8 Important Money Terms You Don’t Know (but Should)

8 Important Money Terms You Don’t Know (but Should)

If you’ve been following my blog or have read my book, you know how much I dislike fancy financial jargon. Personal finance shouldn’t be complicated and both you and I deserve to have a clear understanding of what’s happening with our hard earned money. With this in mind and the fact that April is financial literacy month, I’m taking pause and breaking down 8 important money terms you may not know (but should). In digging into these not-so-sexy money terms, you’ll find that by understanding these foundational financial topics, you’ll only equip yourself to make better financial choices for today and the future. Here are some important money terms defined:

1. Asset Allocation

It literally means your money (asset) is being allocated (assigned) to different investment classes within your portfolio: stocks, bonds, cash, and mutual funds. More specifically, asset allocation determines how your assets are distributed within your investment portfolio. It is an investment strategy that adjusts the amounts or percentages you own in certain asset classes to balance risk versus reward based on your overall risk tolerance, goals and timeframe for holding investments.

2. Net Worth

Your net worth is literally what you own minus what you owe and it’s measured in dollars. Taking stock of this number initially gives you a great starting point for measuring your financial health and progress every six to twelve months. Calculating your net worth is simple and you can learn how here.

3. Compound Interest

This is your money’s best friend! Compound interest is when you earn interest on the money you invest and then earn interest on that interest. The longer this extra interest you earn on your investment has to grow, the more money your money can earn you over your lifetime.

4. Rule of 72

The rule of 72 is something we financial planners geek out over that helps us estimate how long it will take an investment to double its worth and over what time period. It’s a simple mathematical equation by which dividing 72 by the annual rate of return equals how many years it will take for your investment to double.  For example, an investor who invests $1,000 at an interest rate of 6% per year will double their money in 12 years. (72 divided by 6 = 12)..

5. Rate of Return

Rate of return is the profit your investment earns over a particular period of time and can be a positive or a negative number (meaning you’re either making money or you’re losing it). The return is expressed as a proportion of your original investment over a certain time period (mostly a year, which is why you’ll see this number sometimes referred to as an “annual rate of return”). For example, if you invest $10,000 and it grows to $10,650 over 12 months, you’ve earned $650 on your $10,000. Your annual rate of return is: $650 / $10,000 = 6.5%.

6. Diversification

I may or may not compare diversification to the numbers and types of shoes you own in my book, Work Your Wealth. You’re not going to have just one pair of shoes to go with all your outfits. Similarly, you shouldn’t have all of your money in just one or two holdings. Having a variety of investment types in your overall portfolio is diversification. It is a popular and recommended investment technique that helps to reduce risk and can provide more stable returns. Think of it this way: If you carry all of your eggs in one basket and you drop the basket, you’re out of luck for that awesome brunch you were about to have. If you carried your eggs in multiple baskets however, dropping one basket wouldn’t have as big of an impact as you can still rely on the others to help make that omelet!

7. Expense Ratio

This is a fancy term fund managers use that means fees… that you’re paying to them. Expense ratio is an annual fee an investor is charged by funds or ETFs to operate. The simple math is that the fund will divide its operating expenses by the value of the assets it manages and what’s left is the return to the investor. As an investor, you’ll want to know what the expense ratio is for investments you select so that there are no surprises. Aim for funds with expense ratios below 1%.

8. Inflation

Inflation is a term that tells us the rate (percentage) at which prices for goods and services are rising. It’s expressed as an annual percentage rate. Basically, inflation can detour our finances if we don’t invest and grow our money because as things get more expensive, the dollars we have today don’t go as far. For example, if the price of your morning coffee increase from $2.00 to $2.05,  that’s a 2.5% increase and what your money could have bought you in coffee yesterday, now won’t go as far. Prices tend to increase over time, which is why it’s important to grow your money and take advantage of things like compound interest. By getting a clear understanding of certain financial terms, you’re equipping yourself with the knowledge you need to make informed financial decisions. You can also check out more investment terms you should know here and here. Remember, if you’re ever talking with a financial advisor and don’t know a word they use, or concept or strategy they’re recommending –don’t ever hold back your questions. You should have questions and you absolutely deserve a financial professional who will take the time to make sure you have sound understanding around your finances.

20 Smart Choices to Make With Your Tax Refund

20 Smart Choices to Make With Your Tax Refund

If you’re someone who receives a tax refund, the sudden surge in cash, no matter how large or small, is sure to put a smile on your face. You overpaid your taxes for the year and now you have some extra money you weren’t necessarily expecting. So, what do you do with your tax refund? Here is a list of 20 smart money moves you can make with your tax refund:

1.     Start or add to your emergency fund It’s always a good idea to have rainy day money for the ‘just in case’ moments in life.

2.     Put it towards something you’ve been saving for Maybe you’ve been saving for a large purchase like a car or new technology. Your tax refund may not cover all of it, but it can certainly help you save up for that big-ticket item a little faster.

3.     Pay down a debt If you have credit card debt, this is exactly where your tax refund should go. Get rid of those high interest payments first!

4.     Make a home improvement Home improvements can increase the value of your home and your level of enjoyment in your home. You can definitely use a tax refund to tackle that landscaping project, put in those French doors or put it towards any home improvement project you’ve been dying to get to.

5.     Give it away to a charity Giving money away to your church or a cause you believe in is a wonderful way to use your tax refund and may become a tax write off on next year’s return.

6.     Invest it in your business Own a business? This extra surge in cash can be put towards new equipment, software, inventory or something else that can make your business run more efficiently and be more profitable.

7.     Buy something you want (within reason) Although not the most financially savvy option, it’s ok to splurge on yourself every once in a while when you’ve been working hard to save and tackle debt.

8.     Make an extra mortgage payment Making extra mortgage payments help you pay down the principal amount of your loan faster, reducing the length of your loan and interest payments.

9.     Have an experience Buy an experience with your tax refund instead of an item. Experiences create memories that have much stronger lasting gratification than a shiny new toy.

10.  Buy someone a gift If you’re the generous type, show someone you care about them by buying them a gift just because.

11.  Invest in yourself Prioritize your own personal and professional development by investing in your growth.

12.  Open a Roth IRA If you haven’t opened a Roth IRA yet, you can use your tax refund to open one now. I like how these retirement accounts work and recommend them even if you already have a 401(k).

13.  Save it for your child’s education Open or make a contribution to a 529 plan that specifically allows you to set money aside for education purposes.

14.  Pay it forward Next time you’re at Starbucks, pay for the guy or gal in line behind you. Spreading goodwill and good cheer is an excellent use of money any time of the year.

15.  Host friends and family Invite everyone over to your place and host a get together! Fun times all around and you won’t worry about dipping into your regular grocery budget this month.

16.  Update your wardrobe Use a portion of the money to add one or two staple pieces to your wardrobe.

17.  Re-energize your health Join yoga, Pilates or a gym. Try purchasing a couple of workout DVDs or spending a few extra dollars on healthier items at the grocery store. A healthier you could translate into reduced costs for medical expenses over the long term.

18.  Visit friends or family Not everyone lives close to their friends and family. Maybe you can take that trip upstate or buy a plane ticket cross country to spend some good quality time together.

19.  Be extra generous Give your mailman or garbage man a tip, leave a little extra for the waiter, buy an extra box of Girl Scout Cookies!

20.  Do a little bit of everything Typically, I recommend a 50 / 30 / 20 allocation: 50% towards debt, 30% towards savings and 20% towards a splurge on yourself. This gives you the best of all worlds and ensures you’re putting the money to good use! What are you planning on spending your tax refund on this year? Tweet me @marybstorj!