Dictionary

401k

A type of retirement investment account that is offered through your employer. You contribute money before it’s been taxed and then pay taxes later once you retire. Since it’s employer sponsored, you can only participate in one if your company offers it

Accredited Investor

Someone who has earned income that exceeds $200,000 or has a net worth of over $1 million. An accredited investor has access to certain investment options like hedge funds and venture capital, which individuals with less money can’t access due to US federal securities laws

Asset Allocation

The way that you invest your money between different types of investments like stocks and bonds

• Everyone’s asset allocation is a little different because it depends on how comfortable you are with risk. For example, I may invest 100% of my money in stocks which is riskier than someone who invests 90% in stocks and 10% in bonds

Bond

When a company or a government borrows money from investors and pays interest back to them

• Bonds are typically less risky, and when you purchase a bond you are not purchasing ownership in a company, you are just loaning the company money that they will pay you back

Brokerage

A company that offers investment products like Vanguard or Fidelity

Compound Interest

The reason why investing is so awesome. You earn interest based on the original account balance plus your earnings. This one is best explained with an example:

• If you keep $1,000 in a bank account that pays you 10% compound interest:
  • Year 1: Account balance = $1,000.
    • 10% of $1,000 = $100. New account balance = $1,100
  • Year 2: Account balance = $1,100.
    • 10% of $1,100 = $110. New account balance = $1,210.
  • Year 3: Account balance = $1,210.
    • 10% of $1,210 = $121. New account balance = $1,331
• The same concept applies to money that you owe, like credit card debt

Contribution

The amount that you personally deposit into the investment account

Credit Score

How trustworthy you are as a borrower, expressed in a number. The higher the better, and the range is 300 – 850

Earned Income

Money from a job or self employment

Earnings

The amount of money that you make in your investment account. It’s your total account balance minus your contributions

Employer Match

This is the amount that your employer is also contributing to your retirement account, usually expressed as a percentage. A lot of companies will match your contributions up to a certain percentage like 4%

Geoarbitrage

Moving somewhere less expensive while maintaining (or even increasing) your income

• Like moving from Washington, DC or New York City to a small rural town while keeping the same job

Interest

The amount you receive if you let other people borrow your money. It’s also the amount you pay when you borrow money from someone else.

IRA

Individual Retirement Account. This is a long term investment account that is not dependent on any employer and has rules for when you can withdraw your money and how that money gets taxed

Loan

When a person or organization lends money to someone and then receives the money back in addition to interest. Common loan types include car, house, and student loans

Marginal Tax Rate

The percentage of your income that you will owe in taxes based on how much money you make. Google “Current US Tax Brackets” to find yours

Passive Income

Money from rental properties or investments

Rate of Return

How much your investments are growing or shrinking over time – expressed in a percentage like 8% per year.

Rollover

Moving money from one investment account to another

Roth IRA

An individual investment account where you put in money that has already been taxed and it grows tax free so you don’t pay any taxes when you withdraw it later in life

• Great for anyone who makes less than $125,000 per year

Roth IRA Calculator

A tool that helps you estimate what your Roth IRA account balance will be when you retire, based on different factors like how much you plan to contribute to the account over time. Check out how to use one here

Simple Interest

Interest calculated based on the original account balance:

• If you keep $1,000 in a bank account that pays you 10% simple interest, $1,000 is the original loan amount. 10% of 1,000 is $100 = the amount the bank will pay you every year as a reward for keeping your money there:
  • Year 1: Bank pays you $100, so your account balance is $1,100
  • Year 2: Bank pays you $100, so your account balance is $1,200
  • Year 3: Bank pays you $100, so your account balance is $1,300

Stock

Ownership in a piece of a company

Traditional IRA

An individual investment account where you put in money before it’s been taxed, and then you pay taxes on the money when you withdraw it later in life

• Great for anyone who makes more than $125,000 per year

Unicorn

A startup company that is valued at over 1 billion dollars

• These are pretty rare. Previous unicorns include Airbnb, Facebook, and Google. Check out the current unicorn companies around the globe