There are so many words in the personal finance lexicon that it can sometimes feel impossible to keep up. That said, welcome to The Wealth Edit’s “Weekly Words,” where we introduce you to increasingly complex personal finance vocabulary words so your vernacular grows along with your personal finance knowledge. If you have any questions about any of these terms, reach out!
- Net worth is the value of the assets a person owns, minus the liabilities they owe. (What are assets and liabilities? See Weekly Words No. 1!)
- People with substantial net worth are called high-net-worth individuals (HNWI).
- A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets.
- Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors.
- Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds, or other securities at a low price.
- Each shareholder participates proportionally in the gains or losses of the fund.
- Mutual funds charge annual fees (called expense ratios) and, in some cases, commissions, which can affect their overall returns.
- The overwhelming majority of money in employer-sponsored retirement plans goes into mutual funds.
- A 401K plan is a retirement savings plan offered by many American employers that has tax advantages to the saver. It is a great way to save for retirement.
- The employee who signs up for a 401K agrees to have a percentage of each paycheck paid directly into an investment account. The employer may match part of the contribution. The employee gets to choose among a number of investment options – usually mutual funds.
- There are two basic types of 401Ks – traditional and Roth – which differ primarily in how they’re taxed.
- In a traditional 401K, employee contributions are pre-tax, meaning the money is deducted from gross income and no taxes are due on it until the money is withdrawn.
- With a Roth, employees pay the income taxes up front but can make withdrawals tax-free.
Thanks as always to our friends at Investopedia for helping us clarify these sometimes confusing terms. Stay tuned for more Weekly Words next week!