5 Common Financial Terms You Probably Should Know
If you’re just starting to take charge of your financial future, it can be stressful approaching financial planning with confidence. Do you ever talk to your bank or financial manager and think that they’re speaking a foreign language? Between acronyms, money talk, and words longer than my arm, it’s no wonder that sometimes going to the bank is similar to going to the dentist - but hopefully it’s not as painful. Here are a few financial terms you should know by heart before consulting a financial professional. After all, you worked hard for your money, don’t let ignorance stand in the way of you and financial success.
Five Financial Terms to Know:
1. Canada Pension Plan - I feel like this is something everyone earning a regular paycheque is familiar with, but doesn’t 100% understand. “The Canada Pension Plan (CPP) provides contributors and their families with partial replacement of earnings in the case of retirement, disability or death. Almost all individuals who work in Canada outside Quebec contribute to the CPP.” Typically your contributions are taken off of your paycheque, or paid by in individual in a lump sum at tax time; the CPP is not designed to be a person’s sole source of income in retirement.
2. RRSP - The term RRSP is simply an acronym - “A Registered Retirement Savings Plan (RRSP) which is an account, registered with the federal government that you use to save for retirement. RRSPs have special tax advantages.” Before you turn 71, you convert your RRSP into an income stream to go along with you Canada Pension Plan in retirement.
3. Diversification - Of course, if English is your primary language, you probably understand the gist of this term. But when referring to financial actions, Investopedia defines diversification as, “a risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio constructed of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.” In even simpler terms - don't put all your eggs in one basket.
4. Amortization - Amortization, “is an accounting term that refers to the process of allocating the cost of an intangible asset over a period of time. It also refers to the repayment of loan principal over time.” You will run into this term when purchasing a house.
5. Bear market and bull market - Although it might feel like the stock market is a jungle sometimes, terms such as the “bear market” and “bull market” have quite reasonable meanings behind them. “The ‘bear market’ and ‘bull market’ are both terms to describe the stock market and investing. They’re easy to tell apart when you consider the animal's characteristics. In a bullish market, everything’s moving forward: investors are confident making a lot of buys, more companies are entering the stock market, and more money is being invested in the stock market overall. In a bear market, investors pull back (like bears hibernating). Prices start to hover and go down, and people wait and see more before investing additional money into stocks and bonds.”
We do our best in client meetings to use plain language and avoid the industry jargon, but we sometimes get excited and forget to turn off the jargon switch. If that happens in a meeting, let us know! We’re on this financial journey together!
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2022 Advisor Websites.