“Viking” Terms For Financial Independence

Money and financial education can become powerful resources. In many ways the whole personal finance sphere is a game with a set of terms and rules. Like any game, in order to master it, you must have a working knowledge of the terms and the rules. In other words, wealthy folks have learned to play the game. But not a trivial game, a game that has huge consequences and affect on your whole life. This is like bigger than the Hunger Games! An interesting thing about the economic and financial world is that it is a hybrid of pseudo natural laws based on human behavior (like supply and demand) and completely human made systems like stock exchanges. In order to thrive within the system, one would be wise to understand some important financial terms and then be able to know why they are so important to them and their personal wealth. We selected terms that literally mean more money in your pocket from your labor and investments. Here are what we believe are 9 crucial financial terms to keep in mind on your journey to financial independence!  

1. Fiduciary

A person, company or association holding assets in trust for a beneficiary. The fiduciary is charged with the responsibility of investing the money wisely for the beneficiary’s benefit. Most US states have laws about what a fiduciary may or may not do with a beneficiary’s assets. Why is this important: If you seek help in managing your money, then you will want to be careful about who you trust. You want to ensure fees are reasonable and that the person has your best interests at heart. This is easier said than done. One key factor is seeking a fiduciary professional that is obligated to have your interests in mind since it is illegal for a fiduciary to invest or misappropriate the money for their personal gain.  

2. Capitalism

Economic system in which 1) private ownership of property exists, 2) aggregate of property or capital provide income for the individuals and firms that accumulated it and own it, 3) individuals and firms are relatively free to compete, 4) the profit motive is basic to economic life. Why is this important: This is the system and environment we all live in. A Viking can have fantasy time, but we must also face the reality of the system we live in and learn to harness it. It is paramount to understand it on a basic level in order to participate and benefit.  

3. Dividend

Distribution of earnings to shareholders. The amount is decided by the board of directors and is usually paid quarterly. Why is this important: Dividends are key to building wealth and building passive income machines. Dividends also go a long way in adding to the return of stocks and index funds over the long run.  

4. Dividend Reinvestment Plans (DRIPS)

Automatic reinvestment of shareholder dividends in more shares of the company’s stock. DRIPS allow shareholders to accumulate capital over the long term using dollar cost averaging. Why is this important: DRIPS in a solid Dividend champion, aristocrat or king are a great way to build assets up over time and get closer to FIRE goals.  

5. Dollar Cost Averaging

Buying a set dollar amount of stock at regular intervals no matter the fluctuations in the stock, leading over time to an average paid for that acquisition. The buyer acquires at lower prices and higher prices to arrive at an average. Why is this important: Most people are not provided a lump sum of $2 million to go invest. Building wealth takes place by buying small chunks of investments over many many years to build substantial positions. Dollar cost averaging levels out the risk of buying at a time when the stock is too high.  

6. Net Worth

Amount by which assets exceed liabilities. For an individual, net worth is calculated by total  value of all houses/real estate, stocks, bonds, etc. Then subtract the amount of all outstanding debts, such as mortgages and revolving credit loans, school loans, etc. Why is this important: Net Worth is a good indicator of overall financial strength and health. It also helps a person determine when they can retire. When high levels of net worth are achieved, typically a person can derive significant income and withdrawals from those assets in order to support them in retirement.  

7. Compound Interest

Simply put, the interest you make on your money makes more interest, and on and on as long as you do not touch it. In other words, do not chop down the apple tree, just continue to enjoy the apples. Why is this important: One of the great wonders of the financial and mathematical world, compounding! Of all the concepts discussed here, I personally believe this is the most important. The reason is that compound interest reinforces why small amounts of money invested consistently over time become large amounts!  

8. Index Fund, ETF

Simply put, an index fund is a collection of diverse stocks or bonds. Folks can buy shares of the Index Fund in order to gain exposure to the assets contained within. The main value in an index fund such as one that tracks the S&P 500 companies is that it diversifies risk. If one or two companies in the fund do not do well, then the spreading of risk among the other companies keeps the losses to a minimum. Why is this important: The main investment vehicle and asset for people achieving FIRE is typically low cost index funds. This allows broader exposure to the benefits of the stock market at less risk during volatile times. It also allows dollar cost averaging as you buy more share of the index fund during down times.  

9. Roth IRA (Individual Retirement Account)

A Traditional IRA differs from a Roth IRA due to the timing of the tax benefit. A Traditional IRA gives you tax savings upfront, while a Roth IRA defers the savings until your retirement. If you believe taxes will be high when you start taking the money, this is a great option. A Roth IRA may be ideal for younger investors in lower tax brackets in order to minimize their lifetime tax bill. This is because you’d be better off paying taxes in years in which you are in lower tax brackets than when you are in your peak earning years. The 2018 contribution limit for a Roth IRA is $5,500 and is increasing to $6,000 for the 2019 tax year. If you are 50 years old or older, you can contribute an additional $1,000 annually in catch-up contributions. While the annual salary contribution limit means that not everyone can contribute to a Roth IRA, the majority of individuals are eligible. For 2018, the income thresholds for Roth IRA participation phaseouts are $120,000 for individuals and $189,000 for married couples filing jointly. Why is this important: As frugal as we all may want to be, there are just some expenses like taxes that are hard to avoid. We pay taxes in many forms, but why not find a legal way to reduce that tax liability and support yourself in your later years.  

One thought on ““Viking” Terms For Financial Independence

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: