Do you have lots of savings in cash, but not much invested for retirement?
If so, you’re not alone. A majority of Millennials prefer to keep their assets in cash and don’t trust the idea of putting money into the market. That’s not too surprising, since many members of Gen Y started life “in the real world” right before or during the Great Recession. We saw our parents retirement accounts crash and burn. Some of us know people who lost it all.
But here’s the thing: Investing is still important. When we don’t invest, Millennials risk losing money to inflation. If your rate of return doesn’t outpace inflation — typically around 2% per year — your money is losing value over time. Leaving everything in cash over decades will leave you with cash that’s less valuable in the future than it was when you put it in savings. Investing wisely can help you avoid losing a chunk of your nest egg to inflation.
If you’re in Gen Y and aren’t so sure about investing or the stock market, start by educating yourself. Here are 17 terms you’ll encounter as you learn more about investing:
1. ROI
Short for “return on investment,” ROI is a measurement that refers to the gain or loss experienced relative to the amount invested and is often expressed as a percent. ROI is calculated by dividing the gain (or loss) by the cost of the investment. Example: An investment of $1,000 grows to $1,100 would generate an ROI of 10% ($100/$1,000 x 100).
2. Compound Interest
Compounding means that interest is calculated based on the total amount of money you’ve invested plus the interest you’ve already earned.
3. 401(k)
A retirement savings account that takes advantage of a specific tax code to allow deductions (i.e. deposits) to be made from your paycheck on a pre-tax basis. Example: If your gross pay is $900 and your 401(k) deduction is $100, your taxes for that paycheck are calculated on $800 instead of $900.
Some employers will also make contributions on behalf of employees (called “matching contributions”). There is a limit set each year to how much can be deposited. Earnings and deposits grow on a tax-free basis until withdrawn, at which point they are taxed as income.
4. Roth IRA
A Roth Individual Retirement Account is a type of retirement savings vehicle. Unlike a traditional IRA, contributions to a Roth IRA do not receive an up-front tax deduction. You pay taxes on your money today. But then you can withdraw your funds tax-free in retirement, since you already paid taxes on that money.
Another important thing to note is that you can withdraw your Roth IRA contributions at any time, not just the gains on those contributions.
Note: If you’re wondering if you should contribute to a Roth IRA or a 401(k), this post might help you!
5. Certificate of Deposit (CD)
No, I’m not talking about the compact discs I bought in high school (yes, this ages me). A Certificate of Deposit, or CD, is a type of savings account offered by a financial institution. In exchange for keeping savings in the account for a specified period of time — one year, five years, etc. — the financial institution usually offers a higher interest rate than you would earn on your savings account.
6. Money Market Account
A type of savings account offered through many banks and credit unions that pays higher interest, but also may require higher account balances or other restrictions, like the number of withdrawals you can make each month. Two of my favorite money market accounts are at online banks: Ally Bank and CapitalOne 360.
7. Liquidity
The ability to cash out of an investment easily. Cash in your checking or savings account is the easiest to access, so it is your most liquid asset. Money in investments needs to be sold before it can be accessed, and it takes a few days for trades to settle and the cash to become available, making investments less liquid.
8. Stocks
When you own a stock, you own “shares” of a public corporation, which means you have a small amount of ownership in the company and can profit from the company’s earnings.
9. Bonds
A debt security in which the investor loans money to government or corporate entities. In exchange, companies provide interest payments at predetermined intervals until they pay back the loan in full.
10. Bear or Bull Market
A metaphor used to describe the investing environment, primarily related to the stock market. A bear swiping its paws downward indicates a downward market — falling stock prices, investor pessimism, and a general lack of confidence. A bull with its horns pointing upward indicates investor optimism and confidence, usually accompanied by rising stock prices.
11. Diversification
An investment strategy that avoids “putting all your eggs in one basket,” so to speak. Diversified investors have a variety of investments, such as stocks, bonds, money market funds, real estate, and more. The goal is to minimize risk.
12. Buy and Hold
A type of investment strategy where investors buy stocks and hold onto them, guided by the philosophy that stocks are likely to increase in value over the long term regardless of short-term volatility.
13. Mutual Fund
Mutual funds pool funds together from several investors, then invest those funds in stocks, bonds, or other securities. Mutual funds are usually managed by a professional fund manager.
14. Initial Public Offering
Also referred to as an IPO. An IPO occurs when a private company transforms into a public company and starts to sell shares to outside investors.
15. Dividend
A payment of profits, typically quarterly, to shareholders who own stock in a company.
16. Inflation
An increase in the price and value of goods and services, often represented as an annual percentage.
17. Expense Ratio
Expressed as a percent, the expense ratio describes the annual operating expenses for a fund divided by the value of assets under management. Expenses could include such fees for administration and management. Generally speaking, the more hands-off a fund manager is, the lower the expense ratio will be.
Starting to learn the basics of investing will help you have a better grasp on your financial life and give you the confidence to invest in your future.
