Women have learned to talk comfortably about sex and politics. Money is the final frontier. No longer is money a dirty five-letter word. With more women leaning in and rising up in leadership positions, it is time to crack the code on our relationship with money. At FW: Chicago, we have decided that 2016 is The Year of Financial Empowerment. Each issue of this year will include valuable information that we need to know in order to own our Money Power. We must become informed partners in our own financial life. One of the key ways that the investment industry keeps customers on the outside and not part of the “in crowd” is through the use of complex jargon. Let’s start by demystifying some of the most common terms.
A resource that has economic value ($). A home, 401k, investments, etc. are all assets. Jimmy Choos are NOT an asset.
A debt instrument, in which an investor loans money to a corporation or government. They borrow the money for a defined period of time at a rate of interest. Forget James Bond, these are bonds to watch.
You can think of compound interest as interest on interest. Example: You loan $100 at 10% interest. By the first year-end, you would have $110; second year $121, etc. Compounded interest is a woman’s best friend, because it is your money looking out for you even when you can’t.
The payment of a portion of the profits of a company to its shareholders. Dividends are your money makers. Smart women don’t give dividends away—they reinvest them!
An ETF (Exchange Traded Fund) is a marketable security (something that trades on an exchange) that follows an index, a commodity, bonds, or a basket of assets like an index fund. ETFs are easier to buy and sell and have lower fees.
Treasury bills mature in less than 12 months. No-Coupon, they are issued at less than face value. Investor receives the difference between what they paid and the face value. Example: You buy a 12-month TB for $95. At maturity you receive $100. You earned 5%. Treasury notes mature in 1–10 years. Coupon rate (interest) is set by the marketplace at the time of issue. They are issued mostly at par value and mature at par value. Coupon the bond interest rate fixed at issuance. Example $1,000 Treasury Note with a coupon of 5% pays $25 twice a year. Upon maturity you receive $1,000 back.
The charge (cost) for the privilege of borrowing money. Your GOAL is to earn interest not pay it out.
A qualified plan established by employers to which eligible employees may make salary deduction contributions on a pretax basis. Employers offering a 401(k) Plan may make matching contributions to the plan on behalf of eligible employees. Earnings are not taxed until the money is withdrawn. Always contribute to a plan an employer matches. It’s like getting a raise!
Any money or service that is currently owed to another party. Forms of liability, for example, are student debt, rent, and car leases.
Debt obligations issued by cities and towns that use the loans to fund public projects such as the construction of schools, hospitals, and highways. No income taxes on the interest you earn.
A contract that grants its owner the right, to make a transaction in an underlying commodity or security, at a certain price, within a set time in the future. All women want “options” in their life.
Price Earnings Ratio
(P/E) is the best known investment valuation indicator. A high P/E ratio means investors are paying more for today’s earnings in anticipation of future earnings growth. Facebook’s P/E is 100, Apple’s P/E is 12.94. Smart women want value for their money.
S & P 500
An index of 500 stocks chosen for market size, ease in buying or selling and industry grouping. The S&P is not a stock. The S&P 500 is designed to be a leading indicator of U.S. equities. It is a broader measure of the market than the Dow Jones Industrial Average.
Income earned on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the cost of the investment. Savvy women like low-risk and high-yield investments.
Financial terminology can be a barrier if we let it. It is time to take these terms and make them our own.
Carolyn Leonard and Monika Black are the co-founder and strategy analyst, respectively, of DyMynd, a company that helps financial institutions build meaningful relationships with their female clients. Learn more about DyMynd at dymynd.com.