Disclaimer: The statements made in this post are the opinion of the author. They should not be viewed as financial advice. Please consult with a financial specialist before making any financial decisions.
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This is no meant to be a blog post, but a reference for anybody that doesn’t remember what a word means to come back and find the simple definitions given in each post. They are arranged alphabetically.
Annual Return: The amount you will receive back on an invest each year, usually in the form of a percent. So if you have a 10% annual return on $12,000, you’d get $1,200 every year, or $100 every month.
Appraise: To give a property and official value as determined by an appraiser. For homes appraisers use other properties that are comparable to yours that have recently sold in your area.
Assets: Things that put money into your pocket every month (or year). Sometimes equity in your house is also included as an asset, but I prefer not to include it. A car loses value every year (depreciates) so it is NOT an asset.
Balance Sheet: A place to keep track of how much money is coming in and how much money is going out to make sure that you are not spending more money than you make. Assets, liabilities, and savings are included as part of this accounting.
Bonds: To raise funds for a project an entity (usually a government) will sell bonds or certificates saying that if you pay X amount now you will get X back with interest later. This gives them the money they need now and gives the investor interest on their original investment later.
Budget: Assigning each dollar of your income to a certain role or category. Categories include housing, car, food, utilities, entertainment, and so much more. This is meant to be a tool to stop you from overspending.
Cash Flow: Money coming into your pocket from investing (either through stocks, real estate, or other assets). This is NOT the same as income because it doesn’t necessarily require you to work for it.
Cash Out Refinance: Getting a new loan against the value of the home where the amount of the loan is higher than the amount currently owed so the additional cash is given to the owner.
Commodities: Raw materials that can be bought and sold. They hold value because they are useful, but the value can go up and down over time. Examples include Gold, Silver, etc., Coffee Beans, Wheat, and other raw materials.
Compound Interest: When interest builds upon interest over time. So a 10% compound interest rate would start with $1,000 becoming $1,100, like simple interest, but then it continues and $1,100 becomes $1,210 and so on.
Consumer Culture: The idea that our entire society is built around buying things. This is one of the reasons that saving is so difficult and why good financial principles aren’t more widely known.
Consumer Debt: Debt accumulated from spending on wants. Wants include things like eating out, entertainment, but also fancy cars and furnishing a fancy house; wants don’t include things like student loans, medical debt, or a mortgage.
Cost of Living: How much money it takes to buy basic needs in a certain area. This usually increases every year because of inflation. Meaning that it takes more money to buy what you usually buy each year because money isn’t worth as much as the previous year.
Credit: Using someone else’s money to make a purchase (like getting a mortgage on a home, financing on a car, or using a credit card) that then charges interest on top of the amount borrowed.
Depreciating: (Depreciation) When something loses value over time, usually due to wear and tear. A car is a great example of something that depreciates, but furniture and computers and other business equipment are also examples.
Diversify: Spreading your investments to multiple DIFFERENT types of investments/companies/assets. This can include owning some real estate, some stocks, and some other investment options. Or it can be as simple as investing in technology companies and food companies. Diversifying lowers risk.
Emergency Fund: Money set aside to be used in emergencies only. When you use money from your emergency fund you will need to replenish it as soon as you can.
Employer Match: When an employer will match the amount of money your contribute to your retirement account up to a certain percent (usually between 3-5%). So if 5% of you income is $500 and you contribute $500, your employer would also contribute $500 and you would have $1000 saved.
Equity: How much you property is worth versus how much you owe on it. So if your property could sell for $100,000 and you owe $40,000 then you have $60,000 of equity.
Financial Freedom: Being able to cover all of your expenses each month without having to work. This doesn’t mean you don’t work, and it comes in a variety of ways from investing in stocks to real estate to businesses, etc. Your path to financial freedom is your own.
Financially Runway: Cash in the bank, or easily accessible, that you can use to pay the bills while you try to get a new job, start a business, or build passive income.
Financial Security-Being in a position to be able to cover expenses in case of emergencies, such as job loss, major medical event, or accidents. The foundation to financial security is an emergency fund. It is NOT having a secure job which is not in your control. What makes you feel financially secure is up to you.
Fixed Expenses: Monthly expenses that are consistently the same amount. Examples of this are mortgage or rent, car payment, and insurance premiums.
Frugality: Spending as little as possible without reducing your overall happiness. When someone is frugal they will cut every expense they can to the bone, except those things that bring them real joy. In other words, frugality is using every dollar with purpose and not waste.
Government Assistance Programs: When a government organization gives money, food, or other resources to individuals and families that have low incomes, which depend on where you live, or meet other certain criteria. Examples include: Medicaid, TANF, LEAP, and SNAP, etc.
Government Backed Loans: When a government organization provides assurances to a lender that if the borrower doesn’t pay the government will cover the remainder of the loan. This allows lenders to give money to people that are considered “riskier” to lend to. Examples of riskier borrowers include they have a lower down payment or they have a less than desirable credit score, etc.
High Yield Savings Account: A savings account that pays interest above the national average. Usually this is much closer to keeping up with inflation although it is a bit lower than that. While rates vary, around 1% is a high yield in 2020.
House Hacking: Anything that turns your primary residence into a a money making asset. Most commonly this is buying a duplex and renting out one side, but it can include AirBnB, long term renting out a room, etc. This can reduce or entirely eliminate what you pay into your mortgage personally.
Income Tax: Money taken out of your directly paycheck to pay taxes. The amount owed depends on your income.
Index Funds: A way to invest in stocks that puts a little bit of your money into every company listed in that index or list of companies. For example, the index could invest in all companies in the S&P 500 or all publicly traded companies, etc.
Insurance (Home): The money that you pay each month in case there is a disaster in your house that either pays to repair it or pay off your mortgage. This is usually called home owner’s insurance or hazard insurance. Even with a house paid off you still pay this each month. This is the Second I in the common banking acronym PITI (principal, interest, taxes and insurance).
Interest (Financing): The amount of money that you pay each month on top of the principal, the cost of borrowing money. So if you borrowed $100,000 you can pay an extra $40,000-$60,000 on average for a mortgage. This is the first I in the common banking acronym PITI (principal, interest, taxes and insurance).
Interest (Investing): Money returned on top of the original amount of money invested. For a very simplified example, if I invest $1,000 at a %10 interest rate than I can expect to receive $1,100 back.
Investing: Giving an entity (or an individual) money whether in the form of stocks, bonds, or buying any other type of asset in hopes of getting more money back in the form of interest.
Investing Broker: A company that manages your investment account. They offer a variety of options or funds for you to purchase, and fees vary from fund to fund and company to company. Examples of Investing Brokers are Vanguard, Fidelity, Charles Schwab, etc.
Irregular Expenses: Expenses that come out of you budget every other month, semi annually, annually, or unexpectedly. This can include insurance payments, taxes, clothing, doctor’s bills, memberships, etc.
Leverage (Loans): Using what an asset is worth to get a loan against the value of the property.
Liabilities: Things that take money out of your pocket. This includes all of your monthly and yearly expenses. You will often hear that a home is your biggest asset (the opposite of a liability), but it takes money out of your pocket each month in the form of a mortgage, taxes, and insurance, so it is a liability.
Life Style Creep: Also called Life Style Inflation, it means that you increase your expenses exactly as much as your income increases (if not more), this is usually gradual or unnoticeable with each small raise and it gets people into debt or at least living paycheck to paycheck.
Medicaid: Health insurance offered to low income individuals and families through the United States Government at no or little cost.
Multi-family Home: A single structure that has multiple units, such as a duplex, triplex, or apartment building. (House hacking is most common in small multi-families with 2-4 units).
Passive Income: When your money or work, through investments, or royalties, or other means, continues to make money for you without any (or very little) additional effort on your part.
Principal (mortgage/borrowing): The amount of money that you pay each month towards the original amount of money you borrowed. So if you borrowed $100,000 you will pay $100,000 in in principal over the course of the whole loan. This is the P in the common banking acronym PITI (principal, interest, taxes and insurance).
Principal (investing): The original amount that you invest to receive interest on.
Portfolio: All of the assets that your own. Usually listed out with the money in each investment and each assets percentage compared to what you own in total.
Rainy Day Fund: Money set aside in case your income doesn’t cover all of your expenses.
Real Estate: An asset made of either land or buildings.
Regular Expenses: Expenses that come out of your budget consistently every month. This includes expenses that don’t change like mortgage and car payment, as well as expenses that do change like your food bill and utilities.
Retirement Accounts: Different Accounts that have different advantages for preparing for retirement.
- 401(K) An account offered through your employer that is not taxed upfront, but it is taxed taxed when you pull it out.
- 403(B) Basically a 401(K) that is offered to government non-profit employees.
- IRA (Individual Retirement Account) Basically a 401(K) but it is opened by the individual through a third party.
- 457 Basically a 401(K), but you can start withdrawing funds without penalty once you stop working for that employer.
- Roth Accounts (including Roth 401(K), 403(B), etc.) The big difference is that your money is taxed upfront and NOT when it is taken out later.
- HSA (Health Savings Account) These are intended to be used for medical purposes, but the funds deposited can be invested and used tax free (on medical expenses).
- Taxable Brokerage Account An account opened up by an individual that can is contributed to with after-tax dollars. The interest on the contributions is also taxable. The main advantage is that you can withdraw funds at any time without a penalty.
Return on Investment: How much money you get back, usually measured yearly, on the money you invest in something. For example, if you invest $1,000 and receive $100 back from that in the course of a year then you’ve had a 10% return on investment.
ROTH Account: Any retirement account that is labelled a ROTH account (e.g. ROTH 401K or ROTH IRA, etc.) is a tax advantaged account that taxes your contribution upfront but NOT later when the money is pulled out (unlike a traditional account which is the opposite).
Savings Account: Where you place money while you are trying to save up for an upcoming expense or to have on hand when needed that isn’t your regular checking account. It is different than and emergency fund.
Savings Rate: How much money you are saving as a percentage of your income. So if you make $1,000 and you save $100 you have a 10% savings rate (1,000 / 100 = 10).
Side Hustle: An additional job that you do in addition to your full-time employment. Examples include moonlighting as a waitress, driving for a ride sharing app, or starting a side business.
Simple Interest: A one time payment of the interest percentage on the original amount that is lent. A 10% simple interest on $1,000 would be $100.
Stock Market: A place where you can buy and sell ownership within certain companies. Buying company stock is a form of investing and is usually what a 401(K) or other investment account invests in.
Stocks: Buying a certain percentage of ownership or “shares” in a company. The company uses the money received from selling shares to grow the company then pay back the owners of shares in the company with interest.
Subsidized: When a government gives funds to a group, organization, or individual to offset to the cost of something. Subsidizing can include the giving money to farmers, paying for part of health insurance premiums, etc.
Sweat Equity: Using your own labor to add value to a property by fixing it up. If the amount of money you put into it is less than the new value of the home you have created equity or additional value in the property.
Tax Advantaged Retirement Account: Any retirement account that that either allows you to be taxed on your contributions later after they’ve grown, upfront so they grow tax free, or–in rare instances–not be taxed at all.
Tax Refund: Money that is returned to you after your total tax burden is calculated because you paid more than you owed. Most people get refunds.
Taxes (real estate): The amount of money that is owed to the government for owning property. This ranges drastically from state to and state and even city to city. Each year this can range from a few hundred to several thousands dollars depending on where you live. Even with a paid off house you still owe this. This is the T in the common banking acronym PITI (principal, interest, taxes and insurance).
Variable Expenses: Monthly expenses that are not consistently the same amount. Examples of this are food, your utility bill, and gas.
Windfall: Any time you receive a large amount of money–it is usually unexpected and irregular. This can be anything from an inheritance to winning the lottery, but a tax return can also count.
X Y Z
50% Rule: Putting 50% of each raise towards savings (whether in a bank or a retirement account) and 50% of each raise towards things you enjoy. This allows you to have fun with your raise but also contribute to your overall wealth.