10 financial terms everyone should know

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Understand financial matters can be difficult if you don’t understand the jargon. Becoming familiar with these 10 financial terms may help make things clearer.

1) Time value of money
This is the idea that money on hand today is worth more than the same amount of money in the future, because the money you have today could be invested to earn interest and increase in value.

This concept can help you evaluate investments that offer different potential rates of return.

2) Inflation
Inflation reflects any overall upward movement in the price of consumer goods and services and is usually associated with the loss of purchasing power over time.

Any estimate of how much money you’ll need in the future should take inflation into account.

3) Volatility
This is a measure of the rate at which the price of a security moves up and down. If the price of a security historically changes rapidly over a short period, its volatility is high. The reverse is also true.

Understanding volatility can help you evaluate whether a particular investment is suited to your investing style and risk tolerance.

4) Asset allocation
Asset allocation means spreading investments over a variety of asset categories, such as equities, cash, bonds, etc.

Diversifying your investments among a variety of asset classes can help you manage volatility and investment risk.

5) Net worth
This is what your total holdings are worth after subtracting your financial obligations

The faster and higher your net worth grows, the more it may help you in retirement.

6) Five C’s of credit
Character, capacity, capital, collateral and conditions, are the primary elements lenders evaluate to determine whether to make you a loan.

A better understanding of how you’re evaluated can better prepare you to qualify for a loan and get a lower interest rate.

7) Sustainable withdrawal rate
This is the maximum percentage you can withdraw from an investment portfolio each year to provide income that will last, with reasonable certainty, as long as you need it.

Your retirement lifestyle will depend not only on your assets and investment choices, but also on how quickly you draw down your retirement portfolio.

8) Tax deferral
This refers to the opportunity to defer current taxes until sometime in the future.

Contributions and earnings produced in tax-deferred vehicles like 401(k)s and IRAs are not taxed until withdrawn, allowing those earnings to compound.

9) Risk/return trade-off
In short, you must be willing to accept greater risk in order to achieve a higher potential return.

The goal is to get the greatest return for the level of risk you’re willing to take, or to minimize the risk involved in trying for a given return.

10) The Fed
The Federal Reserve, or “the Fed,” is the central bank of the United States.

The Fed has three main objectives: maximum employment, stable prices and moderate long-term interest rates. The Fed sets U.S. monetary policy to further these objectives, and maintain the stability of the entire U.S. financial system.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

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