This blog post was written by Student Advisory Council member, Eddie Richardson.
Money can seem like a foreign language, filled with acronyms and sayings that cause confusion and exclusion. We aren’t born speaking money, may need to take classes to fully understand it, and have to practice to make sure we stay fluent. Here are some money-saving terms to help you become money fluent.
1. Emergency Fund: An emergency fund is a cash reserve that's specifically set aside for unplanned expenses or financial emergencies.
Why you should know this term? When first starting to save, it is essential to set aside an emergency fund. Emergency funds create a financial buffer that can keep you afloat in a time of need without having to rely on credit cards or high-interest loans. It can be especially important to have an emergency fund if you have debt, because it can help you avoid borrowing more.
2. Asset: An asset is anything of value.
Why you should know this term? In the investing world, assets are investment vehicles. Stocks, bonds, mutual funds, ETFs (see #6 for definition of ETF), and options are all types of assets that can carry value.
3. Liquidity: Liquidity refers to how quickly an asset can be bought or sold.
Why you should know this term? If you are in need of cash, it is often better to have a liquid asset, which are easier to sell for cash. Liquid assets can be very helpful in case of an emergency where you may need more cash than you would have otherwise expected. Some assets, like stocks and bonds, are relatively liquid, while others, like real estate, are relatively illiquid.
4. FDIC or NCUA Insured: When you make deposits into savings, checking or money market accounts, the Federal Deposit Insurance Corporation (FDIC) insures up to $250,000 insured per depositor. If there is a bank failure at an institution that is FDIC-insured, the FDIC will reimburse any losses suffered. You may also hear the term NCUA insured. The National Credit Union Administration (NCUA) also provides government-backed insurance for financial institutions -- specifically credit unions. HUECU is an NCUA insured institution.
Why you should know this term? Deposits made into FDIC or NCUA are insured accounts, which makes them much lower risk than other types of assets. Unlike investment accounts, any losses suffered by an FDIC or NCUA institution will not affect individual account balances.
5. APY: The annual percentage yield, or APY, is the amount of interest your account earns in a year.
Why you should know this term? When setting up a savings account, it is crucial to know the APY offered. Different banks and financial institutions may offer different APYs for similar account types, so it is important to understand the differences. Because of compounding interest, small differences in interest rates may have large effects on account balances.
6. Exchange-Traded Funds (ETFs): Exchange-traded funds, or ETFs, are traded on stock exchanges just like common stocks. Often considered to be bucket investments, ETFs are funds that can hold a mix of various assets including stocks, commodities, and bonds.
Why you should know this term? ETFs present a low-cost way to diversify your portfolio without having to buy single shares of many different companies.
7. Dividend: Dividends are distributions of profits to shareholders. Not all companies pay dividends, but if they do, they generally pay them on a quarterly basis.
Why you should know this term? Dividend-paying stocks provide a way for investors to get paid during rocky market periods, when capital gains are hard to achieve.
8. Bull Market / Bear Market: A bull market is a market in which the vast majority of assets are increasing in value. A bear market is used to describe an extended period of downward movement in the market.
Why you should know this term? Understanding when the economy is in a bull market/ bear market can help you gauge overall market risk. For example, bear markets are generally coupled with widespread pessimism. As a result, it’s often best to seek safe-haven investment opportunities during a bear market.
9. Bubble: Bubbles take place in the market when investors drive the values of an asset higher than they should be. This irrational buying leads to unrealistic growth in prices with trades in the sector taking place at high volumes.
Why you should know this term? A feature of a bubble in the market is that it will eventually pop. When a bubble in the market pops, prices of assets within the bubbling sector collapse, bringing them down to more realistic valuations. Knowing when the market is in a bubble can help you prepare for this collapse.
10. Dollar-Cost Averaging: Dollar-cost averaging is a commonly used investment strategy to minimize risk. Instead of making one large investment, you make a series of equal, small investments at predetermined time intervals regardless of trading prices at that time. A common dollar-cost averaging strategy is to make small investments into an asset in monthly increments.
Why you should know this term? Dollar-cost averaging is a way to protect yourself from wide swings in value when making large investments. Because it is difficult to time the market, dollar-cost averaging helps control for seemingly random price fluctuations. If an asset declines significantly in price from month 1 to month 2, an investor who invests using dollar-cost averaging will be less exposed to this price fluctuation compared to one who made a large investment in month one.
