Navigating financial lingo can be tricky if you’re new to the world of investing and personal finance. Keep reading for explanations of the top eight financial terms we think you need to know.
Net Worth
Net worth is when you take all your personal assets, investments, and anything that has value that you own minus any money you owe anybody else. Subtract it out, and that will give you the value of your net worth.
Assets
Assets are anything you own that have value and are an addition to your balance sheet.
Liabilities
Liabilities are anything you owe money on or that you could owe money on in the future. Examples would be your mortgage, a car loan or a bill that is going to come due soon.
Liquid Net Worth
Liquid net worth is the portion of your net worth worth that is accessible to be able to be utilized. Your checking, savings account, any investment accounts that aren’t in your retirement account. We don’t generally put retirement accounts in your liquid net worth because you’ll often have a pretty stiff penalty to access that, and because those are for retirement and future years. They’re not really intended to be used today.
Volatility
Volatility is when your investments go up and down and how much they go up and down. The reason that’s important for you to understand and appreciate is that it will happen. Different classes of your investments will have different volatility levels, like a blue-chip stock that doesn’t go up and down as much as stock for a smaller or newer company.
Risk
Risk is connected to volatility, because higher volatility means a higher chance of your investment account being down when you need the money. Risk means that you have a chance to lose money. Risk is also the fact that you don’t know what you don’t know, because it’s very difficult to see a layoff coming or predict a market downswing.
Retirement Accounts
Retirement accounts are the type of accounts where you can put money to invest in a variety of investments, like stocks, bonds, mutual funds and ETFs. Technically, you can’t invest in a retirement account. You invest in the investments within it. “Retirement account” is a tax umbrella term that determines whether your money comes out tax-free, if it’s going to be treated as ordinary income when it comes out, or if it can be penalized for early withdrawals.
Capital Gains
Capital gains refers to the profit you make from selling an investment for more than what you bought it for. Gains are classified as long-term or short-term. Long-term capital gains happen when you sell an investment after owning it for more than a year, and short-term capital gains happen when you sell an investment after owning it for less than a year. Short-term capitals are taxed more highly than long-term capital gains.
Have questions about any of these terms or curious how you can use the concepts to your advantage? Schedule a free introductory meeting with any of our advisors below.