Financial Jargon That’s Simpler Than It Sounds
A movie director knows the day is almost finished once they set up the “martini shot.” Journalists tuck the who, what, where, when and why into a paragraph known as the “nut graf.” Truckers radio their brethren when they spot a “smokey” clocking speeders. Elite hockey players shame goalies by scoring through the “five-hole.”
No matter the occupation, there’s a thesaurus of jargon familiar to insiders but foreign to outsiders — nut graf, really? To be fair, industry-specific jargon is useful shorthand (nut graf, by the way, is short for nutshell paragraph) when you’re on the job, but it can overcomplicate simple concepts for the casual observer. The financial industry is as guilty as any other in this sense.
If you’ve been brushing up on personal finances, you’ll probably encounter some of these overly complicated, industry-specific terms that, at their core, are quite simple.
Basis Point: A single basis point is just 1/100th of a percent. One percent, for example, is 100 basis points. You’ll hear basis points brought up often when describing fees paid for an investment fund, earnings as a percentage of how much you have invested or if the Federal Reserve adjusts interest rates.
CFP®: An acronym for Certified Financial Planner. One can’t simply read “Rich Dad Poor Dad” and claim to be a CFP®. Rather, they must study and pass a rigorous exam administered by the Certified Financial Planner Board of Standards, Inc., a non-profit organization that sets knowledge and ethics requirements for the industry.
Codicil: It sounds like something Indiana Jones would search for, but this is simply a legal document that’s created to edit, or amend, a will.
Compounding: When you earn interest in a bank account or investment, and you continue to earn more interest on interest already paid. Over many years, that can really snowball and add up to a lot of money.
Dead Cat Bounce: This is when a company’s stock price falls sharply, appears to recover quickly, but promptly resumes its sharp decent. That illusory bounce on the way down is known as the dead cat bounce. It’s thought that speculative traders swooping in to cover their complicated financial positions are behind these phantom bounces. The idea is that even a dead cat will bounce if dropped from a great height. Investors are apparently dog people?
Decumulation: When you save for retirement you’re in an accumulation phase. Once you retire, you begin the — drumroll — decumulation phase, or selling your investments for income. A financial pro can help you do this in the most tax-efficient manner and in a way that ensures you won’t run out of money.
Dollar-Cost-Averaging: If you had $12,000, you could sink it all into the stock market in one day and hope you bought at a great price, or you could put $1,000 in each month and get 12 shots at hitting a bullseye — odds are you average into a decent price. This is one way to negate market volatility worries if you are planning to invest a large sum of money. It’s also what you’re already doing if you divert a portion of every paycheck toward retirement.
Dry Powder: Does “wet” powder even exist? Anyways, dry powder is just cash investors keep on hand that’s ready to be invested when opportunity strikes.
Equities: It’s just another word for stocks. If you’re buying equities, you’re buying stocks.
Equity: The difference between the value of something you own, and the amount you still owe. If your mortgage is $190,000 but the home is worth $250,000, you have $60,000 in equity. Keep in mind, equity can also be negative.
Estate Planning: This doesn’t refer to the architectural design of your dream home and the surrounding gardens. This is the process of building a will and planning how your assets will be distributed to family, friends or organizations after you die. And it’s not just for the people who are building the aforementioned estates. If you have a family, it’s probably a good idea to have one of these. Otherwise, a judge may make decisions about things like who cares for your children if you and your spouse die unexpectedly.
Intestacy: This is what happens when a person (known as the testator) dies without having a will in place. When a person dies intestate, a court appointed administrator will determine how the assets are distributed. An intestate estate can also be a will that a court deemed invalid. (We promise there won’t be an intestate estate test).
Junk bond: No, this doesn’t describe one’s newfound affinity for financial items one wants to sell at a rummage sale. Instead, this term describes bonds issued to companies that may have trouble repaying the debt. Because of this, junk bonds generate higher interest payments, or yields to you as an investor — although they also come with a higher risk that you won’t get all your money back. Junk bonds are often referred to as high-yield bonds.
RMD: This stands for Required Minimum Distribution. When you reach the age of 70 and a half, you may not have a boss telling you what to do, but you are required to start withdrawing a minimum amount from many retirement savings accounts each year. It’s because you haven’t paid tax on this money yet (the beauty of the IRA or 401(k)) and the government wants its money. The balance in your account, as well as your age, will affect the amount of your RMD each year.
Volatility: It has nothing to do with combustibility or temperament. This simply refers to the inevitable ups and downs in the stock market. An asset with significant upward and downward swings in value is more volatile.
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