your future. Basically, you contribute pre-tax dollars, invest those dollars, and watch them grow (you don’t have to pay taxes on the money in the IRA until you withdraw it). IRAs are a great vehicle for growing your money over the long term.
Roth IRA - A Roth IRA is a fun way to save for retirement as well. Roth IRAs are different than Traditional in that instead of contributing pre-tax dollars, you’re putting in after-tax dollars. The money you put in this year is not tax deductible, but the contributions will grow tax-free and will be taken out tax-free when you retire.
*There are limitations and rules you should be aware of regarding both Traditional and Roth IRAs (contributions, income, age, conversions, etc). If you want to compare the differences between the two IRA options, and see which might be a better fit for you, this is a good place to start.
401(k) - This is a retirement savings plan provided by your employer. The money you contribute will grow tax-deferred. Often, your employer will match your contributions up to a certain percentage to help your money grow even more! Yay, free money! When you withdraw money in retirement, it’ll be taxed at your ordinary income tax rate.
403(b) - Similar to a 401(k), the 403(b) is most commonly the retirement savings plan for public school teachers, non-profit employees, and ministers. There are 457 plans as well, those are usually for government workers.
Pension - You’ve got to love pensions. It’s a retirement account where your employer makes the contributions on your behalf! How nice! Because pensions cost the company a lot of money, employers are moving away from them and shifting the onus of saving for retirement to the employee, a la the 401(k). If you do have a pension, it’s important to know what kind and the details.
Life Insurance - There are two main types of life insurance: term and permanent (whole life). Term insurance lasts for a certain amount of time (usually 10, 20, or 30 years). Permanent insurance is as it sounds: permanent. Having enough life insurance is super important if you have a spouse or children relying on your income. For the vast majority of people, there’s no need for whole life insurance. There are plenty of term insurance policies available to cover your needs for a fraction of the price.
Compound Interest - This is as close to magic as it gets. If you put $1000 in an account earning 10% annually, at the end of one year you’d have $1100, right? So for year two, you’re now earning interest on top of the original interest. Your new $1100 balance will earn the 10%, and at the end of year two the account will be worth $1210. Same for year three: now you’re earning 10% interest on $1210. See how that works? The trick is, the greater number of “compounding periods”, in this case years, the greater the amount of compound interest you will accrue. This is how you boost your savings over a longer period of time. Math is magic!
Adjusted Gross Income (AGI) - This is a common term around tax time (which is quickly approaching! Gah! No! Puke!) Gross income is simply the sum of all the income you earned in a year. From there, you’ll subtract your deductions (the most common include business expenses, medical expenses, alimony, retirement plan contributions, and losses from a sale of property). Gross income - Deductions = Adjusted Gross Income. After your AGI is calculated, you can then apply the standard federal deductions to find out your total taxable income! Isn’t tax preparation the best!? Are we having fun yet? Do accountants even have friends?
Standard Deduction - This is the dollar amount you can subtract from your Adjusted Gross Income. It helps make sure at least part of your income is not taxable. Isn’t the IRS generous and sweet? The amount you are allowed to deduct depends on your filing status, age, if you’re disabled and/or are claimed on someone else’s tax return as a dependent. Remember, you can’t use the standard deduction if you itemize! We could easily fall into a tax rabbit hole here, but I like you too much as a reader and do not wish to inflict any further pain upon you.
Interest Rate - This is the amount the lender charges a borrower for use of their money. You could be either the borrower or the lender! Interest rates can be fixed: the interest rate doesn’t fluctuate over the period of the loan. Or it can be variable: the interest rate fluctuates.
Dividend - When you own shares of a company (stocks!), that company may pay out a sum of money to you on a (usually) quarterly basis. This sum of money is called a dividend. You can re-invest the dividends or take the money and run! Isn’t that fun?
I’ve been working on this glossary all day and I’m pooped. Did you yell “I’m financially lit, bitch!”? Please say yes, otherwise all this work was for naught.
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