How We Do Things Around Here
I very frequently find myself on personal finance blogs and discover they seem to develop a language all their own. It can be hard to pick some things up until you’ve been around a while, so this is my attempt at flattening the curve. Call it the Freedom Jar FIRE Glossary of Common Financial Terms (and more).
Visual Cues
You’ll also see throughout the site we use colors to indicate “happy money” like saving $3,000 on groceries. Of course the other side of that is “sad money” like $778,000 worth of debt.
Internal links will take you to other pages within the site, and generally open in the same tab/window.
External links will take you to pages outside the site, and generally open in a new tab/window.
Definition links that appear in blue (with an interrobang!) will lead you to a term’s definition on this page.
Sponsored links have a subtle green underline and when you hover with your mouse they show a little dollar sign. They’re not so much ‘sponsored’ in the real sense of the word. No one came to me and begged me to take money in exchange for showing my zero readers a link to amazon. What they are is amazon affiliate links, where I like something that I was already talking about, and I created a link to where if you click & buy that thing, I’ll theoretically get some money. This happened yet, but you can be the first! I’ll try not to be tacky about it, but rest assured it’s stuff I like and nobody is dumb enough to pay me for endorsing things in front of a non-existent audience.
Note that they’re not subtle to try to trick you into accidentally clicking (I’d only get paid if you purchased something anyway). The reason they’re subtle is because I’ve had it with sites that are totally unreadable because ads take up like 70% of the screen and I can barely see whatever I wanted to read in the first place.
Glossary of Common Financial Terms
FIRE: Financial Independence/Retired Early. Neither of those words mean the same thing to me today as they did when I first saw them, but they’re both still the goal. Sometimes stylized as FI/RE, or just FI if we’re talking about the financial independence side of things.
Coast FI: One of the many variations of FIRE, Coast FI or CoastFIRE is loosely defined as “having enough in your retirement accounts today that you could stop contributing and be able to retire at age 65.” The idea is you no longer have to worry about being destitute or working in your 80s, and it theoretically frees you up to pursue more interesting work. There are hundreds of opinions on the topic but in our case it doesn’t change our daily work, it just changes our focus to non-retirement accounts.
PMI: Private Mortgage Insurance. Generally speaking, when you take out a mortgage and put less than 20% down, you’ll be charged a monthly fee for the first few years.
401k: A retirement fund available through (many) employers. Generally speaking, any money you put in every year will save you on taxes, but you can’t get it back until you retire.
Index Fund: Basically a big bundle of a bunch of stocks that you can invest in like it was an individual stock. For when you want to invest in the stock market but you’re aware that picking individual stocks is essentially gambling. It’s like saying “Give me a little bit of Apple, Toyota, Chipotle, and Pfizer stock because I have no way of knowing what’s best.” You can read all about them (and why they’re great) here.
Unit Price: When shopping (primarily for food), each item has a ‘price per ounce’ (or price per each, or whatever the unit is). Master the art of choosing the item with the lowest unit price to drastically reduce your grocery bill
4% Rule: A rule of thumb, also known as the safe withdrawal rate, that says you can safely withdraw 4% of your investments forever and not touch the principal. What this means in practice is that if you can live on $24,000/yr, you can retire as soon as you have $600,000 invested ($600k * .04 = $24,000). We’ll be referring to this a LOT as we go forward.
Cost Basis: The price you paid for an investment. For a stock, it’s literally the price you paid per share. For a house, it’s more complicated but it starts with your purchase price. You need to understand cost basis to understand capital gains. Be aware that cost basis generally resets when passed to an heir. For example, I buy a house for $100k and it’s worth $500k when I die and leave it to my niece. That means the cost basis resets to $500k and she would pay no capital gains if she sold it immediately.
Capital Gains: The tax you pay on investment profits. In the case of a stock, it’s based on the difference between sale price (when you sold) and cost basis (purchase price when you bought).
There are two different rates, short term is for assets held less than a year (think day trading) and is taxed like your normal income. Long term is for assets held over a year and is taxed at 0, 15%, or 20% based on your income.
Opportunity Cost: Defined officially as “the loss of potential gain from other alternatives when one alternative is chosen.” Basically it’s a term for the gains you’re losing out on when you choose to spend money on something else. As an example, if I have $10,000 cash, I could buy a jet ski or I could invest it in index funds. After 10 years if I’d bought the jet ski I would have a worthless toy and a sunburn. If I had invested in VTSAX I would have $35,000. There’s a detailed real-world example in my post on 401k loans.
Median: The middle point of a sorted set a numbers, and probably the one you should care about instead of average.
REIT: Real Estate Investment Trust. It’s essentially an index fund that targets the real estate sector (so it has stocks of homebuilders, land developers, property management companies, etc. Probably don’t buy it, though, just get an index fund.
Lifestyle Creep: It’s not a sketchy dude on IG trying to sell you on #vandwelling. Lifestyle creep is the phenomenon where our expenditures seem to magically increase with each pay raise, because we’re not disciplined about saving our raises, even though we should since we’re already used to living at the old salary.
Savings Rate: The amount of your post-tax (net) income that you save for retirement. This number will determine how long you have to work if you have $0 saved right now, and does not require budgeting or having any particular income level.
Meta-Glossary: Terms We Use Here
Imagi-Planning: Some combination of imagining early retirement while making plans. Think of it as daydreaming with action. In our case, it frequently manifests as running early retirement scenarios and wondering how long we could live in Spain at each dollar amount.
Mathgic: Some combination of math and magic. Like how your Savings Rate will determine how many years you have to save for retirement, no matter your income level. Or how the 4% Rule will let you retire at any age if you spend according to the rule.
Jarhead: Not the crayon-eating kind (semper fi). Someone that visualizes their debt via jars full of pasta and is trying to move in the right direction. A very exclusive group of approximately two people.
Definition Link: Did you get here by clicking at the top of this page? Now you know the drill! (also that the ‽ symbol is called an interrobang)
Do you see any terms being thrown around you’d like me to elaborate on?