Finally Decipher Common Financial Jargon: 12 Financial Terms You Need to Know
Admin • July 7, 2023
Are there financial terms you’ve heard so often that you think you understand them but would have a hard time defining? As we navigate financial waters, we often find that we have opportunities to grow our understanding of common financial terms.
While you certainly don’t need to get a finance degree to be successful in your personal finances, you can become well-versed in common terms so you can make informed and educated decisions.
Whether you want to brush up on common financial jargon for yourself, or want to share these with a young adult starting their financial journey, we hope you’ll find value in this easy to understand definitions.
Top 4 Financial Buzzwords in 2023
Since the COVID-19 pandemic, there have been many financial buzzwords flying around in the news. And while you may have a vague understanding of what’s happening, it’s best to clearly understand these financial terms so you can confidently navigate the economy.
- Shrinkflation . This refers to downsizing the amount of product in a particular package (such as a bag of chips) while the price remains the same. Companies know that savvy consumers will notice if the price of an item increases. But consumers may be less likely to notice a smaller amount of the product. This strategy is a response to the rising prices of goods. As a consumer, you can try a different, less expensive brand, compare products per ounce instead of per package, and try shopping at different stores.
- The Fed. Interest rates have starkly risen this year, and we often hear it’s “the Fed” who’s raising them. The Federal Reserve System is our country’s central bank. They are responsible for creating the United State’s monetary policy, regulating banks, operating the country’s payment systems, and maintaining the stability of our financial systems. To combat inflation and avoid a recession, the Fed has consistently risen interest rates ( 10 times since March 2022 ). This makes it more expensive to borrow money, but more financially beneficial to save money in an interest-bearing account.
- Risk Assessment. The market volatility in the past couple of years has left many consumers concerned about their finances, leading many to reach out to financial advisors for a comprehensive risk assessment. Financial advisors can help determine your level of risk (more on that below!), asset allocations, investment diversification, and risk management strategies.
- Recession. This word has definitely been thrown around this year and last. An official recession is typically declared after the economy is already in one, thus making it hard to predict. Recessions are marked by significantly prolonged periods of decreasing economic activity. Officially speaking, two consecutive quarters of negative gross domestic product. Recessions are typically marked by a decrease in the stock market, high unemployment rates, low consumer confidence, and general fear and apprehension. A great antidote for the uncertainty that can accompany a recession (or talks of a recession) is having a solid financial plan in place with an advisor you trust.
Credit and Loan Terminology
Loans can be a powerful provision for both individuals and businesses. Mortgages often help families buy a home, auto loans help people secure their transportation, credit cards offer flexibility and convenience, and business loans help entrepreneurs start and grow their businesses.
Unfortunately, however, the terminology surrounding credit and loans can make them feel intimidating and overwhelming. Familiarize yourself with these terms so you can be confident and empowered the next time you need to apply for a loan or chat with your credit card company.
- Annual Percentage Rate. This is simply the total annual cost of your loan (including any accompanying fees!) . This comprehensive number allows you to easily shop around for the best price and understand exactly what your annual cost will be. Coupled with the loan’s interest rate, the APR is a powerful piece of data to help you understand the total cost of your borrowed funds.
- Amortization . This is the process of repaying your loan over a period of time. An amortization schedule shows exactly how much of your payment is going toward interest, and how much is going toward the principal. There are handy amortization calculators you can use to show you the total cost of your loan, and even how making extra payments impacts your total cost throughout the loan.
- Secured vs Unsecured loans . There are different requirements for obtaining different types of credit and loans, and a large part of that depends on the type of loan. Secured loans are backed by collateral such as your home, car, or even a cash deposit. These can include personal loans, credit cards, mortgages, home equity loans, auto loans, and business loans. Secured loans typically offer lower interest rates than unsecured loans and have longer repayment terms. Unsecured loans are not backed by collateral and instead are established based on the borrower’s creditworthiness (e.g. income, credit history, and debt-to-income ratio). These can include student loans, credit cards, signature loans, personal loans, and business loans. These types of loans typically have higher interest rates and shorter repayment terms.
- Credit utilization ratio . This ratio, displayed as a percentage, refers to the amount of credit you have available to you versus the amount you actually utilize. For example, if you have a total of $50,000 in credit card limits spread amongst your credit cards, but only use $10,000 of it, your credit utilization ratio would be 20%. A lower credit utilization ratio shows that you can handle having access to a lot of credit while only utilizing a small portion. On the other hand, a high credit utilization ratio shows that you use most or all of the credit available to you (something lenders don’t like to see). Your credit utilization is periodically reported to the major credit bureaus, so it’s important to pay attention and keep your ratio as low as possible.
Investing Terminology
Investing can be an effective tool in personal finance to grow and preserve your wealth. To make wise and prudent investment decisions, you should understand these common investing terms.
- Dollar-cost averaging. This investment strategy involves regularly investing a fixed dollar amount regardless of how much the asset costs or how the markets are performing. It’s a popular strategy for long-term investments and promotes discipline and eliminates the need to continually think about your investment choices. For example, you invest $600 every month into a chosen fund, regardless of how many shares it buys you. In some months, your $600 will buy a lot of shares, and in other months, it might buy you very few. The idea of dollar-cost averaging is that over a long period, your fund purchase prices will even out. Think of it as the opposite of “timing the market”.
- Capital gains. This is the difference between what you bought an asset (real estate, stocks, cryptocurrency, etc.) for and how much you sell it for. Short-term capital gains are when you held the asset for less than a year before selling and long-term capital gains are when you held an asset for more than a year before selling. Most capital gains are subject to taxation. The amount of tax depends on the asset, the holding period (short-term versus long-term), and your tax bracket. A tax professional can help you determine your capital gains tax rate.
- Risk tolerance. All investing carries a certain level of risk and everyone has their own level of risk tolerance. Your financial ability, your mental willingness, and your time horizon (how long you plan on holding your investment) all play into your risk tolerance. A well-balanced, personalized investment plan can help you feel comfortable with the amount of risk you’re taking with your money.
- Rebalancing. When you and an advisor put together your investment strategy, you will allocate your portfolio to reflect your risk tolerance and desired returns. As the market changes, the value of your assets will increase or decrease, causing your desired allocation to become unbalanced. Periodically rebalancing your portfolio to your original allocations will help you maintain your original investment preferences.
Decipher Your Finances with Five Pine Wealth Management
At Five Pine Wealth Management , we love educating our clients so that they can feel empowered in their finances. We know that not everyone has a finance degree but that doesn’t mean you can’t know what’s going on with your portfolio.
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Key Takeaways High earners maxing out 401(k)s at $24,500 are only saving about 8% of a $300,000 income in their primary retirement account. The mega backdoor Roth strategy can increase total 401(k) contributions to $72,000 annually with tax-free growth. A comprehensive approach can create nearly $3 million in additional retirement wealth over 20 years. It's 2026. You're checking all the boxes. You're earning upwards of $300,000 annually, and you're maxing out your 401(k) every year. You've reached the $24,500 contribution limit and feel confident about securing your financial future. Then you realize $24,500 represents less than 8% of your income. Over 20 years, this gap adds up to millions in lost opportunity. Thankfully, you're not stuck with the basic 401(k) playbook. There are sophisticated strategies beyond your contribution limit. 5 Strategic Moves for High Earners with Maxed-Out 401(k)s Here are five sophisticated strategies that can help you build wealth beyond your basic 401(k) contributions. All projections assume a 7% average annual return and are estimates for illustrative purposes. 1. Mega Backdoor Roth Contributions If your employer's 401(k) plan allows after-tax contributions, this could be your biggest opportunity. With employee contributions, employer match, and after-tax contributions, the combined 401(k) limit for 2026 is $72,000 ($80,000 if you're 50 or older). The mega backdoor Roth works because you immediately convert those after-tax contributions into a Roth account, where they grow tax-free forever. The catch: Not all employers offer this option. You need a plan that permits after-tax contributions and in-service Roth conversions. The impact: The available space for after-tax contributions depends on your employer match. With a typical employer match of 3-6% (roughly $10,000-$21,000 on a $350,000 salary), you could contribute approximately $26,500-$37,000 annually. At 7% average returns over 20 years, this creates approximately $1.1-$1.5 million in additional tax-free retirement savings. 2. Donor-Advised Funds for Charitable Giving If you're charitably inclined, donor-advised funds (DAFs) offer a way to bunch several years of charitable contributions into one tax year, maximizing your itemized deductions while still spreading your giving over time. You get an immediate tax deduction for the full contribution, but you can recommend grants to charities over many years. The funds grow tax-free in the meantime. The catch: Once you contribute to a DAF, the money is irrevocably committed to charity. You can't get it back for personal use. The impact: Contributing $50,000 to a DAF in a high-income year (versus giving $10,000 annually) can create immediate federal tax savings of $15,000-$18,500 while still allowing you to support the same charities over five years. 3. Taxable Brokerage Accounts with Tax-Loss Harvesting Once you've maximized tax-advantaged accounts, strategic taxable investing becomes your next move. The key is working with a financial advisor who implements systematic tax-loss harvesting throughout the year. Tax-loss harvesting involves selling investments at a loss to offset capital gains elsewhere. Done strategically, this can save thousands in taxes annually. The catch: Long-term capital gain rates (0%, 15%, or 20%) are lower than ordinary income tax rates, but you're still paying taxes on gains. It's less tax-efficient than retirement accounts, but far better than ignoring tax optimization. The impact: For high earners in the 35-37% ordinary income brackets, the difference between long-term capital gains (20%) and ordinary rates is significant. Effective tax-loss harvesting on $50,000 in annual gains over 20 years could save $150,000+ in taxes. 4. Health Savings Account (HSA) Triple Tax Advantage HSAs offer a unique triple tax benefit: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. With 2026 contribution limits of $4,400 for individuals and $8,750 for families, this adds another powerful layer to your strategy. You can invest HSA funds just like an IRA and let them grow for decades. After age 65, you can withdraw the funds for any purpose, medical or otherwise. The catch: You must have a high-deductible health plan to qualify for an HSA. After age 65, non-medical withdrawals are taxed as ordinary income (like traditional IRA distributions), but you still benefit from the upfront deduction and decades of tax-free growth. The impact: Contributing the family maximum ($8,750) annually for 20 years at a 7% average annual return creates approximately $355,000-$360,000 in tax-advantaged savings. 5. Backdoor Roth IRA Contributions Not to be confused with mega backdoor Roth contributions! Even if your income exceeds the Roth IRA contribution limits, you can still fund a Roth through the backdoor method: make a non-deductible contribution to a traditional IRA, then immediately convert it to a Roth IRA. The catch: If you have existing traditional IRA balances, the pro-rata rule complicates things. You may want to consider rolling those funds into your 401(k) first if your plan allows. The impact: Contributing $7,000 annually through the backdoor Roth for 20 years at 7% average annual return creates approximately $285,000-$290,000 in tax-free retirement savings. What Compounding These Strategies Looks Like Over 20 Years Let’s look at approximate outcomes based on a 7% average annual return. 401(k) Only: Annual contribution: $24,500 Total after 20 years: ~$1M 401(k) + Mega Backdoor Roth: Annual contribution: $72,000 Total after 20 years: ~$3M Note: Mega backdoor Roth space varies based on your employer's match. These calculations assume you're maximizing the total annual limit. Comprehensive Approach (under age 50): Mega Backdoor Roth: ~$3.0M HSA: ~$350K-$360K Backdoor Roth IRA: ~$285K-$290K Strategic taxable investing with tax-loss harvesting Total retirement savings: ~$3.6M+, plus taxable investments Comprehensive Approach (ages 50-59): With higher contribution limits and catch-up contributions, total retirement savings can reach ~$4M+ over 20 years. Comprehensive Approach (ages 60–63 with enhanced catch-up contributions) Higher contribution limits during peak earning years allow for meaningful acceleration of retirement savings. The exact impact depends on timing, contribution duration, and existing balances. The Bottom Line The difference between stopping at your basic 401(k) and implementing a comprehensive strategy can approach $3 million or more in additional retirement wealth over time. Why Strategic Coordination Matters These aren't either/or decisions. The most effective approach coordinates multiple strategies while ensuring everything works together. At Five Pine Wealth Management , we help high-earning clients build comprehensive plans that go beyond the 401(k). We coordinate your employer benefits, tax strategies, and investment accounts to create a cohesive approach that maximizes your wealth-building potential. This requires working across several areas: Analyzing your employer's 401(k) plan for mega backdoor Roth opportunities Implementing systematic tax-loss harvesting in taxable accounts Coordinating Roth conversions and backdoor contributions Optimizing your HSA as a long-term retirement vehicle Ensuring charitable giving strategies align with your tax situation Maximizing catch-up contributions when you reach milestone ages As fiduciary advisors, we're legally obligated to act in your best interest. That means we're focused on strategies that serve your goals, not products that generate commissions. Ready to see what's possible beyond your 401(k)? Email us at info@fivepinewealth.com or call 877.333.1015 to schedule a conversation about your specific situation. Frequently Asked Questions (FAQs) Q: Does my employer's 401(k) plan automatically allow mega backdoor Roth contributions? A: No. You need a plan that permits after-tax contributions and in-service conversions to Roth. Check with your HR department. Q: How do I prioritize which investment strategies to use? A: Generally, maximize employer match first (it's free money), then fully fund your 401(k), explore Mega Backdoor Roth if available, max out your HSA, consider backdoor Roth IRA contributions, and then move to taxable accounts with tax-loss harvesting. We can help determine the right sequence for your circumstances.
Key Takeaways Your guaranteed income sources (pensions, Social Security) matter more than your age when deciding allocation. Retiring at 65 doesn't mean your timeline ends. You likely have 20-30 years of investing ahead. Think in time buckets: near-term stability, mid-term balance, long-term growth. You're 55 years old with over a million dollars saved for retirement. Your 401(k) statements arrive each month, and you find yourself questioning whether your current allocation still makes sense. Should you be moving everything to bonds? Keeping it all in stocks? Something in between? There's no single "correct" asset allocation for everyone in this position. What works for you depends on factors unique to your situation: your retirement income sources, spending needs, and risk tolerance. Let's look at what matters most as you approach this major life transition. Why Asset Allocation Changes as Retirement Approaches When you’re 30 or 40, your investment timeline stretches decades into the future. When you’re 55 and looking to retire at 65, that equation changes because you’re no longer just building wealth: you’re preparing to start spending it. You need enough growth to keep pace with inflation and fund decades of retirement, but you also need stability to avoid the need to sell investments during market downturns. At this point, asset allocation 10 years before retirement is more nuanced than a simple “more conservative” approach. Understanding Your Actual Time Horizon Hitting retirement age doesn't make your investment timeline shrink to zero. If you retire at 65 and live to 90, that's a 25-year investment horizon. Think about your money in buckets based on when you'll need it: Time Horizon Investment Approach Example Needs Short-Term (Years 1-5 of Retirement) Stable & accessible funds Monthly living expenses, healthcare costs, and early travel plans Medium-Term (Years 6-15) Moderate risk; balanced growth Home repairs, care and income replacement, and helping grandchildren with college Long-Term (Years 16+) Growth-oriented with a Long-term care expenses, decades-long timeline legacy planning, and extended longevity needs This bucket approach helps you think beyond simple stock-versus-bond percentages. Asset Allocation 10 Years Before Retirement: Starting Points While there's no one-size-fits-all answer, here are some reasonable starting frameworks: Conservative Approach (60% stocks / 40% bonds) : Makes sense if you have minimal guaranteed income or plan to begin drawing heavily from your portfolio upon retirement. Moderate Approach (70% stocks / 30% bonds) : Works well for those with some guaranteed income sources, moderate risk tolerance, and a flexible withdrawal strategy. Growth-Oriented Approach (80% stocks / 20% bonds) : Can be appropriate if you have substantial guaranteed income covering basic expenses and the flexibility to reduce spending temporarily as needed. Remember, these are starting points for discussion, not recommendations. 3 Steps to Evaluate Your Current Allocation Ready to see if your current allocation still makes sense? Here's how to start: Step 1: Calculate your current stock/bond split. Pull your recent statements and add up everything in stocks (including mutual funds and ETFs) versus bonds. Divide each by your total portfolio to get percentages. Step 2: List your guaranteed retirement income. Write down income sources that aren't portfolio-dependent: Social Security (estimate at ssa.gov), pensions, annuities, rental income, or planned part-time work. Total the monthly amount. Step 3: Calculate your coverage gap. Estimate monthly retirement expenses, then subtract your guaranteed income. If guaranteed income covers 70-80%+ of expenses, you can be more growth-oriented. Under 50% coverage means you'll need a more balanced approach. When to Adjust Your Allocation Here are specific triggers that signal it's time to review and potentially adjust: Your allocation has drifted more than 5% from target. If you started at 70/30 stocks to bonds and market movements have pushed you to 77/23, it's time to rebalance back to your target. Your retirement timeline changes significantly. Planning to retire at 60 instead of 65? That's a trigger. Every two years of timeline shift warrants a fresh look at your allocation. Major health changes occur. A serious diagnosis that changes your life expectancy or healthcare costs should prompt an allocation review. You gain or lose a guaranteed income source. Inheriting a pension through remarriage, losing expected Social Security benefits through divorce, or discovering your pension is underfunded. Market volatility affects your sleep. If you're checking your portfolio daily and feeling genuine anxiety about normal market movements, your allocation might be too aggressive for your comfort, and that's a valid reason to adjust. Beyond Stocks and Bonds Modern retirement planning involves more than just deciding your stock-to-bond ratio. Consider international diversification (20-30% of your stock allocation), real estate exposure through REITs, cash reserves covering 1-2 years of spending, and income-producing investments such as dividend-paying stocks. The Biggest Mistake: Becoming Too Conservative Too Soon Moving everything to bonds at 55 might feel safer, but it creates two significant problems. First, you're almost guaranteeing that inflation will outpace your returns over a 30-year retirement. Second, you're missing a decade of potential growth during your peak earning and saving years. The difference between 60% and 80% stock allocation over 10 years can mean hundreds of thousands of dollars in portfolio value. Being too conservative can be just as risky as being too aggressive, just in different ways. Questions to Ask Yourself As you think about your asset allocation for the next 10 years: What percentage of my retirement spending will be covered by Social Security, pensions, or other guaranteed income? How flexible is my retirement budget? Could I reduce spending by 10-20% during a market downturn? What's my emotional reaction to seeing my portfolio drop 20% or more? Do I plan to leave money to heirs, or is my goal to spend most of it during retirement? Your honest answers to these questions matter more than your age or any generic allocation rule. Work With Professionals Who Understand Your Complete Picture At Five Pine Wealth Management, we help clients work through these decisions by looking at their complete financial picture. We stress-test different allocation strategies against various market scenarios, coordinate withdrawal strategies with tax planning, and help clients understand the trade-offs between different approaches. If you're within 10 years of retirement and wondering whether your current allocation still makes sense, let's talk. Email us at info@fivepinewealth.com or call 877.333.1015 to schedule a conversation. Frequently Asked Questions (FAQs) Q: What is the rule of thumb for asset allocation by age? A: Traditional rules like "subtract your age from 100" are oversimplified. Your allocation should be based on your guaranteed income sources, spending flexibility, and risk tolerance; not just your age. Q: Should I move my 401(k) to bonds before retirement? A: Not entirely. You still need growth to outpace inflation. Gradually shift toward a balanced allocation (60-80% stocks, depending on your situation) and keep 1-2 years of expenses in stable investments. Q: What's the difference between stocks and bonds in a retirement portfolio? A: Stocks provide growth potential to keep pace with inflation but come with volatility. Bonds offer stability and income but typically don't grow as much.
