Understanding Financial Terms and Concepts

Learning to develop sound financial skills takes time. It’s not going to happen overnight. Remember when you were in school and took a foreign language class? Did you learn to be proficient and literate in one lesson? No, you probably took classes for at least three years. It takes time, studying, and practice to learn, whether it’s a foreign language or financial fitness. Here are some terms and concepts you’ve probably heard:

Dollar Cost Averaging – you invest a fixed amount of money on a regular schedule. The amount can be $10, $25, $50, $100, or more. You don’t need a large sum of money. The most important thing is that you invest the same amount regularly and don’t wait to start. Time is not your friend when it comes to investing. Don’t pay attention to the price of the investments at the time. Your monthly investment will purchase more shares when the prices are low.

Many people are in a panic because of what’s been happening with the stock market. Instead of being in a panic—think of it as a sale, you get more for your money when the prices are low. Dollar cost averaging doesn’t automatically make a profit. However, if you invest on a regular schedule and stick to it you will probably do better than the investor who tries to time the market to purchase low and sell high. 

Rule of 72 – helps you to determine how long it will take to double your investment at a certain interest rate. For example, if you wanted to double your money in 10 years, divide 72 by 10 years = 7.2% interest rate. In order to double your money in 10 years you must earn 7.2% annually. Another way to use this method is by dividing 72 by the interest rate. For example, 72 divided by 3% = 24 years. It will take 24 years to double your investment.  

Asset Allocation – dividing your money between stocks, bonds, cash and other investments. In other words, don’t put all your eggs in one basket. For example, don’t invest all your money in stocks. Diversify your assets by allocating them in different investment vehicles. Your age and risk tolerance should be considered when you are determining how to allocate your assets.