Money Talk: Financial jargon demystified
With plenty of technical jargon, an array of innovative and new financial products to tailor to your specific situation and an evolving industry, it can be hard to keep up with all the financial terms out there. Thrivent Financial knows finances aren’t everyone’s favorite topic, so we’ve compiled a short list of some of the most common finance terms — translated into plain English. INVESTING WORDS
Asset: Something you own that has value. In the case of personal finances, something that has either a monetary or an exchange value, such as cash or the home you own.
Capital gain: The profit from selling an asset for more money than you originally paid for it. If you sell it for less, you have a capital loss. Since capital gains and losses can affect how much you pay in taxes, these two terms may be important to discuss with your tax advisor come tax season. Let’s say you’ve invested $10,000 in a stock that grew over the years to a value of $25,000. Your capital gain would be $15,000. If you sell that stock, you’ll pay taxes on that gain.
Compounding: The act of taking interest earned on an investment and putting it back into the investment to earn still more interest. Ever marvel at how some old savings bond worth a few hundred bucks when you received it as a kid magically blossomed into thousands of dollars years later? You can thank compounding.
Dividend: When talking about a publicly traded company, dividends refer to the portion of a company’s profits paid out to shareholders. One of the other places profits can go is back into the company. When talking
about a mutual fund, dividends are generally made up of the dividends received from the stocks held by the fund or the interest received for the bond holdings of the fund. Typically, dividends are paid each quarter or twice a year.
Diversified portfolio: An investment strategy that spreads your assets over a variety of stocks, bonds and other investments. This is fancier way of saying “don’t-put-all-your-eggs-inone-basket.” This can also be referred to as “asset allocation” and your financial representative may talk about “looking at your asset allocation.” It simply means to think about how much money you’re putting into what type of investment. Asset allocation affects both the risk and the return you can expect from your financial assets. Dollar cost averaging: Investing smaller, fixed amounts at regular intervals, like $100 per month.
Load: A fee charged by certain mutual funds. These fees can be charged when you purchase a fund (frontend load) or when you sell a fund (back-end load). Retirement plan distribution: A payout of funds from a retirement plan. These funds can come from a company-sponsored 401(k) or an Individual Retirement Account (IRA). Different retirement plans will have different options as to when and under what circumstances you can take your money from the plan. You’ll typically want to wait until you are at least 59 1/2 years old before taking money out of your qualified retirement plan to avoid early-withdrawal penalties. Retirement plan roll over: Transferring funds from one retirement plan account (e.g. 401(k), IRA, etc.) to another retirement plan account. The funds are not subject to tax or penalties, and continue the tax deferred growth.
INSURANCE WORDS Cash surrender value: The amount of money you’d receive if you decided to cancel your permanent life insurance contract, before it becomes payable upon death or maturity.
Cash value: The money you can access from tapping the accumulated value of a permanent life insurance contract. Contracts vary from insurer to insurer, though, so be sure to talk with your financial representative to make sure you understand your life insurance contract.
Elimination period: The amount of time you’ll have to wait until insurance benefits are paid. In general, the shorter the elimination period the more expensive the contract and vice versa.
Exclusion ratio: A ratio applied to each annuity payment to find the portion of the payment that is subject to income tax and the portion, which is considered to be an income tax free return of your investment in the annuity contract. Say you invested $10,000 per year in an annuity for 30 years, for a total investment of $300,000. Because of compounding, this amount might appreciate to $1,010,700 by the time you begin withdrawals—$710,700 more than
This article first appeared in Thrivent Magazine. To read articles from previous Thrivent issues on a variety of these topics, go to www.Thrivent. com/magazine/links This article was prepared by Thrivent Financial for use by John A. Ungerman representative. His office is at 2879 E High Street in Pottstown and can also be reached at 610970-4740.
your original investment. You’ll pay taxes on that $710,700 but not on the original $300,000, which means in this scenario you’ll receive about onethird of your withdrawals income tax free. Living withdrawal
benefit: As applied to an annuity contract, a living withdrawal benefit usually guarantees the annuity payments and/or guarantees a minimum income over a specified period to the annuitant and/or beneficiary of the contract.
Rider: Special coverage added to insurance contracts and annuity products to cover additional items or provide extra benefits. With life insurance, one popular rider is a “waiver of premium,” allowing you to keep your coverage without paying if you become ill or disabled. These add-ons cost extra but can help you customize your insurance so you’re covered for special circumstances.
Preferred risk: Insurance companies reward positive decisions and lifestyle choices by offering reduced insurance rates. Or if a doctor’s checkup shows a clean bill of health, it can help to lower your health or life insurance premiums.
Special risk: If your lifestyle or circumstances suggest that the odds are better than average that you’ll collect on your insurance, you’ll be deemed “special risk” and pay a higher price for the coverage.
Standard risk: When you buy any type of insurance, the standard price you pay for that insurance will depend on your age, health, lifestyle and other factors affecting the odds that you’ll collect on that insurance. About Thrivent Financial Thrivent Financial is a financial services organization that helps Christians be wise with money and live generously. As a membership organization, it offers its more than 2.3 million memberowners a broad range of products, services and guidance from financial representatives nationwide. For more than a century it has helped members make wise money choices that reflect their values while providing them opportunities to demonstrate their generosity where they live, work and worship. For more information, visit Thrivent.com/why. You can also find us on Facebook and Twitter. If you meet the company ‘standards’ you’re entitled to purchase insurance without special restrictions or extra fees.
Financial terms aren’t always easy to understand. A first step in selecting a financial advisor is making sure you’re working with someone who is speaking a language you understand and never be afraid to ask for clarification about a term you don’t recognize or understand