Top 9 Financial Terms You Must Know in 2023, According to Experts
Having basic financial skills is something they may not have taught you in school, yet it can mean the difference between prosperity and poverty and is essential in the modern world.
Understanding the concepts and terms related to finance is essential in making informed decisions. With 2023 just around the corner, it’s important to understand the language of finance during these times of uncertainty so we can manage our financial matters and prepare for what lies ahead.
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Educators from TPR Teaching teamed up with financial experts across the United States to teach us the most important financial terms you must know in 2023 and beyond. From planning retirement income to knowing how investments work, these terms can help you better understand today's economy and how to manage your money.
Top 9 Financial Terms To Know
Consumer Price Index (CPI)
The Consumer Price Index (CPI) measures the average price change of a basket of goods and services in the United States and smaller geographic areas. It is tracked and reported monthly by the U.S. Bureau of Labor Statistics. It is one metric used to track inflation.
“The reference value of 100 is for the year 1984. A value of more than 100 indicates prices are higher than in 1984,” said Prakash Kolli from Dividend Power. “The BLS usually reports four categories: All Items, Food, Energy, and All Items less food and energy.”
“They do this because food and energy prices are more volatile and exhibit more significant monthly variation than core prices.”
Compound Interest
Compound Interest is when you earn interest not only on the original balance but also on the additional interest.
“Compound interest is a powerful concept to understand and take advantage of. Using the power of compound interest, young savers can grow their money tremendously,” said Robyn from A Dime Saved. “Saving small amounts of money and letting the power of compound interest take over is more powerful than saving large amounts later in life.”
Tax-Advantaged Accounts
“The United States incentivizes individuals to take certain actions by crafting the tax code to include provisions enhancing the attractiveness of taking these actions,” said Riley Adams, a certified public accountant.
“Individuals can use investment schemes like the individual retirement account, 401k, health savings account, or other similar accounts to set aside money on either a pre-tax or post-tax basis and capture higher amounts of funds that remain in their hands as a result of a lower tax burden,” Adams added.
“Many people use these accounts to prepare for significant events like retirement, having a backstop for medical expenses, or other financial goals and priorities.”
Annuity
Annuities are products offered by insurance companies to consumers through financial professionals. They provide you with a guaranteed stream of future income in exchange for an upfront payment made in a single lump sum or over a period of time.
“Depending upon the type of annuity contract you purchase, the costs and benefits can vary considerably. Many purchase annuities provide a steady income source throughout their retirement years,” said Brian Thorp from Wealthtender. “Other people choose annuities that offer access to the stock market and tax deferral advantages.”
“As annuities are complicated to understand, it's essential to consult a financial professional who is knowledgeable about annuities and obligated to provide advice based on what's best for your individual needs.”
Net Worth
Your net worth is the summary of all your assets minus your liabilities.
Total assets include things like money in your bank accounts, brokerage accounts, any retirement accounts such as 401(k), IRAs, Roth IRAs, collectibles such as art investments, vintage cars, watches, stamps, coins, gold, and luxury goods. All your liabilities include mortgages, auto loans, medical debt, student loan debt, and credit card debt.
“Determining the overall monetary value of your total assets and liabilities can be very useful for understanding your financial position,” said John Dealbreuin from Financial Freedom Countdown. “Figuring out your net worth – and comparing it to your age group's average net worth or median worth – can help you benchmark your total financial performance against similarly situated people in your age bracket,” Dealbreuin added.
“It can be a good snapshot in time that can help you understand how much money you have and how you are doing in terms of meeting overall financial goals.”
Defined-Contribution Plan
Defined-contribution plans are retirement plans offered by a company where a set amount is contributed by the company on a regular basis.
“The most common example of a defined-contribution plan is a 401(k). Both you and your employer can add money to your account and invest it in various stocks, bonds, and other financial assets,” said Andrew Herrig from Wealthy Nickel.
“A defined-contribution plan differs from a defined-benefits plan, such as a pension, where you are guaranteed a certain amount of income in retirement. With a defined-contribution plan, your money grows based on the performance of your investments, whereas with a pension, the company takes the investment risk and may have to contribute more or less to pay out the benefit.”
Amortization
When borrowing for a home, most fixed-rate mortgages follow an amortization schedule. When a loan is amortized, the payments and interest rate are the same for the life of the loan.
“What changes every month is the ratio of your payment applied towards the principal compared to the amount that goes towards interest,” said Greg Wilson from Cha Ching Queen. “The interest is calculated on the outstanding balance. So as you pay down the balance, the interest owed is less,” Wilson added.
“Following an amortization schedule helps the lender hedge the risk that a borrower may default, refinance, or move earlier in the life of the loan. Borrowers can benefit from amortization by understanding that the longer they stick with a loan instead of moving, the better.”
ETF (Exchange-Traded Fund)
An exchange-traded fund (ETF) is an investment type that tracks a specific index, sector, or commodity.
“ETFs are straightforward to buy and sell, unlike mutual funds. They are one of the most popular ways to invest when you want to diversify your portfolio,” said Marjolein Dilven, Celebz Net Worth.
“The biggest advantage of an ETF is that you can invest in a diversified way, even when you invest $50 per month. That's why ETFs are one of the most efficient tools people use to build their net worth.”
Roth IRA
“If you don't have a retirement account, consider looking into a Roth IRA. A Roth IRA is an individual retirement account that offers a long-term tax benefit,” said Cindy from The Money Dreamer.
“Even though you pay taxes when your money goes into the account (different from a traditional IRA), all your contributions and earnings growth will be tax-free. To make the most out of your retirement savings, you want to max it out every year.”
Plan, Prepare, Prosper
These nine financial terms are essential for understanding the basics of personal finance and preparing yourself to reach your long-term financial goals. Whether you're a first-time investor or an experienced pro, having a firm grasp on these concepts can help ensure that you make smart decisions with your money.
Educators at TPR Teaching said, "The research indicates that these nine financial terms are essential to know in 2023 and beyond. Knowing what they mean can help you better understand your finances, create a more secure financial future, and invest more confidently. With the right knowledge base, you'll be prepared for whatever comes next."
This research was conducted by TPR Teaching, bringing you simplified answers to pressing English language questions. Any opinions expressed are our own. We give credit to all the sources used in this article.
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