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10 Important Finance Terms to Know

  1. 401(k): A retirement savings plan offered by many businesses to their employees. Employees enrolled in their company’s 401(k) plan will have a portion of their pre-tax paycheck deposited into an investment fund. These savings then grow, tax-free, until withdrawal at or during retirement.  
  2. Amortization: The distribution of scheduled loan repayments into installments. Each repayment consists of both interest and money toward the loan’s principal. The amortization schedule will determine how much of the repayment goes toward each category.
  3. Asset allocation: Spreading investments across different asset classes. The three basic asset classes are cash, bonds and stock.
  4. Diversification: Spreading investments across different industries and classes for the benefit of reducing risk.
  5. Dividend: A portion of a company’s profits that is paid out to its shareholders, usually distributed quarterly. Dividends are part of your taxable income.
  6. FICO score: A credit score devised by the Fair Isaac Corp. and based on your payment history, credit length, amounts owed, credit utilization and other factors. Scores range from 300 to 850. The higher your score, the better chance you have of being approved for a loan and obtaining a favorable interest rate. Most lenders will only grant loans to borrowers with a minimum score of 620. For a larger loan, such as a mortgage, you’ll likely need a score of 720 or higher.
  7. Index fund: A fund that tracks or matches a market index. Index funds typically have low fees since they’re run by computers. They can perform well, but do tend to reflect the market’s conditions.
  8.  IRA: An IRA, or Individual Retirement Account, is a retirement savings account opened by an individual without the involvement of their employer. You can contribute income up to a set maximum amount. Contributions to IRAs can grow tax-free, but all withdrawals are taxed.
  9. Mutual fund: A collection of different investments, usually stocks, that are all of similar size or in a common industry. Most mutual funds require minimal involvement on the part of the investor, but have large fees attached, which eats away at the returns.
  10. Net Worth: The difference between your assets (including all cash, savings, investments and items of value) and liabilities (all debt).

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