// 47 terms

Money words, without the suit.

Finance loves long words for simple things. Makes the fees easier to justify. Here they are in plain English.

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4 A B C D E F I K M N P R S T U V W

4% rule: A rule of thumb from US studies of the 1990s: take out 4% of your portfolio in the first year of retirement and raise that amount with inflation. It was tested on US data for about 30 years of retirement, without costs and taxes. A starting point, not a law of nature.See also: Safe withdrawal rate, Sequence-of-returns risk, FIRE
Accumulating fund: A fund that reinvests dividends for you instead of paying them out. Your number of fund units stays the same, and each unit grows in value. Compound interest on autopilot.See also: Distributing fund, Compound interest, Advance lump sum (Vorabpauschale)
Advance lump sum (Vorabpauschale): A German rule that taxes a small assumed return on funds every year, mainly on accumulating funds. The state doesn’t like waiting. It’s based on an official base rate and never exceeds the fund’s actual gain for the year. What you pay is credited when you sell: tax paid earlier, not tax paid twice.See also: Accumulating fund, Flat tax (Abgeltungsteuer), Partial exemption (Teilfreistellung)
Asset allocation: How you split your money between asset classes such as shares, bonds and cash. This split decides most of your risk and return. Far more than the choice of single products, whatever your bank’s brochure says.See also: Rebalancing, Diversification, Bond
Bear market: A market that has fallen by a fifth or more from its last high. It happens regularly and has always ended so far. Nobody rings a bell at the bottom, though.See also: Drawdown, Sequence-of-returns risk
Bond: A loan that you give to a state or a company. You receive interest and get your money back at the end, as long as the borrower can pay. Prices fall when interest rates rise, and the other way round.See also: Asset allocation, Money market fund
Broker: The company that holds your securities account and carries out your orders on the exchange. Compare costs, the choice of savings plans and how the broker handles tax in your country. The app’s colour scheme is not a criterion.See also: Savings plan, ISIN
Capital gains tax: Tax on the profit when you sell an investment for more than you paid. You took the risk, the state takes a share. The rules differ in every country, and in most of them the tax is due only when you sell.See also: Flat tax (Abgeltungsteuer), Saver allowance (Sparerpauschbetrag)
Compound interest: Returns on your returns. Your gains stay invested and earn gains of their own, so growth speeds up over time. The main ingredient is time. That’s why starting early beats starting big.See also: Accumulating fund, Real return
Distributing fund: A fund that pays the dividends it collects into your account, usually a few times a year. Nice for income. Still building wealth? Then you have to reinvest the money yourself, and no, you won’t always do it.See also: Accumulating fund, Dividend
Diversification: Spreading your money over many companies, countries and sectors, so that one failure can’t sink you. If the whole market falls, you fall with it. Just not alone.See also: Asset allocation, Index fund
Dividend: The part of a company’s profit that is paid out to shareholders. Not free money: the share price usually drops by about the same amount on the day it’s paid.See also: Dividend yield, Distributing fund, Withholding tax
Dividend yield: The dividends of one year divided by the current price. A very high yield is often a falling price in disguise. Check why it’s high before you get excited.See also: Dividend
Drawdown: The fall from a peak to the following low, in percent. The maximum drawdown tells you how much pain an investment has caused in the past. Ask yourself honestly whether you’d have sat through it.See also: Volatility, Bear market
Earnings point: The unit of the German statutory pension (Entgeltpunkt). Earn exactly the average income in a year and you get one point. Earn half, get half a point. Points times the current pension value gives your monthly gross pension.See also: Pension level, Pay-as-you-go pension
Emergency fund: Cash for the unplanned: a broken car, a lost job, a dead laptop. It sits in an account you can reach at once, so you never have to sell investments at the worst moment. A common guide is a few months of expenses.See also: Money market fund
Emerging markets: Countries whose economies and stock markets are still developing, such as China, India, Taiwan or Brazil. Growth potential, with bigger swings and more political risk. Who belongs to the group? The index providers decide.See also: MSCI World, FTSE All-World, Volatility
Exchange-traded fund (ETF): A fund you buy and sell on the stock exchange like a single share. Most ETFs just copy an index. That keeps costs low and surprises rare.See also: Index fund, UCITS, Total expense ratio (TER)
FIRE: Financial independence, retire early. The idea is to save and invest enough that your portfolio can cover your living costs. You don’t have to stop working. The point is that you could.See also: Savings rate, Safe withdrawal rate, 4% rule
Flat tax (Abgeltungsteuer): Germany’s single tax rate on capital income such as interest, dividends and gains on sale. A German broker deducts it and pays it to the tax office for you, so you never even get to hold the money. Solidarity surcharge and, where it applies, church tax come on top.See also: Capital gains tax, Saver allowance (Sparerpauschbetrag), Partial exemption (Teilfreistellung)
FTSE All-World: A share index of large and mid-sized companies from developed and emerging markets. One index, and you’ve got most of the investable world market.See also: MSCI World, Emerging markets
Index fund: A fund that copies a market index instead of paying someone in a nice suit to pick winners. You get the market’s return minus a small fee. Boring by design, and that’s the feature.See also: Exchange-traded fund (ETF), MSCI World, FTSE All-World
Inflation: Prices go up, so your money buys less every year. Cash in a drawer loses value without making a sound. It’s the opponent every savings plan has to beat first.See also: Real return
ISIN: The International Securities Identification Number, a twelve-character code that identifies a security worldwide. Fund names can look confusingly alike, the ISIN can’t. Search by ISIN and you buy what you meant to buy.See also: Broker
Key information document (KID): A short standard document that must come with every fund sold to private investors in the EU. Aim, risk class, costs and performance scenarios on a few pages. Read it before you buy. It takes five minutes, and it’s the one document nobody reads.See also: UCITS, Total expense ratio (TER)
Money market fund: A fund that invests in very short-term, high-quality debt. Its return follows short-term interest rates closely and its price barely moves. A parking spot for cash, not an engine for growth.See also: Emergency fund, Bond
MSCI World: A share index of large and mid-sized companies from developed countries. “World” is generous: it leaves out emerging markets and small companies, and US companies make up the biggest part.See also: FTSE All-World, Emerging markets, Index fund
Net worth: Everything you own minus everything you owe. The score of your financial game. Your salary shows what came in, this shows what you kept.See also: Savings rate
Partial exemption (Teilfreistellung): In Germany, a fixed share of the income from funds stays tax-free for the investor. It’s no gift: it makes up for tax that the fund has already paid. Equity funds get the largest exemption.See also: Flat tax (Abgeltungsteuer), Advance lump sum (Vorabpauschale), Withholding tax
Pay-as-you-go pension: A pension system in which today’s workers pay for today’s pensioners. Nothing is saved up in your name. You earn a claim on future contributors and hope they show up. It works with many workers per pensioner and gets tight when that ratio falls.See also: Pension level, Earnings point, Pension gap
Pension gap: The difference between what you will need each month in retirement and what your pensions will pay after tax, social contributions and inflation. This is the bug. Your own investing is the patch.See also: Pension level, Real return, Safe withdrawal rate
Pension level: In Germany, the standard pension after 45 years on average pay, compared with the current average pay, both before tax. It describes the system, not your personal pension. Most people don’t work 45 years at average pay, which politicians rarely mention.See also: Earnings point, Pension gap, Pay-as-you-go pension
Real return: Your return after inflation. It shows how much more you can actually buy, not how much bigger the number on the screen got. For retirement planning it’s the only return that counts.See also: Inflation, Compound interest
Rebalancing: Bringing your portfolio back to its planned split after markets have moved it. You sell a bit of what ran ahead and buy what fell behind. It controls risk. It’s not a trick for extra return.See also: Asset allocation
Safe withdrawal rate: The share of your portfolio you can take out each year with a low risk of running out of money during retirement. It comes from historical data. So “safe” means “worked in the past”, not “guaranteed”.See also: 4% rule, Sequence-of-returns risk, FIRE
Saver allowance (Sparerpauschbetrag): The amount of capital income that stays tax-free each year in Germany. Give your bank or broker an exemption order (Freistellungsauftrag) and it’s applied right away. Without one you have to get the tax back through your tax return. Unused allowance doesn’t carry over to the next year.See also: Flat tax (Abgeltungsteuer), Advance lump sum (Vorabpauschale)
Savings plan: A standing order for investing: a fixed amount goes into a fund automatically, usually every month. No timing questions, no willpower needed. You can’t forget it and you can’t overthink it.See also: Broker, Savings rate, Exchange-traded fund (ETF)
Savings rate: The share of your net income that you save and invest. It’s the one lever you control directly, and in the first years it matters more than the return.See also: Savings plan, FIRE
Sequence-of-returns risk: The risk that bad market years arrive just when you start to withdraw. The same average return can end very differently depending on the order of good and bad years. A crash early in retirement hurts far more than a late one.See also: Safe withdrawal rate, Bear market, Drawdown
Share: A small piece of a company. If the company earns money, you’re in: rising price, dividends. If it goes bust, your piece can go to zero. That’s the deal.See also: Dividend, Diversification
Side business: Self-employed work next to your main job. A second income, and a way to test a business idea with a safety net. Check your employment contract and register it properly. Tax offices have no sense of humour.See also: Tax wedge, Savings rate
Tax wedge: The gap between what your work costs your employer and what arrives in your account, as a share of the total labour cost. It consists of income tax and the social contributions of employee and employer. The OECD publishes it for each country every year. Read it sitting down.See also: Side business, Savings rate
Total expense ratio (TER): What a fund costs you per year, as a percentage of your investment. It’s taken out of the fund automatically, so you never see a bill. Clever, isn’t it? Trading costs inside the fund are not included.See also: Tracking difference, Exchange-traded fund (ETF)
Tracking difference: The gap between a fund’s return and the return of its index over a period. It shows what the fund really cost you. The TER is the price tag, this is the receipt.See also: Total expense ratio (TER), Index fund
UCITS: The EU rulebook for funds sold to private investors. It sets rules for diversification, custody and disclosure, and it keeps the fund’s assets separate from the fund company. One of the few EU rulebooks that’s on your side. Look for “UCITS” in the fund name.See also: Exchange-traded fund (ETF), Key information document (KID)
Volatility: How strongly a price swings around its average. High volatility means a bumpy ride, not necessarily a bad destination. It’s the entry fee for higher expected returns.See also: Drawdown, Bear market
Withholding tax: Tax that is taken at the source before a payment reaches you, for example on dividends from foreign companies. Depending on the tax treaty between the countries you can get part of it credited or refunded. Bring patience.See also: Dividend, Partial exemption (Teilfreistellung)