Financial jargon: A cheat sheet
You’ve probably heard the phrase, “Money makes the world go round.” Since money underpins many aspects of life, it’s important to understand the terms we use to discuss finances.
At Revo Financial, we try to help clients understand financial concepts and terms when they come up. We also wanted to create a guide to some of the more jargon-y terms you might encounter outside of our work together. Consider this a potential refresher, too, on terms that you might understand but don’t feel 100% comfortable with.
APR stands for annual percentage rate. This refers to the rate you pay on debt, like a mortgage or credit card. It includes the base rate—your interest rate or mortgage rate—plus any additional fees. Because APR looks at the total cost of the loan, it’s the most important number to reference. (Note: Mortgage lenders are legally required to disclose APR.)
Bps, pronounced “bips” for short, is a term we use in-house that may spill over into our interactions with clients. Bps is an abbreviation for basis points. A basis point equals 0.01%; 100 basis points is 1%. Basis points can help us discuss and analyze small percentage changes, such as Fed rate hikes, investment returns or product fees. Small percentages often make a big difference, and it may be easier to discuss 35 basis points than 0.35%.
Cash flow originated as a business term to discuss money in and money out. In many ways, cash flow is the key to financial planning. We want to make sure you have enough money (cash) flowing in to comfortably cover your expenses with some margin left over. The margin is key to achieving your financial goals. Cash flow comes up frequently in retirement, as living on a fixed income requires careful planning to ensure you can cover your expenses.
COLA is an acronym for cost-of-living adjustment. The Social Security Administration uses a precise formula to update retirement payments based on inflation, or an increased cost of living. Companies may offer cost-of-living adjustments, or raises, as well, but the formulas tend to be discretionary.
Equities and fixed income are common synonyms for stocks and bonds. Equity, at its core, refers to buying a share of a company. When you buy a stock, you become a partial owner of the company; you purchase equity. It’s a similar concept to any equity you have in a home. Fixed income investments primarily refer to bonds, which are essentially loans. The issuer pays you interest, or a fixed income, in return. What’s more important than the different terminology, however, is understanding how these investments work and your relationship to the issuer. One note: Bonds issued by the government are referred to as Treasuries (they’re issued by the Treasury Department). The 10-year note is the default, but there are Treasury bonds of various durations.
ERISA refers to legislation passed in the 1970s—the Employee Retirement Income Security Act—which established 401(k)s to help Americans save for retirement. The law, which is enforced by the Department of Labor, aims to protect retirement savings. If you’ve ever wondered why the investment options within your 401(k) seem limited, or why advisors manage 401(k)s differently from other investment accounts, it’s largely down to these ERISA protections.
GDP stands for gross domestic product; it measures the economic output of a country. You may hear the acronym used to discuss economic growth or the likelihood of a recession.
Leverage refers to borrowing money. At a personal level, we help clients use debt strategically. Taking on too much debt may result in folks being over-leveraged, where the payments start to interfere with other financial goals. Leverage works the same way for companies, who use it to finance growth. Companies who take on too much debt face the same risk as overleveraged consumers. We often look at how a company uses leverage when evaluating an investment.
Liquidity measures how easy it is to access money. Accounts with easy access—such as a checking account—are highly liquid. A home, on the other hand, is an illiquid asset, since you can’t access its value without taking multiple steps (selling, establishing a line of credit, and so on). We use liquidity to discuss investments, too. If a client thinks they might need cash in the short term, we want to make sure that money is invested in assets that can be sold relatively easily and without compromising other aspects of your financial plan.
Your marginal tax rate is what you actually pay in taxes. The U.S. income tax system is progressive, so even if you are in the top tax bracket, that isn’t the percentage of your income that you’ll pay the IRS.
Return and yield are sometimes used interchangeably, but they are different. An investment can produce yield, like the interest payment on a bond or a dividend on a stock. An investment can also grow in value. Return usually refers to “total return” or the change in the value of the investment as well as the yield. It’s important to pay attention to this wording when analyzing investment products or insurance offerings. For instance, we may dig into return, yield, and how they work together when discussing a fixed annuity.
Volatility is a measure of stability. When stocks swing up and down, we say the market is volatile, though the term is used more to discuss market selloffs than rallies. Professional traders and investors have different metrics to measure volatility, which you may hear referenced in financial commentary.
While learning these terms can feel a bit like studying vocabulary, having a cheat sheet handy can help you ask smart questions (or give you a head start if you prefer to research on your own).
If you ever encounter a financial term that confuses you, whether it’s in your work with Revo or outside of our meetings, don’t hesitate to ask for clarification! We want you to understand your finances and our approach.
