1. Compound Interest
According to Dave Nugent, head of investments at Wealthsimple, "compound interest is the principle by which the interest you earn also earns interest, and the interest on that interest earns interest, and so on forever. The larger your balance gets, the bigger those interest numbers become." However, it works against you when it comes to your credit card, so make sure you're debt-free before you start investing, since your efforts will cancel each other out, otherwise.
2. Net Worth
According to Gerri Sexsion, CEO of Jax Federal Credit Union, "your net worth is the difference between what you own, your assets, and what you owe, your liabilities. Over the course of your life, your net worth should increase as you pay down debts and build wealth through savings and investments."
To work out your net worth, you'll need to add the market values of your car and home, as well as any savings or investments you've made. Then you have to "subtract all of your debt, including your mortgage balance, credit card balances, student loans, and other obligations. The resulting number is your current net worth."
3. Diversification
In layman's terms, financial diversification is being wary of putting all your eggs in one basket and branching out instead. According to Nugent, when it comes to investments, "some investments go up, others go down. Overall, the balance makes you better off."
To diversify safely, we'd recommend getting in touch with a financial advisor, who can help you identify the most efficient variety of high and low-risk opportunities.
4. FICO
An acronym for 'Fair Isaac Corporation', the company that created the whole system, FICO is basically your credit score, and it affects eligibility and interest rates when it comes to borrowing. Sexsion advises keeping it as close to perfect (800 to 850) as possible, and to certainly not allow it to fall under 700.
She says that there are "many factors affect your score, including the number of accounts open in your name, your payment history, and total amount owed. By carefully limiting the number of new accounts you open, making payments on time, and steadily decreasing your debt, you can slowly but surely improve your FICO score."
5. Durable Power of Attorney (POA)
A POA is a person or organization in charge of handling your finances in case of death or an incapacitating illness. You can empower them to make any difficult financial or healthcare decisions on your behalf, among many other things, which will make everything go a lot smoother for everyone involved, and prevent any undesirable and bitter family rows.
6. Portfolio Rebalancing
Portfolio rebalancing is all about moving your money between investments, in order to keep up the ideal balance that will help you reach your financial goals. Basically, you simply need to keep up with the investments you made as they fluctuate between good and bad moments.
Nugent explains that "it keeps you on track. Some rebalancing is to make sure you maintain the portfolio you initially set up. And some portfolio rebalancing happens because your goals will change over time."
7. Tax-Free Income
This is a term that's usually associated with municipal bonds. According to Kimberly Foss, president and founder of Empyrion Wealth Management, "the interest earned from municipal bonds or mutual funds that invest in municipal bonds is not taxed by the federal government, ever," and that "if you live in a state with income tax, bonds issued by your home state are also exempt from that tax."
8. Taxable and Tax-Deferred
When making investments, you'll often have to pay taxes on the money you earn. Foss says that "if you own stocks that pay dividends, you must pay income taxes on those dividends. It's the same for interest you earn on bonds, CDs, or savings accounts, and if you sell a stock for a profit, you must pay tax on that."
However, with a 401K or a SEP IRS, your income will be tax-deferred, meaning that you won't be taxed for any cash that remains in the account, but you will then be taxed when you eventually withdraw it for retirement.
