Investment/Financial Planning Terms
One should never think that financial planning is out of their reach. This section will explain some of the vocabulary and options one has to chose from.
Please also see our section on "Key books, Publications, & Resources for individuals and those starting a small business"
Definitions
IRA = a tax-deferred retirement account that an employed person can set up, and put in a maximum of $2000 a year. In some cases, the contribution is tax deductible. These funds generally can’t be accessed until retirement without a penalty. Withdrawals from an IRA are taxable.
Roth IRA = mostly the same rules as the IRA, but contributions are not tax deductible and withdrawals are not taxable, but interest is taxable.
Stocks = ownership of shares in a company. The price of a stock rises and falls based on perceptions of the earnings potential of the company.
Bonds = an IOU from a corporation, government, or city. The issuer agrees to pay the bondholder a certain amount of interest for a specific time period, and then pay back the "loan".
Mutual Funds = a professionally managed investment in a group of stocks and/or bonds that are selected and diversified to meet the stated objective of the fund.
Compounding = what happens when you continually reinvest earnings of interest form investments and your "reinvestments" also through earnings of interest.
The more often growth is compounded, the faster savings grow (see below).
FACT: An investment of $1000 a year (that’s $20 a week) that grows at a rate of 10% a year (that’s lower than the average annual growth of the stock market, which is 12%) will grow to almost $110,000 in 25 years. An annual investment of $2000 at the same growth rate will be $220,000 in that same time period. Not magic, its the power of compounding.
