So, we are back again to share 10 financial terms young professionals should know. This is our third list to bring our total to 30 terms! Don’t worry we will create a free e-book for our subscribers so that you can always have these terms with you. As we continue this financial roller coaster as a nation, some terms listed will be mentioned frequently. For example, the Federal Reserve and S&P 500 will be a term that we hear often especially if we are in a recession.
Many Americans will have July 28th circled on their calendars and will be tuned in at 8:30 A.M to see the Gross Domestic Product, 2nd Quarter 2022 results. If we have a negative GDP that will be two consecutive quarters where we would have experienced this negative result and we will officially be in a recession. Many are hoping that will not be the case, but by the looks of things I will be surprised if the numbers were better than the first quarter of 2022. Nevertheless, we should all be sure to do our best to learn, prepare, and execute. Here are another 10 financial terms young professionals should know.
10 Financial Terms Young Professionals Should Know
1. Federal Reserve
The Federal Reserve is the central bank of the United States and is responsible for implementing monetary policy. It was created by Congress in 1913 in response to the Panic of 1907, when a financial crisis caused banks to fail and led to a decrease in the money supply. The Federal Reserve has several tools at its disposal to influence the money supply, including open market operations, reserve requirements, and discount rates.
Does the president control the Federal Reserve?
The president does not have direct control over the Federal Reserve, but he can influence it through his appointments to the board of governors. Additionally, the Federal Open Market Committee, which sets monetary policy, is made up of members of the Federal Reserve Board and the president of the Federal Reserve Bank of New York. Therefore, while the president does not have direct control over the Federal Reserve, he can indirectly influence its policies.
Is the Federal Reserve owned by the US government?
The Federal Reserve is not actually owned by the US government. It is, however, a quasi-governmental organization. The Federal Reserve was created by Congress in 1913 and is responsible for managing the nation’s money supply and interest rates. It is overseen by a Board of Governors, which consists of seven members appointed by the President and confirmed by the Senate. The Federal Reserve also has 12 regional banks, each of which is responsible for supervising the member banks in its district. The Federal Reserve is not funded by the government; instead, it generates its own income through the interest on government securities that it holds and through the fees it charges banks for services.
2. Gross Domestic Product (GDP)
GDP stands for Gross Domestic Product and is a measure of the size and health of an economy. It is the total value of all the goods and services produced in a country over a period of time, usually one year. This term is used to measure the wellbeing of a country’s citizens and its economy. GDP per capita is often used as a measure of living standards. GDP growth is a measure of how an economy is expanding or contracting.
What happens when 2 consecutive quarters decrease GDP?
If GDP decreases for two consecutive quarters, the economy is considered to be in a recession. A recession is typically defined as a period of declining economic activity, as measured by GDP, lasting for at least two quarters. During a recession, businesses may experience decreased demand for their products and services, which can lead to layoffs and reduced spending. It is just one of many indicators that economists use to measure economic activity. Other indicators include employment, retail sales, and manufacturing output.
3. FICO score
A FICO score is a type of credit score that helps lenders evaluate your creditworthiness. FICO scores are the most widely used credit scores, and they’re based on information in your credit report. Your FICO score is a number between 300 and 850, and it’s based on your payment history, credit utilization, length of credit history, and other factors. A higher FICO score indicates that you’re a lower-risk borrower, which could mean you’re more likely to get approved for a loan with a lower interest rate.
You have FICO scores from each of the three major credit bureaus (Equifax, Experian, and TransUnion), and your scores may vary depending on which bureau’s information is used. FICO scores are just one factor that lenders use to evaluate your creditworthiness, so it’s important to keep track of all the information in your credit report.
How can I get my fico score for free?
Sign up for a credit monitoring service that will provide you with your FICO score monthly. Another option is to use a credit card that offers free FICO score monitoring as part of its benefits package. Finally, you can also contact the credit reporting agencies directly and request a copy of your FICO score. Whichever route you choose, getting your FICO score for free is relatively easy and can be very beneficial in terms of monitoring your financial health.
4. Compound interest
Compound interest is when you earn interest on your interest, in addition to the principal. This means that your money can grow at a much faster rate than with simple interest. Compound interest is often used in investments and savings plans. There are two main types of compound interest. The first is simple compound interest. With this type of interest, you earn interest on your principal only. Another type of compound interest is compound interest. With this type of interest, you earn interest not only on your principal, but also on the accumulated interest from previous periods.
How do you calculate compound interest?
To calculate compound interest, you will need to know the principal amount, the rate of interest, and the number of compounding periods.
The formula for compound interest is:
A = P(1 + r/n)^nt
Where:
A = the future value of the investment including interest
P = the principal amount invested (the original sum of money)
r = the annual rate of return or interest rate
n = number of compounding periods per year
t = number of years the money is invested for
For example, let’s say you invest $1,000 at a 5% annual rate of return. Compounding occurs monthly, so n would equal 12. If you leave the money invested for 10 years, t equals 10. Plugging those values into the formula, you get:
- A = 1000(1 + 0.05/12) ^ (12*10)
- A = 1000(1.00417) ^ 120
- A = 1630.69
So, in 10 years you will have earned $630.69 in interest on your original investment of $1,000!
5. Capital gains
Capital gains is the profit you make when you sell an investment for more than you paid for it. This can happen in the stock market, with real estate, or with other types of investments. For example, let’s say you buy a stock for $50 and sell it later for $70. Your capital gain would be $20. Capital gains can be short-term (one year or less) or long-term (more than one year).
Short-term capital gains are taxed at your ordinary income tax rate, which could be as high as 37%, depending on your tax bracket. Long-term capital gains are usually taxed at a lower rate, 20% for most people. Capital gains are taxable, which means you must pay taxes on them if you sell an investment for a profit. But there are some strategies you can use to minimize your capital gains taxes, such as investing in a tax-advantaged account like a 401(k) or IRA.
You can also take advantage of Capital Gains Tax (CGT) discounts if you’ve owned an investment for more than 12 months before selling. For example, if you’re in the 10% or 15% tax bracket, you’ll only pay 0% on long-term capital gains.
6. 401k
A 401k is a retirement savings plan sponsored by an employer. It’s named after the section of the Internal Revenue Code that created it. Employees can choose to have money withheld from their paycheck and deposited into the 401k account. The funds in the account grow tax-deferred, meaning that employees don’t have to pay taxes on them until they withdraw the money during retirement. 401ks often come with employer matching contributions, which can make them an especially powerful tool for saving for retirement.
There are some important things to know about 401ks. First, they have contribution limits. For 2020, the limit is $19,500 for employees under age 50. Employees 50 and over can make catch-up contributions of up to $6,500, for a total contribution limit of $26,000. 401ks also have vesting schedules, which determine how long employees must stay with a company before they fully own the employer match. And finally, 401ks have withdrawal rules that dictate when and how employees can access their money. employees can typically only withdraw money from their 401k after they reach age 59 1/2, and if they do so before then, they may be subject to taxes and penalties. Withdrawals are also subject to income taxes.
What happens to 401k when you quit?
If you have a 401k plan through your employer, quitting your job will usually mean that you will no longer have access to that 401k. In most cases, you will be able to keep the money that is already in your 401k account, but you may be unable to make any new contributions.
There are some exceptions to this general rule. For example, if you leave your job to take another one, you may be able to roll your 401k money over into the new employer’s 401k plan. And in some cases, you may be able to keep contributing to your old 401k even after you leave your job.
If you’re not sure what will happen to your 401k when you quit your job, the best thing to do is to ask your employer or the plan administrator. They should be able to give you specific information about your particular 401k plan.
7. ETF
ETFs are exchange-traded funds, which are investment vehicles that trade on stock exchanges. They track indexes or baskets of assets, and they offer investors exposure to a wide range of asset classes, including stocks, bonds, commodities, and real estate. ETFs have become increasingly popular in recent years as investors seek to diversify their portfolios and access new markets. They offer many benefits, including low costs, tax efficiency, and flexibility. However, ETFs also come with some risks, and it is important to understand these before investing. ETFs are a versatile tool that can be used to achieve a variety of investment objectives. ETFs can provide exposure to an asset class, sector, or region, and they can be used to hedge against market risks.
Are ETFs better than stocks?
ETFs have become increasingly popular in recent years, as investors look for ways to diversify their portfolios and get exposure to a variety of assets. Are ETFs better than stocks? Let’s look at the pros and cons of each investment option to see which one is right for you.
ETFs offer a number of advantages over stocks, including:
- ETFs are more diversified than stocks. When you invest in an ETF, you are buying a basket of assets, which helps to reduce your risk.
- ETFs are more liquid than stocks. ETFs can be traded throughout the day on major exchanges, whereas stocks can only be traded during regular market hours.
- ETFs often have lower fees than stocks. ETFs are typically passively managed, which means they have lower management fees than actively managed stock funds.
ETFs also have some disadvantages to consider:
- ETFs can be more volatile than stocks. Because ETFs are traded on major exchanges, their prices can fluctuate rapidly, which can be a drawback for some investors.
- ETFs may not perform as well as stocks in a bull market. ETFs tend to track the overall market, so they may not outperform stocks during periods of strong economic growth.
So, which is better – ETFs or stocks? The answer depends on your investment goals and risk tolerance. If you’re looking for a more diversified portfolio, ETFs may be the right choice. However, if you’re willing to accept more volatility in exchange for the potential for higher returns, stocks may be a better option. Ultimately, it’s up to you to decide which investment is right for your needs.
8. Dollar Cost Averaging
Dollar Cost Averaging is a technique that can be used when investing to reduce the overall risk of an investment portfolio. This technique involves investing a fixed sum of money into a security or securities at regular intervals, regardless of the price of the security at the time of purchase. By buying shares at different price points, the investor reduces their exposure to market volatility and reduces the overall cost of their investment. Dollar cost averaging can be a useful tool for investors who are worried about making a large investment all at once.
What are the 3 benefits of dollar-cost averaging?
1. Dollar cost averaging can help to reduce the effects of market volatility.
2. Dollar cost averaging can help to build a position in an investment over time.
3. Dollar cost averaging can help to take the emotions out of investing.
9. DRIP
DRIP is an acronym that stands for Dividend Reinvestment Plan. DRIPs are often offered by companies to shareholders as a way to reinvest their dividends back into the company, rather than taking the cash. They can be a great way to grow your investment over time. Many people find them to be a more convenient way to reinvest their dividends than having to do so manually. DRIPs are not without their drawbacks though, and it is important to be aware of these before investing in a DRIP.
One downside of DRIPs is that they can sometimes result in fractional shares, which can be difficult to track and sell. Another potential issue with DRIPs is that they may not be well suited for investors who are looking for immediate income from their dividends. DRIPs can also sometimes have high fees associated with them, so it is important to compare different DRIPs before investing. Overall, DRIPs can be a great way to reinvest your dividends and grow your investment over time, but it is important to be aware of the potential drawbacks before investing.
What companies have a DRIP program?
There are over 50 companies that offer Dividend Reinvestment Plans (DRIPs) to their shareholders.
Some examples of the larger companies that offer DRIPs include Coca-Cola, General Electric, Johnson & Johnson, Procter & Gamble, Exxon Mobil Corporation, Realty Income Corporation, AFLAC Incorporated, and 3M Company.
10. S&P 500
S&P 500 is an American stock market index that includes 500 of the largest U.S. companies by market capitalization. The S&P 500 is one of the most used benchmarks for measuring the performance of large-cap stocks in the U.S. stock market. S&P 500 Index Components: The S&P 500 is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. S&P 500 companies are large-cap, meaning they have a market capitalization of $10 billion or more.
Can you buy S&P 500 directly?
No, you cannot buy the S&P 500 directly. However, you can buy S&P 500 directly through a number of investment products. These include exchange-traded funds (ETFs), mutual funds, and index funds. Each of these product types has its own set of benefits and drawbacks, so it’s important to do your research before investing. S&P 500 ETFs are typically the simplest and most straightforward way to get exposure to the S&P 500. This is because they offer the same weighting and holdings as the index itself. Mutual funds and index funds provide a slightly different approach, as they are managed by professionals who may make slight adjustments to the portfolio. However, all three product types can give you direct access to S&P 500 investments.
Conclusion:
That’s it for our list of 10 financial terms every young professional should know. By understanding these concepts, you’ll be on your way to making sound financial decisions now and in the future. While this may seem like a lot to learn, you don’t need to be an expert in all these financial terms overnight! Just start by familiarizing yourself with the basics and then gradually increase your knowledge as you feel more comfortable. If there are any other financial terms that you think we should include on this list, please let us know in the comments below. We hope you found this post helpful, and please feel free to share it with your family and friends. Thanks for reading! Check out the first two parts of our financial terms here: