Not-so-sexy (but critical) Key Terms For Financial Wellness

By Ella Murdock Gardner

We get it: vocab is not the sexist part of personal finance. Paying off debt, watching your investments grow, achieving financial independence and peace of mind, traveling the world – now that’s sexy. That’s an ice cream sundae with a cherry on top.

But with financial literacy hovering around 57% in the US - and declining in some populations - it’s crucial to build a working knowledge of key financial terms so that we can ask informed questions and make educated decisions about where to put our money. In order to get to dessert, we need to eat our vegetables.

So, here are some quick and easy definitions to get you started.

Assets: Anything that has significant cash value. Assets can include property, cars, fine art, collectibles (ex. your rare platypus Beanie Baby), investments, and jewelry.

Appreciation: The increase in value of an asset over time. For example, your rare platypus Beanie Baby has appreciated in value while it’s been sitting in your attic for all these years.

Bonds: An investment where you loan money to a government or other entity at a fixed interest rate for a certain period of time. After that period, the money loan plus the interest earned is repaid, making bonds a low-risk investment option.

Compound interest: When interest earned over a certain period is added to the original payment before the next interest payout is calculated. Think of it as a kind of snowballing effect for your money: if you deposit money in your savings or investments and it earns a certain amount of interest, that amount is added onto the original contribution for the next interest assessment.

Credit: Money that you can access to purchase goods and services – you’re expected to pay it back over a specified period of time. It’s important to make these payments on time, or you’ll have to pay interest. 

Dividends: The money a company pays out (often quarterly) to its shareholders out of its profits or reserves. Basically, when they make it rain (or drizzle).

Exchange-Traded Fund (EFT): Essentially a holding place for your assets. The money invested in an ETF may be distributed across stocks, bonds, and other securities. While ETFs are funds, they trade throughout the day like stocks and bonds.

Fees: The percentage of your money that you pay in order for that money to be professionally managed. It’s important to keep an eye on fees – while they might seem negligible (many financial advisors charge 1%), fees can add up over time and greatly impact your overall earnings.

Index Funds: A portfolio of stocks or bonds designed to mimic the composition and performance of a financial market index (which is essentially a segment of the entire financial market). Think of it this way: individual stocks go up and down, but the entire stock market generally goes up over time. Index funds have lower expenses and fees than actively managed funds, making them a great option for your retirement accounts.

Interest rate: A certain percentage of a sum that’s added over each pay cycle. For a debt, that means the lender multiplies the interest rate by the remaining balance owed and adds that to your bill. (This is the type of interest we don’t like.) For an investment, your contributions are multiplied by the interest rate and your eventual payout increases by that amount. (This is the type of interest we love!)

Mutual fund: Another holding place for your different assets (like ETFs). Some mutual funds are managed by professional third parties, allowing you access to professionally managed portfolios of equities, bonds, and other securities. Unlike ETFs - which trade throughout the day like stocks - you can only buy or sell mutual funds after the market closes (at 4 pm ET).   

Roth IRA: A specialized type of Individual Retirement Account where you contribute money you earn after taxes, but the withdrawals are tax-free. This is a great option if you’re in a low tax bracket because of your income. And since your contributions have already been taxed, there are no penalties for early withdrawal (before the age of 59.5), which is great if you’re worried about getting into sticky financial situations down the road.

Stock: The money a business raises by selling its shares. Ownership of a corporation is divided into little bits (shares) which you can purchase. When the company makes money, your shares receive a portion of the profits, paid out as dividends.

Target-date funds: A type of mutual fund (holding place) that aims to grow your wealth over a certain period – hence, the “target-date” part of the name. Often, this target-date will be set for when you hope to retire. A target-date fund rebalances your assets over time as your tolerance for risk changes. For example, when you’re young and just starting out in your career, you might have your money in 90% stocks and 10% bonds since stocks are riskier and generally more lucrative. However, as you get closer to retirement, the target-date fund will slide the scale over and begin allocating more money to bonds, which are safer. Target-date funds are a great option if you want a hands-off approach to investing.

Traditional IRA: A type of Individual Retirement Account where you contribute pre-tax income and pay taxes on the money that you withdraw upon retirement. Unlike a Roth IRA, there are penalties if you withdraw your money before you turn 59.5. This is a good option if you’re currently in a high tax bracket since it allows you to wait to pay taxes until you’re in a lower tax bracket in retirement.

401(k): A retirement plan offered through an employer. You make recurring contributions from your pre-tax income into a retirement account, and your employer can “match” contributions up to a certain percentage or amount. (Pretty sweet, right?) You can begin withdrawing from your 401(k) at age 59.5.

529 college savings plan: The most common type of college savings plan (which usually includes tax benefits) that parents can use to save up for their children’s education. In the words of The Notorious B.I.G., “Take a better stand. Put money in my mom’s hand. Get my daughter this college plan, so she don’t need no man.”

Now more than ever, financial literacy is proving crucial in the United States. According to Forbes, 38% of US households have credit card debt, 33% of Americans have no money saved for retirement, 43% of student loan borrowers are not making payments, and 44% of Americans don’t have enough cash to cover a $400 emergency. And these are pre-pandemic numbers that don’t reflect disparities based on gender, race, and socioeconomic status. So how do we close that gap? It starts simple – if we can take small steps toward educating ourselves, we can take strides toward greater equality in our society.

Maybe vocab is a little sexy after all.