Over the past few months, I’ve done a lot of reading and research on how to start investing. And I’ve pretty much learned one major thing. Investing is not for the faint of heart.
Different accounts, different rates, different fees, different tax advantages. The amount of information out there on investing is enough to drown in! No wonder so many young adults put off retirement planning as long as they possibly can.
I am determined to not be one of those young adults.
Last year, my husband and I hit a huge milestone by paying off our debt.
Basically, we are following most of Dave Ramsey’s principles for finding financial freedom. We put a small amount in savings, paid off all of our debt, started building up our Emergency Fund Savings, and finally, finally, FINALLY are ready to start thinking more about retirement.
We still have a little bit longer to go until our Emergency Fund is fully funded. But while we are working on that, I’m using my time wisely and learning everything I can about investing. And oh-my-lanta is there a lot to learn!
If any of you out there are interested in learning more about investing or saving more aggressively for retirement, I thought I would put together a list of some of the most important terms you should be familiar with.
You will see these same terms pop up again and again as you start your own investing journey.
I’ve also created a free printable that is available exclusively for my subscribers. It lists all of these terms and what they mean in everyday language, and they all fit on one page. You can hang it on your bulletin board as a reminder, or stick it in a clear sheet protector in your finance binder, or tape it to the fridge until you are more familiar with them. If you would love this printable just enter your email address in the little box at the bottom of the post, and I’ll send you the link to download it. (As an added bonus, you will also get access to my free finance printable library.)
401(K) – A 401(K) is a retirement savings plan that is set up through your employer. Contributions are pulled out of your paycheck every month, TAX FREE. This allows more money to be invested and grow. When you retire and pull your money out, the total amount that has accumulated will be taxed. Usually, employers will match up to a certain percentage (mostly up to 3% or so) of whatever you put in. Hellooooooo, free money.
403(b) – A 403(b) is similar to a 401(K) in that it is a retirement plan set up through an employer. But the employer is most likely a public service instead of a business, such as an education institution, hospital service, or other non-profit organization. Sometimes these companies match your contributions, other times they might not. Make sure to check if you work somewhere that offers a 403(b) instead of a 401(K).
SEP – An SEP is a “simplified employee pension,” and it’s offered to individuals who own their own businesses. Contributions to an SEP IRA are tax deductible.
IRA – An IRA, or an “individual retirement account,” allows individuals to invest a portion of their income before taxes. These investments grow tax-deferred, which means no taxes come out until things are withdrawn at retirement. An individual can invest up to $5,500 a year, or $11,000 for a married couple filing jointly.
Roth IRA – The biggest difference between a traditional IRA and a Roth IRA is that contributions are invested after taxes come out. This means that contributions grow tax free, AND when you go to pull money out later, they will not be taxed as well. This a great thing if you are worried about what tax bracket you will fall under later in life, or in case the government changes tax limits in the next couple of decades. Investment limits are the same: $5,500 a year for individuals, and $11,000 a year for married couple filing jointly.
CD – A CD, or certificate of deposit, is a savings certificate that earns more interest than a regular savings account. When you put money into a CD it is locked for a specific amount of time, depending on the CD you get. A six month CD earns interest (and cannot be accessed) for six months. A three-year CD earns interest (and cannot be accessed) for three years. The longer you keep your money locked up in a CD, the more interest you earn. Honestly, the interest rates are still not that great with even long-term CDs. The best 3-year CDs earn about 1.7% interest as of this writing.
Money market account – A money market account, or MMA, is a savings account that has higher interest rates than a traditional savings account. Most MMA’s also come with check-writing privileges. *Note: While these earn more interest than a regular savings account, I’ve found an online savings account usually earns more interest, about 1%.
ESA – An Education Savings Account is a tax-deferred trust account that the U.S. Government set up as an option for families to start saving for college expenses. Up to $2,000 a year can be contributed per child.
529 – A 529 is another tax-advantaged college savings option for families. Most states offer their own policy with different benefits. You do not have to be a resident or go to a state school in order to buy another state’s plan.
Bond – Someone who purchases a bond is loaning money to a company or government. The money is borrowed for a set amount of time (maturity date) and earns a specified amount of interest (coupon) on the amount loaned (bond principal). Government bonds are much safer since they aren’t going anywhere. A bond for a company is riskier since the company might fold or go out of business, taking your investment with it. (T-bills work much the same way, except they are only issued from the government.)
No-load – A no-load fund is one that is not charged any sales or commission fees. (Hint: This is a GREAT option! Less money lost to fees means more of your money grows with compound interest each year.)
Front-end load – A front-end load is a sales charge that is taken out at the beginning of a purchase, typically with a stock or mutual fund. A certain percentage is paid of the initial investment when you first buy it.
Back-end load – A back-end load is a fee that is charged at the end of the the investment, once the investor is ready to sell it. For example, say you make an investment of $5,000 and it grows to $6,000. When the investor goes to sell it, he is charged a percentage of the $6,000, instead of the initial $5,000 that was originally invested. Get it? Front end – at the beginning. Back end – at the end.
Small-cap stocks – A small-cap stock refers to a share purchased from a small company. Many small-cap companies are newer. They are riskier, but also have a great reward if the company does well.
Mid-cap – A mid-cap stock refers to a share purchased from a medium-sized company. Mid-cap stocks tend do better than small-cap or large-cap since the companies are still growing fairly quickly, but are large enough that they won’t fall apart in a harder economy.
Large-cap – A large-cap stock refers to a share purchased from a large company. These are more stable investments, since the companies are more established. While there is less risk, there might also be less reward.
Blue chip – Blue chip companies refer to a more reliable investment. They are more stable and tend to have reliable growth. Think companies that have been around for forever, like Coca-Cola.
Stock – When you buy stock in a company, you are buying a “share” of that company. Each share gives you partial ownership in that company or corporation. Often, people who own stock in a company are called “shareholders.”
Actively managed – This refers to accounts and investments that are bought, sold, and traded very often by someone who is actively managing funds, trying to “beat the market”. Sometimes that is the individual who paid for the investment, and sometimes it is someone who has been hired to manage investments, like a stock broker. Usually, this means higher fees for you, the investor.
Mutual fund – A mutual fund is an investment that is mutually funded by multiple investors. For example, instead of one investor purchasing one big piece (share) of one company, in a mutual fund many investors purchase a little piece of many different companies. This is extremely beneficial for diversifying your investments. If you invest a lot in ONE company and it goes out of business you lose everything. But if you invest a little bit in MANY different companies and one or two go out of business, you only lose a little bit of your investments. You still have several other companies still growing and increasing the value of your investments. Also, mutual funds are bought and sold only at the end of the day.
Index fund – An index fund is a type of mutual fund that is a more passive investment than actively managed funds. Because it is passive, it has lower expenses. An index measures change in the market, or how much things grow or lose. An index tracks a certain market, like the Dow Jones or S&P 500, in order to make a plan for their investments.
ETF – ETF stands for “exchange-traded funds” and they are similar to how common stocks work. They are different from mutual funds in that they are bought and sold all throughout the day, instead of just at the end of the day.
Domestic – Domestic stocks are those which are invested primarily in U.S. companies and corporations.
International – International stocks are those which are invested primarily in foreign (non-U.S.) companies and corporations.
Expense ratio – An expense ratio is the percentage of the investment that will be paid for fees, charges, and expenses.
Capital gain – Capital gain is the profit made when an investment is sold.
Capital loss – Capital loss is how much value the investment loses when it is sold.
Dividend income – A dividend income is the earnings of a mutual fund or other investment that is paid out to all of the shareholders. Usually, dividends are paid out as cash or other stocks.
And there you have it! The more familiar you are with all of this terminology, the less intimidating the process of saving and investing will seem to you.
Don’t forget to grab the Investing Terminology cheat sheet so you always have a quick reference guide handy. Enter your email address below to get it. delivered to your inbox.
What is the most intimidating thing about investing? Has anything held you back from jumping in and starting your retirement planning?