Back to the Basics: 35 Key Financial Terms

Welcome to Financial Terms 101, brought to you by 210 Financial! We’ve compiled a list of 35 of the most common financial terms you’ll encounter and their meanings.

Navigating the financial world and its unique terminology can be confusing, much like starting a new school subject. But don’t worry, we’re here to bring you back to the basics. So, grab your notebook and pencil, and let’s dive into our financial vocabulary lesson!

1. Investing: When you put money into something with the possibility of gaining a profit or material result by putting it into shares, property, or by using it to develop a commercial value.
2. Financial Advisor: A financial advisor is someone who you can employ who may help guide your financial services.

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3. 401(k) Plan: This plan is a feature for employee-qualified profit-sharing that allows them to contribute a portion of their wages to individual accounts.
4. IRA (Individual Retirement Account): An individual retirement account or IRA consists of a long-term, tax-advantaged savings account that individuals with earned income can use to save for retirement.
5. Roth IRA: Roth is an after-tax income one can set aside for an individual retirement account up to a specified amount each year. Earnings and withdrawals on the account after age 59 and a half are tax-free.
6. Traditional IRA: Traditional IRAs (Individual Retirement Account) allow one to contribute their pre-tax dollars into a retirement account where investments grow tax-deferred until withdrawal during retirement.
7. Pension Plan: A pension is a defined-benefit plan involving an employer guaranteeing a specific payment if an employee works for a company for a specified period.
8. Required Minimum Distribution (RMD): The minimum amount retirees must withdraw annually from their retirement accounts, starting at a specified age (currently 72 for most accounts). Ensuring the gradual depletion of retirement savings and tax obligations on withdrawals.

a. Example: Once you turn 72, you must withdraw a set minimum from your IRA or 401(k) each year. This withdrawal amount is calculated based on IRS guidelines and helps manage retirement savings effectively.

9. Defined Contribution Plan: An employee and employer contribute to an individual account. The value then fluctuates based on contributions, investment performance, and fees. When the employee retires, they can use the account to receive benefits.
10. 403(b) Plan: A retirement savings option is available to employees of public schools, nonprofits, and religious organizations. Employees can contribute part of their salary to individual accounts, often with tax advantages like 401(k) plans.
11. 457(b) Plan: This plan allows employees who sponsor organizations to defer income taxation on retirement savings into their future years.
12. Simple IRA (Savings Incentive Match Plan for Employees): A savings plan that enables small business employees and employers with 100 or fewer employees and no other retirement plans to contribute to traditional IRAs.
13. Annuity: Financial products by financial institutions and purchased by individuals are designed to provide a steady income stream, typically for retirement.
14. Retirement Income Fund: An investment product that’s available to anyone as a conservative way to save for retirement. It is well-diversified in large and mid-cap stocks and bonds.
15. Retirement Planning: A retirement plan is a strategy for long-term saving, investing, and finally withdrawing money you accumulate to achieve a financially comfortable retirement.

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16. Income Replacement Ratio: The replacement ratio helps determine how much income you need to maintain your pre-retirement lifestyle.
17. Vesting: a legal term used in the context of employer-provided benefits, referring to the process by which an employee earns the right to receive employer-provided contributions or benefits over time.
18. Social Security: Benefits provided by a federal insurance program for retirees and those who are unemployed or disabled.
19. Life Insurance: An insurer pays a designated beneficiary a sum of money, known as the death benefit, upon the death of the insured or after a specified period. Policyholders pay premiums to maintain coverage.

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20. Allocation: The action of distribution of your finances according to a plan. An allocation is an amount of money given to a financial advisor or used for a particular purpose.

a. Example: Once you turn 72, you must withdraw a set minimum from your IRA or 401(k) each year. This withdrawal amount is calculated based on IRS guidelines and helps manage retirement savings effectively.

21. Assets: Assets represent something when converted into cash or used to generate revenue.
22. Equity: The value of shares issued by a company. The amount of money paid to the owner after selling and any associated debts were paid off.
23. Revenue: The total sum of money brought in by a company’s operations measured over time. A business’s revenue is its gross income before subtracting any expenses. Profits and total earnings define revenue. It is the financial gain through sales and services rendered.
24. Interest: The cost of borrowing money is the payment from a borrower or a deposit-taking financial institution to a lender or depositor for the amount borrowed or deposited. Interest can be a fixed or variable amount, usually expressed as a percentage of the principal sum over a specified period.
25. Return on Investment (ROI): Is a performance measure used to evaluate the efficiency or profitability of an investment. Divide the net income (or profit) generated by the investment by the initial cost of the investment.

ROI= (Investment Cost/Net Income) ×100

26. Liquidity: Refers to how quickly and easily an asset can be converted into cash without affecting its value. Cash is the most liquid asset, while others follow stocks and bonds.
27. Market Capitalization: Represents the total dollar market value of a company’s outstanding shares of stock. You can calculate it by multiplying the current share price by the total outstanding shares.

a. Example: If Company XYZ has 10 million shares and each share is worth $50, the market capitalization of Company XYZ is $500 million (10 million shares x $50 per share). Market cap helps investors determine the size and value of a company in the market.

28. Market Volatility: Refers to the frequency and magnitude of price movements, up or down, creating a volatile market.
29. Bond: A fixed-income instrument where you can lend money to a government or company at a particular interest rate for a long time.
30. Stock: Is a general term used to describe a share in the ownership of a company. When you own stock, you own a piece of the company and can claim part of its assets and earnings. Stocks are also known as equities.
31. Mutual Fund: A professionally managed investment vehicle that pools money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities.

a. Example: Imagine you and several other investors each contribute $1,000 to a mutual fund. The fund manager uses the combined $100,000 to invest in a mix of stocks, bonds, and other assets. By investing in a mutual fund, you benefit from the manager’s expertise and the diversification of the fund’s holdings, helping reduce risk.

32. Index Fund: A type of mutual fund or exchange-traded fund (ETF) designed to replicate the structure and performance of a specific financial market index, like the S&P 500 or the Dow Jones Industrial Average.
33. Depreciation: The reduction in the value of an asset over time is due to factors such as age, wear and tear, and obsolescence.

a. Example: A company buys a delivery truck for $50,000. Each year, the truck loses value because it is used for deliveries, incurs mileage, and undergoes wear and tear. After five years, the truck might only be worth $20,000.

34. 210 Retirement Blueprint: 210 Financials review of your finances where you may learn where you stand, how well you’re protected, and where to go next.

35. 210 Financial: A financial firm that’s passionate about helping individuals and families pursue their ideal retirements.

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As we wrap up our Financial Terms 101 class, remember that understanding these basic terms is like mastering the ABCs of finance. Just as foundational knowledge is key to success in school, grasping these concepts is crucial for navigating the financial world confidently.

Whether you’re a student learning about personal finance or a seasoned professional brushing up on your knowledge, we hope this guide has been helpful. Stay curious, keep learning, and let 210 Financial be your guide on this journey through the world of finance. Here’s to a successful school year and a bright financial future!

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