It seems like everything in the world of finance has at least three names to keep everyone confused. If you have ever been bamboozled by financial mumbo jumbo, we have what you need. This is a list of commonly-used financial terms explained in plain English.

Annuity

A contract purchased from an insurance company to provide retirement income. You sign over your life savings and they send you a check every month. Sounds great but there are drawbacks. The financial advisor (salesperson) receives a commission and the insurance company makes a profit. Where do you think that money comes from? Your savings. 

People are drawn to annuities because they’re convenient. Someone else figures out how to invest your money and how much you get each month. You pay for that convenience. Valet parking is also convenient, but it costs more than doing it yourself. The solution? Learn about investing and retirement planning and put yourself in charge of your financial future.

Appreciating Asset

An investment that goes up in value over time such as a stock or bond.

Asset Class

A financial category with similar characteristics and tax treatment. Examples include:

• Equities (for example, stocks).
• Fixed income (for example, bonds).
• Cash equivalents (for example, money market accounts).
• Real estate.

Basis Point

A basis point is 1/100^th of 1%. When you hear on the news that the Fed has lowered interest rates by 25 basis points, it means interest rates were lowered by 25/100^th of a percent. For example, 5.75% lowered to 5.50%.

Bond = Fixed Income Security

You can think of a bond as the opposite of a loan. You loan money to the government or a company and they pay you back with interest.

Blue Chip

Stocks from large, well-established U.S. companies.

Broker

Company through which you buy and sell stocks and other investments.

Contribution

Money placed into a tax-advantaged retirement savings account by you or your employer.

Distribution

Withdrawal.

Diversification

Spreading your investments around so if one takes a hit, you don’t lose everything.

Dow = Dow Jones Industrial Average = DJIA

A stock market index that tracks the stock price of 30 large, well-established, publicly traded companies. The companies that make up the Dow change over time based on their relevancy. The Dow is the most commonly-reported stock index.

Equity = Security

Stocks, bonds, and other similar investments.

Inflation

Price increase per year. Most people don’t understand inflation. They hear on the news that inflation is coming down and they think prices are coming down. They’re not. A decrease in inflation means that prices are rising at a slower pace, but they’re still rising. 

Once prices rise, they almost never return to their previous levels. From 2020-2024 prices rose approximately 25%. If you are waiting for them to come back down, you can stop now. It won’t happen.

Investment Account

An account in your name with a brokerage, typically an online broker. This is similar to a bank account in that you have exclusive rights to the account, except the purpose is to invest in stocks or other securities. When opening an investment account, you have to specify whether you want a tax-advantaged account for retirement savings which has rules about adding and removing funds, or a general account which is typically referred to as a taxable or cash account.

Investment Earnings = Investment Returns = Investment Growth = Yield

Amount investments increase in value over time. If you buy a stock for $1,000 and later it’s worth $1,100, you have $100 in investment earnings.

Margin Trading

Borrowing money from your broker to trade stocks (not recommended).

Nasdaq

This has two meanings:

• A global stock exchange.
• A stock market index that tracks the stock price of more than 2,500 companies listed on the Nasdaq exchange.

If you follow financial news for any amount of time, you will quickly grow tired of hearing “the tech-heavy Nasdaq." As the tired cliché implies, a lot of technology companies such as Apple and Microsoft are listed on the Nasdaq. Newspeople: please stop. Calling it “the tech-heavy Nasdaq" does not make you sound smart, it makes you sound like a parrot.

Publicly Traded

A company that sells shares of stock, thereby giving shareholders partial ownership.

EGGSTACK RETIREMENT PLANNER

RMD = Required Minimum Distribution

Government-mandated withdrawals from tax-deferred retirement savings accounts such as traditional 401(k)s and IRAs. You pay no taxes on contributions to tax-deferred retirement savings accounts. Eventually, the government grows tired of waiting for their money. 

Beginning at a certain age, you must withdraw a specific amount each year which counts as taxable income. That forces you to pay taxes on the contributions you made years ago. The start age keeps changing, but currently it’s 73.

S&P 500

A stock market index that tracks the stock price of 500 large, well-established, publicly traded companies.

Traditional Account = Tax-Deferred Account = Pre-Tax Account

For most people, this is one of the following:

• 401(k): An employer-sponsored retirement savings plan that operates on a tax-deferred basis as explained below. Money is taken out of your paycheck before you ever see it and gets placed into your account. Many employers match your contributions up to a specific percent of your pay. If you are not contributing to your 401(k) at least to the maximum match amount, you are missing out on free money.
• Traditional IRA: A retirement savings account that operates on a tax-deferred basis as explained below.

Tax-deferred basis refers to the basic functionality of these types of accounts. Account contributions are not taxed during your working years, then when you make withdrawals in retirement both your original contributions and any investment earnings are taxed.

Other types of accounts in this category include 403(b), 457(b), traditional TSP, SEP IRA, SIMPLE IRA, and solo 401(k).

Roth Account = Tax-Free Account = After-Tax Account

For most people, this is one of the following:

• Roth 401(k): An employer-sponsored retirement savings plan that operates on an after-tax basis as explained below. Money is taken out of your paycheck before you ever see it and gets placed into your account. Many employers match your contributions to a specific percent of your pay. If you are not contributing to your 401(k) at least up to the maximum match amount, you are missing out on free money.
• Roth IRA: A retirement savings account that operates on an after-tax basis as explained below.

After-tax basis refers to the basic functionality of these types of accounts. Account contributions are taxed during your working years, then when you make withdrawals in retirement you don’t pay taxes on your original contributions or your investment earnings.

Other types of accounts in this category include Roth 403(b), Roth 457(b), Roth TSP, and Roth solo 401(k).

Tax-Advantaged

An account or investment that is exempt from taxes or has some type of tax benefit designed to encourage you to save for retirement.

Vesting

Delayed ownership. An employer may give an employee matching funds in their 401(k), or stock options, or some other benefit, but the employee does not fully own it until they keep working there for a set amount of time. If an employee leaves a company before they are fully vested, the unvested portion is forfeited.

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