Must-Know Financial Terms Part 1
Financial planning is much more than just numbers. From investments and savings to credits and debts, there’s a lot to know—and financial terminology is a major aspect. Knowing financial terms, what they mean, and how they can affect your financial plan will help you construct and enjoy a successful financial future—which is exactly what Steve Lynch Wealth Management in Albuquerque aims to do!
Below, we’ve defined some of the most important and frequently used financial terms to help you get started.
401(k): A 401(k), named after the tax section code that governs it, is a retirement savings plan offered and sponsored by an employer. Before taxes are taken out of a paycheck, workers can choose to invest a portion into their 401(k), putting them in control of their investments and savings.
Asset Allocation: Asset allocation is where you choose to put your money. The three major asset classes are stocks, bonds, and cash, and each reacts to market and economic conditions differently. This is why it’s important to assess your goals and risk tolerance to determine which assets will align with and support them best.
Compound Interest: Compound interest is a principle by which the interest you earn also earns interest, and more interest is earned on that interest, and so on. When you’ve deposited money, such as investments or savings, interest is earned on the amount you deposited. However, when you borrow money, such as a loan, interest is charged on the original amount you were loaned.
Diversification: Diversification is the act of allocating capital in different areas to reduce the exposure of a particular asset or risk. A financial advisor will help you identify both low and high risk opportunities to build a financial portfolio that’s well diversified.
FICO Score: A FICO Score is a methodology used for calculating a credit score, and is an acronym for the company that came up with it, Fair Isaac Corp. This score can range from 300 to 850 and is based on several factors, such as credit history, payment history, total amount owned, and more. Those with higher scores will receive better terms on their next loan or credit card, while those with lower scores may struggle with higher interest rates.
New Worth: Net worth is the difference between your assets, what you own, your liabilities, and what you owe. This can be calculated by adding up all your money and investments and subtracting all of your debt, and will help you determine your overall financial well-being.
Rebalancing: A standard practice in any financial portfolio, rebalancing is the process of bringing financial aspects, such as stocks and bonds, back to their desired percentages so that you can stay on track with your financial goals. This can be done by selling stocks or investing new money.
Taxable & Tax Deferred: Most accounts are either taxable or tax deferred. Taxable accounts are liable to be taxed immediately whereas tax deferred refers to investment earnings that accumulate tax-free until a future time or event.
Whether you’re ready to begin financial planning today or have further questions on these terms and how they can affect you, turn to Albuquerque’s leading financial advisors—Steve Lynch Wealth Management!