This episode is the fourth part of a series on your post-divorce finances. If you have not already heard the first three episodes, please go back and listen to them first. Even if you are in the early or middle stages of a divorce, this series will help you define your financial goals for the rest of your life. It is important to define those goals early in the divorce process, so that you know what is important to negotiate throughout it.
This episode will discuss finance and investment terminology that you need to know while going through your divorce. We will just cover some of the most important terms, so that you can follow these finance conversations more easily.
Here are 13 key financial terms to know:
Asset – anything you own that has value (such as a house, car, computer, baseball card collection, or investment account)
Debts – money you owe to other people (such as loans and credit cards)
Balance sheet – a summary of all of your assets and all of your debts on one page. This sheet covers the same information as a financial affidavit in a divorce. It is important to note that a balance sheet is a snapshot of your financial situation on a particular date, because assets can fluctuate in value over time.
Stock – ownership in a company (same as equity). It can be a share of a publicly traded stock, or an equity in a private company (such as a small business).
Bond – money that you loan as an investment, typically to a company or government. You will be paid interest until they are ready to repay the loan. Keep in mind that bonds are a very complicated topic.
Portfolio – the combination of investments that you own. They can be stocks, bonds, real estate, any other type of investment, or a combination of different types.
Asset allocation – the percentage of your portfolio in stocks, bonds, or other investment types. For example, a younger person may have an asset allocation of 80% stocks and 20% bonds, whereas an older person might have a higher percentage of bonds and real estate.
Risk – uncertainty about how your assets will perform. Some forms of investment carry more risk than others.
Index – a group of stocks or investments. They may group similar stocks (such small companies, large companies, and international companies), bonds, or other investments. Often, they are followed over time to measure how the group is performing, or how a country’s economy is doing. Therefore, they are often used as benchmarks (such as NASDAQ and S&P 500). One related financial concept (that we will not be able to cover in this episode) is a type of investment called index funds, but you can research it on your own to learn more.
Mutual fund – a common type of investment that involves a company pooling money from different investors. This combined money is invested by a manager, and each investor’s returns are carefully measured. The investment strategies for mutual funds vary; they may invest in stocks, bonds, real estate, or international companies.
Hedge fund – similar to a mutual fund, but typically with a very high minimum investment ($500,000 and up, depending on the fund).
Capital gain – the amount of money that you receive when selling an investment that exceeds the price you paid for it. For example, if you bought a house for $100,000 and sold it for $120,000, you would have a capital gain of $20,000. This term is important because you will owe capital gains tax on that $20,000. During your divorce, you will need to be aware of how much capital gain each of the assets you will receive will have, so that you are not stuck with a large, unexpected tax bill.
Inflation – the concept that prices of goods and services generally increase over time. Costs of everything from gas to bubblegum to homes are higher today than they were fifty years ago, because of inflation.
If you would like to learn more about finance, start regularly reading the Wall Street Journal. If you look up terms and companies that you do not know, you will learn a lot about the finance world. In the next episode, we will talk about which types of investments to consider when you plan your post-divorce finances.
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