Understanding financial matters can be
difficult because of the jargon used. Becoming
familiar with these ten financial terms may
help make your financial picture clearer.
2. Market volatility
Market volatility measures the rate at which
the price of a security moves up and down. If
the price of a security historically changes
rapidly over a short period of time, its volatility
is high. Conversely, if the price of a security
rarely changes, its volatility is low. Why is it
important? Understanding volatility can help
you evaluate whether a particular investment
is suited to your investing style and risk
tolerance.
3. Inflation
Inflation reflects any overall upward movement
in the price of goods and services in the
economy. Why is it important? Because inflation
generally pushes the cost of goods and
services higher, any estimate of how much
you'll need in the future--for example, how
much you'll need to save for retirement--
should take into account the potential impact
of inflation.
4. Asset allocation
This strategy means spreading investments
over a variety of asset categories, such as
equities, cash, bonds, etc. Why is it important?
How you allocate your assets depends
on a number of factors, including your risk
tolerance and your desired return. Diversifying
your investments over asset classes can
potentially help you manage risk and volatility.
5. Net worth
Net worth is what your total holdings are worth
after subtracting all of your financial obligations.
Why is it important? Your net worth will
probably fund most of your retirement years.
Therefore, the faster and bigger your net
worth grows, the earlier and more comfortably
you will be able to retire. Once retired,
preserving your net worth to last through your
retirement years is your goal.
6. Five C's of credit
These are character, capacity, capital, collateral,
and conditions. They're the primary elements
lenders evaluate to determine whether
to make you a loan. Why is it important? With
a better understanding of how your banker is
going to view and assess your creditworthiness,
you will be better prepared to deliver
appropriate information to obtain the loan you
want or get a better interest rate.
7. Sustainable withdrawal rate
Sustainable withdrawal rate is the maximum
percentage that you can withdraw from an
investment portfolio each year to provide
income that will last, with reasonable certainty,
as long as you need it. Why is it important?
Your retirement lifestyle will depend not only
on your assets and investment choices, but
also on how quickly you draw down your retirement
portfolio.
8. Tax deferral
Tax deferral refers to the opportunity to pay
income taxes in the future for investment interest
and appreciation earned in the current
year. Why is it important? Tax-deferred
vehicles like IRAs and annuities produce
earnings that are not taxed until withdrawn.
This allows those earnings to compound,
further adding to potential investment growth.
9. Risk/return trade-off
This concept holds that, in order to achieve a
higher personal investment return, you must
be willing to accept greater risk. Why is it important?
When considering your investments,
the goal is investing to get the greatest return
for the level of risk you're willing to take, or to
minimize the risk involved in trying for a given
return.
10. Annuity
An annuity is a contract where you pay money
to an insurance company in return for the
insurer's promise to pay it back, with interest,
in the future. Why is it important? You can
supplement other retirement savings with taxdeferred
annuity funds, and you can add to
your retirement income with payments from
your annuity for a fixed period of time or for
the rest of your life
difficult because of the jargon used. Becoming
familiar with these ten financial terms may
help make your financial picture clearer.
1. Time value of money
The time value of money is the concept that
money on hand today is worth more than the
same amount of money in the future because
the money today can be invested to earn
interest. Why is it important? Understanding
that money today is worth more than the same
amount in the future can help you evaluate
and compare investments that offer returns at
different times.
The time value of money is the concept that
money on hand today is worth more than the
same amount of money in the future because
the money today can be invested to earn
interest. Why is it important? Understanding
that money today is worth more than the same
amount in the future can help you evaluate
and compare investments that offer returns at
different times.
2. Market volatility
Market volatility measures the rate at which
the price of a security moves up and down. If
the price of a security historically changes
rapidly over a short period of time, its volatility
is high. Conversely, if the price of a security
rarely changes, its volatility is low. Why is it
important? Understanding volatility can help
you evaluate whether a particular investment
is suited to your investing style and risk
tolerance.
3. Inflation
Inflation reflects any overall upward movement
in the price of goods and services in the
economy. Why is it important? Because inflation
generally pushes the cost of goods and
services higher, any estimate of how much
you'll need in the future--for example, how
much you'll need to save for retirement--
should take into account the potential impact
of inflation.
4. Asset allocation
This strategy means spreading investments
over a variety of asset categories, such as
equities, cash, bonds, etc. Why is it important?
How you allocate your assets depends
on a number of factors, including your risk
tolerance and your desired return. Diversifying
your investments over asset classes can
potentially help you manage risk and volatility.
5. Net worth
Net worth is what your total holdings are worth
after subtracting all of your financial obligations.
Why is it important? Your net worth will
probably fund most of your retirement years.
Therefore, the faster and bigger your net
worth grows, the earlier and more comfortably
you will be able to retire. Once retired,
preserving your net worth to last through your
retirement years is your goal.
6. Five C's of credit
These are character, capacity, capital, collateral,
and conditions. They're the primary elements
lenders evaluate to determine whether
to make you a loan. Why is it important? With
a better understanding of how your banker is
going to view and assess your creditworthiness,
you will be better prepared to deliver
appropriate information to obtain the loan you
want or get a better interest rate.
7. Sustainable withdrawal rate
Sustainable withdrawal rate is the maximum
percentage that you can withdraw from an
investment portfolio each year to provide
income that will last, with reasonable certainty,
as long as you need it. Why is it important?
Your retirement lifestyle will depend not only
on your assets and investment choices, but
also on how quickly you draw down your retirement
portfolio.
8. Tax deferral
Tax deferral refers to the opportunity to pay
income taxes in the future for investment interest
and appreciation earned in the current
year. Why is it important? Tax-deferred
vehicles like IRAs and annuities produce
earnings that are not taxed until withdrawn.
This allows those earnings to compound,
further adding to potential investment growth.
9. Risk/return trade-off
This concept holds that, in order to achieve a
higher personal investment return, you must
be willing to accept greater risk. Why is it important?
When considering your investments,
the goal is investing to get the greatest return
for the level of risk you're willing to take, or to
minimize the risk involved in trying for a given
return.
10. Annuity
An annuity is a contract where you pay money
to an insurance company in return for the
insurer's promise to pay it back, with interest,
in the future. Why is it important? You can
supplement other retirement savings with taxdeferred
annuity funds, and you can add to
your retirement income with payments from
your annuity for a fixed period of time or for
the rest of your life
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