DEFINING MOMENT: Words Worth Knowing
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401(k) Plan:
A tax-deferred retirement plan offered by employers as a benefit to
their employees, often in place of a pension plan. How they usually
work: A percent of your income—up to a designated limit— is
automatically deducted from your pay check and is often matched or
partially matched by your employer. The money you contribute into
the plan is tax-deductible and must remain in the account until
you are 59 1/2 years old. Early withdrawals are penalized and taxed.
See “NUMBERS YOU NEED TO KNOW: NEW CONTRIBUTION LIMITS FOR IRA'S AND
401(K)'S” in our Tip of the Week Archive for more details. |
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APR:
The Annual Percentage Rate, or APR, is the fixed interest rate a
credit card company charges you each year on the money you borrow.
To determine the monthly rate you will be charged on balances,
divide the APR by 12. |
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Adjustable Rate Mortgage:
Also called a variable-rate mortgage, this is a mortgage loan in
which the interest rate may initially be lower than could be had in
a fixed-rate mortgage, but will be adjusted upward at agreed upon
times, or in response to market conditions, throughout the term of
the loan. Monthly payments will change as the rate changes. |
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CD’s:
Though others may be “music to your ears,” financial CD’s, or
Certificates of Deposit, are “receipts” received as proof of “loans”
you make to a bank or other financial institution at an agreed upon
rate of interest for an agreed upon period of time. When the CD
matures or reaches its pay-out date—which can vary from three months
to several years—you get back your initial deposit plus interest.
The longer you leave the money in the bank, the greater the rate of
interest you receive. As with savings accounts, all interest earned
is taxable. The rate of return on CD’s is generally higher than you
might receive from a bank savings account, but if you make an early
withdrawal from a CD, you will be charged an early-withdrawal penalty.
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COBRA:
Federal legislation requiring health insurers and employers with 20
or more employees to continue medical coverage of an employee, at
the employee’s expense, for a period of 18 months after a person
leaves the company. The price of this coverage may or may not be
lower than might be obtained for comparable coverage on the open
market. For the employee, one advantage of COBRA is that she/he
doesn’t risk being without coverage while he or she is looking for
another job and/or cheaper coverage. Also, if you have or develop a
medical problem while covered under COBRA, the law allows you to
purchase a policy at the same price that you would if you were
healthy. |
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Collateral:
An
asset that is pledged as security for a loan and which will be
forfeited if you don’t fulfill your agreement to repay the loan. |
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Community Property:
Not the town square, this is the term used to define the assets
acquired and owned jointly by spouses after marriage. |
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Credit Report:
A “report card” measuring your credit-worthiness, it details such
financial history as how often you are late making payments to
creditors, how much debt you owe, and which companies or individuals
have inquired about your credit rating.
The highest “grade” or rating given by the credit bureaus who
gather this data is AAA; the lowest is D. Any time you apply
for credit, such as a mortgage, an auto loan or a new credit card,
the lender will check your credit report. The better your rating,
the better your chances of qualifying for a no- or low-interest
loan. You are considered a “good risk” and they want your business.
You should check your credit report yourself at least once a year to
make sure there are no errors recorded. To check it free of charge,
call Experian at 1-800-682-7654 (www.experian.com)
, TransUnion at 1-800-851-2674 (www.transunion.com)
or Equifax at 1-800-685-1111 (www.equifax.com). |
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Diversification:
Not putting all your eggs in one basket. In investing,
diversification means spreading your money across stock and/or bond
funds of varying risk and growth potentials so that when one hits a
bad patch, the others will continue to earn money for you. In
business, it means offering more than one service (or, if you are
large enough, buying companies that offer other services), so that
you will always have a secure source of income. |
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DRIP: Not
an annoying problem with your faucet, rather DRIP’s, or dividend
reinvestment programs, are a great way for investors with small
amounts of money to begin to invest in stocks. Here’s how they
work: You purchase a minimum number of shares in a company’s stock
(it could be as little as a single share, in some cases) and
instruct the company to reinvest the dividends the stock earns into
purchase of more of the same company’s stock. Some companies even
offer a discount on their stock price, when you purchase it through
a DRIP. Not all companies offer DRIPs, and management fees vary
from company to company, though some charge none at all. Contact
The National Association of Investors Corporation
www.better-investing.org
or
www.oneshare.com
for more information, or to purchase shares.
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Equal
Credit Opportunity Act:
A Federal law that
prohibits lenders from discriminating against you on the basis of
your sex, age, race, color, national origin, religion, marital
status or public-assistance-program participation. In other words,
the fact that you are collecting unemployment or welfare payments
shouldn’t count against you if you apply for credit. Your ability to
pay back the loan, of course, remains a deciding factor in any loan
application. |
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Equity:
The value of a property after all the debts have been subtracted
from its worth The equity you hold in your house, if its mortgaged,
is equal to its assessed value minus the amount you still owe on
your mortgage and any other loan you have taken out using it as
collateral. |
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Fixed Rate Mortgage:
Also called a conventional mortgage, a fixed-rate mortgage is one in
which the interest rate does not change during the term of the loan.
The alternative is an adjustable rate mortgage, in which the rate
may initially be lower than could be had in a fixed rate mortgage,
but will be adjusted upward at agreed upon times, or in response to
market conditions, throughout the term of the loan. |
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Home-equity loan:
A
home-owners loan that provides you with a loan amount equal to or
more than the equity you own in the property, using your house as
collateral. |
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Income Exclusion
Rule:
This IRS rule is the friend of rich and financially challenged
alike, benefiting divorced mothers, welfare recipients, investors
and others. It excludes from taxable income such items as child
support, welfare payments, life insurance benefits and income on
tax-exempt investments. |
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IRA:
If you and your spouse already contribute the maximum amount to a
401(k) at work, an Individual Retirement Account (IRA) may be
another place to save money tax-deferred. If you fall within the
income limits set by the IRS, the amount you contribute to an IRA
(currently up to $3000 if you are under 50 and $3500 if you are over
50) can be deducted from your taxable income. The money will not be
taxed until you withdraw it. If you don’t have access to a 401(k),
you should definitely put the maximum allowed each year in an IRA.
Under new legislation, those amounts will increase each year until
2008. See “NUMBERS YOU NEED TO KNOW: NEW CONTRIBUTION LIMITS FOR
IRA'S AND 401(K)'S” in our Tip of the Week Archive for more
details. |
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Liquid Assets:
No, not your stock of liquor—unless you can convert it into cash.
Liquid assets are the valuables you own that are held in the form of
cash or are easily converted into cash. If all of your savings is
tied up in long-maturing bonds or CD’s and you can’t cash them in
without paying a penalty, they are not liquid. You need a certain
amount of liquidity to be able to pay your bills. |
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LLC:
Standing for Limited
Liability Corporation, the LLC is a form of incorporation often used
by small business owners, because, like an S Corp., it provides
personal liability protection, and allows you to report your profit
and losses on your personal income tax.
Unlike an S Corp., which can be solely owned, most
states require you to have at least two partners, and there are no
restrictions as to number or type or origin of shareholders. |
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Money Market Accounts:
FDIC-insured
savings accounts offered by banks, money market accounts
pay higher interest than passbook savings accounts and offer
checking privileges, but often require a minimum deposit.
Note: Some
mutual-fund companies offer money market fund accounts that invest
in short-term government and corporate bonds. These pay higher
interest than bank money market accounts but they are not
FDIC-insured. |
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Mortgage refinancing:
That’s when you
pay off an existing mortgage with money borrowed from
a new loan, using the same property as collateral. The second loan
is generally at a lower rate and/or for a larger amount than the
first. |
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Mutual Fund:
A fund operated by an investment company that raises money through
the sale of shares and invests that pool of money in a group of
assets, such as stocks or bonds. With literally thousands of funds
to choose from, you’re sure to find one or more that meet your risk
tolerance and growth needs—even some that reflect your social
values.
The benefits of purchasing shares in a mutual fund, rather than
buying individual stocks or bonds, include professional money
management, diversification, and low minimum investment. Shares are
bought and sold on demand, with the price based on the fund’s net
asset value at the end of each trading day. Note: Unlike savings
accounts, most mutual funds are not FDIC-insured. When buying, look
for no-load mutual funds that don’t charge transaction fees. |
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Points:
A one-time charge paid to the mortgage lender, a point represents
one percent of the mortgage amount. One point on a $100,000 loan
equals $1,000. Depending on the sale agreement, points may be paid
by the buyer or the seller at settlement. |
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Principal:
What you started with; the original amount of money either borrowed
or invested. |
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Redundant:
More than
enough, overabundance, excess. English teachers may frown on
redundancy in speech, but it’s a quality to be desired in a bank
account . . . or the contents of your refrigerator! |
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REIT:
Like
to go shopping? Want to own a
piece of the mall? With a Real Estate Investment Fund, or REIT, you
can. Much like a mutual fund that invests in corporate stocks, REITs
pool shareholders’ money to purchase and manage real estate. Many
specialize in specific types of real estate, such as industrial
space, office properties, hotels or shopping centers. REITs are
traded on the stock market, fluctuate in value in response to
quality of management and the economy, and pay dividends, just as
mutual funds do. |
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Roth
IRA:
Taxpayers who don’t qualify for tax-deferred savings in a simple IRA
are probably eligible to contribute to a Roth IRA.
Established in 1997, the Roth IRA allows
eligible taxpayers, determined by income limits higher than those
set for IRA’s, to save for retirement while allowing the savings to
grow tax-free. Roth IRA’s differ from simple IRA’s in that
the money contributed is not tax-deductible. However, neither
earnings nor qualified withdrawals are taxed. |
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S
Corporation:
A hybrid form of incorporation used by small business owners,
because it provides liability protection (your personal assets are
not at risk if you are sued), while still allowing you to report
your profit and losses on your own personal income tax. |
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SEP-IRA:
A simplified employee pension individual retirement account. Such
accounts are useful to self-employed people who do not have access
to 401(k) plans, allowing them to save money on a tax-deferred
basis. |
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Spousal IRA:
An
Individual Retirement Account opened in the name of an unemployed
spouse. |
