If you’re just starting to take charge of your financial future, it can be stressful approaching financial planning with confidence. Do you ever talk to your financial professional and think that they’re speaking a foreign language? Between acronyms, money talk, and words longer than my arm, conversations can get overwhelming. Though we definitely try to avoid jargon as much as possible, there are a few basics that are sometimes tough to avoid. Here are a few financial terms you should know by heart…

The easy ones:

1. Canadian Pension Plan - I feel like this is something everyone earning a regular pay cheque is familiar with, but doesn’t 100% understand. “The Canada Pension Plan (CPP) provides contributors and their families with partial replacement of earnings in the case of retirement, disability or death. Almost all individuals who work in Canada outside Quebec contribute to the CPP.” Typically your contributions are taken off of your pay cheque, or paid by in individual in a lump sum at tax time; the CPP is not designed to be a person’s sole source of retirement income, but more a supplement.

2. RRSP/TFSA - RRSP is a, “A Registered Retirement Savings Plan (RRSP) which is an account, registered with the federal government that you use to save for retirement. RRSPs have special tax advantages.” TFSA is a Tax-Free Savings account, also registered with the federal government, that has set contribution amounts for every Canadian, tax-sheltered investment growth, and a bit more flexibility when it comes to contributions and withdrawals, than an RRSP. Most investments are eligible for both types of accounts.

3. Diversification - Of course, if English is your primary language, you probably understand the gist of this term. But when referring to financial actions, Investopedia defines diversification as, “a risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio constructed of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.”

4. Compound Rate of Return - The compound return is the rate of return, usually expressed as a percentage, that represents the cumulative effect that a series of gains or losses has on an original amount of capital over a period of time. Compound returns are usually expressed in annual terms, meaning that the percentage number that is reported represents the annualized rate at which capital has compounded over time. If an investment fund claims to have produced a 10% annual compound return over the past five years, this means that at the end of its fifth year, the fund's capital has grown to a size equal to what it would be if the funds on hand at the beginning of each year had earned exactly 10% by the end of each year.

5. Bear market and bull market - Although it might feel like the stock market is a jungle sometimes, terms such as the “bear market” and “bull market” have quite reasonable meanings behind them. “The ‘bear market’ and ‘bull market’ are both terms to describe the stock market and investing. They’re easy to tell apart when you consider the animal's characteristics. In a bullish market, everything’s moving forward: investors are confident making a lot of buys, more companies are entering the stock market, and more money is being invested in the stock market overall. In a bear market, investors pull back (like bears hibernating). Prices start to hover and go down, and people wait and see more before investing additional money into stocks and bonds.”

If you’ve got anymore terms you can think of that you’d like some clarification on, let us know and we’d be happy to help explain them further.

Resources

1. https://www.canada.ca/en/services/benefits/publicpensions/cpp.html

2. https://www.getsmarteraboutmoney.ca/plan-manage/retirement-planning/rrsp...

3. http://www.investopedia.com/terms/d/diversification.asp

4. https://www.investopedia.com/terms/c/compoundreturn.asp

5. http://lifehacker.com/the-most-important-financial-terms-everyone-should...

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2014-2018 Advisor Websites