Financial Freedom Common Terms
Last Updated on January 11, 2025 by policyengineer
- Compound Interest: Compound interest is the interest earned not only on the initial amount of money you save or invest but also on the accumulated interest over time. It allows your savings or investments to grow faster over the long term.
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Asset Allocation: Asset allocation refers to the distribution of your investment portfolio among different asset classes, such as stocks, bonds, and cash. It helps manage risk and potential returns by diversifying your investments.
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Risk Tolerance: Risk tolerance is the level of uncertainty or potential loss an investor is comfortable with when making investment decisions. It depends on factors such as financial goals, time horizon, and personal attitudes towards risk.
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Diversification: Diversification is the strategy of spreading your investments across different assets, industries, or regions to reduce the impact of any single investment’s performance on your overall portfolio. It helps manage risk by not putting all your eggs in one basket.
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Expense Ratio: The expense ratio is the annual fee charged by mutual funds or exchange-traded funds (ETFs) to cover their operating expenses. It is expressed as a percentage of the fund’s average net assets and is deducted from the investment’s returns.
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Liquidity: Liquidity refers to how easily an asset can be bought or sold without causing a significant impact on its price. Highly liquid assets can be quickly converted to cash, while less liquid assets may take time or involve transaction costs to sell.
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Principal: Principal refers to the original amount of money you invest or borrow, excluding any interest or returns. It represents the initial value of an investment or the amount of debt owed.
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Inflation: Inflation is the gradual increase in the prices of goods and services over time. It erodes the purchasing power of money, meaning that the same amount of money will buy fewer goods or services in the future.
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Capital Gains: Capital gains are the profits earned from selling an asset, such as stocks or real estate, at a higher price than its original purchase price. They can be subject to capital gains tax, depending on the holding period and the tax laws in your country.
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Emergency Fund: An emergency fund is a savings account set aside for unexpected expenses or financial emergencies, such as medical bills, car repairs, or job loss. It provides a financial safety net and helps avoid reliance on high-interest debt during challenging times.
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Roth IRA: A Roth IRA (Individual Retirement Account) is a retirement account that allows individuals to contribute after-tax income, and qualified withdrawals are tax-free in retirement. It offers potential tax advantages and flexibility for retirement savings.
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Estate Planning: Estate planning involves preparing for the transfer of assets and wealth to beneficiaries after an individual’s death. It typically includes creating wills, establishing trusts, and designating beneficiaries for various accounts and assets.
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Credit Score: A credit score is a numerical representation of an individual’s creditworthiness, indicating the likelihood of repaying debts. It is based on credit history, payment behavior, outstanding debt, and other factors. A higher credit score generally reflects better creditworthiness.
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Pre-tax vs. After-tax: Pre-tax refers to money or contributions that are made before taxes are deducted, such as contributions to a traditional 401(k). After-tax refers to money or contributions that are made after taxes have been deducted, such as Roth IRA contributions.
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Net Worth: Net worth is the calculation of an individual’s total assets (including investments, properties, savings) minus their total liabilities (such as mortgages, loans, credit card debt). It represents the value of their overall financial position
Annuities Most Common Terms
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Annuity: An annuity is a financial product offered by insurance companies that provides a regular income stream in exchange for an upfront payment or a series of payments over time. It is commonly used for retirement planning to ensure a guaranteed income during retirement.
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Fixed Annuity: A fixed annuity is an annuity where the income payments are predetermined and remain fixed throughout the contract’s term. It offers a stable and predictable income stream, making it a conservative option for individuals seeking a guaranteed income in retirement.
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Variable Annuity: A variable annuity is an annuity that allows individuals to invest their contributions into various investment options, such as stocks and bonds. The income payments from a variable annuity can fluctuate based on the performance of the underlying investments, offering the potential for higher returns but also more risk.
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Immediate Annuity: An immediate annuity is an annuity where income payments begin shortly after making a lump sum payment. It provides immediate income, making it suitable for individuals who are already in retirement or need income to start soon.
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Deferred Annuity: A deferred annuity is an annuity where income payments start at a future date, typically during retirement. It allows individuals to accumulate savings over time, often with tax-deferred growth, and then convert it into a regular income stream when needed.
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Surrender Charge: A surrender charge is a fee imposed by insurance companies if you withdraw or surrender funds from an annuity before a specified period, known as the surrender period. The surrender charge gradually decreases over time and is meant to discourage early withdrawals.
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Annuity Period: The annuity period is the duration over which income payments are made from an annuity. It can be for a specific number of years or for the individual’s lifetime, depending on the terms of the annuity contract.
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Annuitant: The annuitant is the person whose life or lifespan is used as the basis for calculating the income payments from an annuity. The annuitant is typically the person who will receive the income payments, often the individual who owns the annuity contract.
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Death Benefit: The death benefit is a feature in some annuities that provides a payment to the annuitant’s beneficiaries upon the annuitant’s death. It ensures that any remaining value in the annuity can be passed on to heirs or designated beneficiaries.
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Annuity Rider: An annuity rider is an optional feature or add-on that can be attached to an annuity contract for additional benefits or customization. Examples of annuity riders include guaranteed minimum income benefits (GMIB), long-term care riders, or inflation protection riders.