Do you know your AGI from your ARM from your PMI? Or does the mere mention of those acronyms make you go, “Huh?". If you don’t speak personal finance, don’t worry — we’re here to help.
We know that managing your money can sometimes make you feel like
you’re learning a foreign language. So we compiled a handy glossary of
must-know money terms that affect all aspects of your financial life.
Whether you’re confused about amortization or not sure what escrow,
exactly, is good for, this primer will help you get up to financial
speed.
#
#
1.Handy banking and credit terms
#1. Compound interest
When you’re investing or
saving, this is the interest that you earn on the amount you deposit,
plus any interest you’ve accumulated over time. When you’re borrowing,
it’s the interest that is charged on the original amount you are loaned,
as well as the interest charges that are added to your outstanding
balance over time.
Think of it as “interest on interest.”
It will make your savings or debt grow at a faster rate than simple
interest, which is calculated on the principal amount alone.
#2. FICO score
A number used by banks and other
financial institutions to measure a borrower’s credit worthiness. FICO
is an acronym for the Fair Isaac Corporation, a company that came up
with the methodology for calculating a credit score based on several
factors, including payment history, length of credit history and total
amount owed.
FICO scores range from 300 to 850, and the higher the score, the
better the terms you may receive on your next loan or credit card.
People with scores below 620 may have a harder time securing credit at a
favorable interest rate.
#3. Net worth
The difference between your assets and
liabilities. You can calculate yours by adding up all of the money or
investments you have, including the current market value of your home
and car, as well as the balances in any checking, savings, retirement or
other investment accounts. Then subtract all of your debt, including
your mortgage balance, credit card balances and any other loans or
obligations. The resulting net worth number helps you take the pulse on
your overall financial health.
2.Handy investing terms
#4. Asset allocation
The process by which you choose
what proportion of your portfolio you’d like to dedicate to various
asset classes, based on your goals, personal risk tolerance and time
horizon. Stocks, bonds, and cash or cash equivalents (like certificates
of deposit) make up the three major types of asset classes, and each of
these reacts differently to market cycles and economic conditions.
Stocks, for instance, have the potential to provide strong growth
over time, but may also be more volatile. Bonds tend to have slower
growth, but are generally perceived to have less risk. A common
investment strategy is to diversify your portfolio across multiple asset
classes in order to spread out risk while taking advantage of growth.
#5. Bonds
Commonly referred to as fixed-income
securities, bonds are essentially debt investments. When you buy a bond,
you lend money to an entity, typically the government or a corporation,
for a specified period of time at a fixed interest rate (also called a
coupon). You then receive periodic interest payments over time, and get
back the loaned amount at the bond’s maturity date.
#6. Capital gains
The increase in the value of an
asset or investment — like a stock or real estate — above its original
purchase price. The gain, however, is only on paper until the asset is
actually sold. A capital loss, by contrast, is a decrease in the asset’s
or investment’s value.
You pay taxes on both short-term capital gains (a year or less) and
long-term capital gains (more than a year) when you sell an investment.
By contrast, a capital loss could help reduce your taxes.
#7. Rebalancing
The process of buying or selling
securities over time in order to maintain your desired asset allocation.
For example, if your target allocation is 60% stocks, 20% bonds and 20%
cash, and the stock market has performed particularly well over the
past year, your allocation may now have shifted to 70% stocks, 10% bonds
and 20% cash.
To rebalance your portfolio, you could sell some of your stocks and
reinvest the proceeds in bonds, or invest new money in bonds to bring
the portfolio back to the original balance.
#8. Stocks
Also called equities or shares, stocks
give you ownership in a company. When you buy stocks, you become a
company shareholder, giving you a claim on part of that company’s assets
and earnings. The two main types of stocks are common and preferred.
If you hold common stock, you can vote at shareholders’ meetings and
receive dividends — however, you’re also lowest on the totem pole in the
corporate ownership structure. Preferred stockholders have a higher
claim on assets and earnings than owners of common stock (for example,
they receive their dividends first), but they don’t have voting rights.
3.Handy real estate terms
#9. Amortization
This is the process of paying off
your debt in regular installments over a fixed period of time. Your
mortgage is amortized using monthly payments that are calculated based
on the amount borrowed, plus the interest that you would pay over the
life of the loan.
#10. ARM
An acronym for adjustable rate mortgage, a
type of mortgage in which the interest you pay on your outstanding
balance rises and falls based on a specific benchmark. ARMs usually
start out at a fixed rate for a short period of time, and then the rate
resets annually based on the benchmark, plus an additional amount.
For example, if you have a five-year ARM, you will have a set rate
for the first five years. Then the rate will change based on the terms
of your mortgage. This means your monthly mortgage payment may start out
low, but then rise (sometimes significantly) after the fixed-rate
period is over.
#11. Escrow
An account held by an impartial third
party on behalf of two parties in a transaction. During the home-buying
process, the buyer will deposit a specified amount in an escrow account
that the seller can’t touch until the terms of the contract, such as
passing an inspection, have been fulfilled and the sale is completed.
An escrow account can also hold money that will later be used to pay
your homeowner’s insurance and property taxes. You can put money in
escrow every month, so that when your premiums and taxes are due, you
have enough to cover those bills.
#12. Fixed-rate mortgage
A mortgage that carries a
fixed interest rate for the entire life of the loan. With a fixed-rate
mortgage, you don’t have to worry about your payments going up if
interest rates rise. The downside is that you could be locked into a
more expensive mortgage if interest rates go down.
4.Handy career terms
#13. Defined-benefit plans
Employer-sponsored
retirement plans, such as pensions, in which the employer promises a
specified retirement benefit based on a formula that may include an
employee’s earnings history, length of employment and age. The employee
may or may not be required to contribute anything to the plan. Because
of their high costs, many companies no longer offer this type of
benefit.
#14. Defined-contribution plans
A retirement plan
companies may offer as a benefit to their workers in which the employer,
the employee or both make contributions on a regular basis. The 401(k)
and 403(b) are the most common forms of defined-contribution plans. The
money that goes into these accounts comes out of earnings pre-tax, so
you don’t pay taxes on the amount you put away every year.
Qualified withdrawals (usually those you make at age 59½ or older)
are taxed as ordinary income. The value of the retirement benefit is
determined by its investment performance. Unlike with defined-benefit
plans, the employee, rather than the employer, shoulders the investment
risk in the account.
#15. Executive compensation
The pay and benefits
package provided to senior executives, which is usually different from
what’s offered to the typical employee. Executive compensation often
includes a base salary, bonuses, incentives based on the company’s
earnings (such as stock options), income guarantees in the event of a
sale or public stock offering, and a guaranteed severance package. These
packages are typically negotiated individually and spelled out in
employment contracts.
#16. Stock options
An employee benefit that gives
the owners of the option the right, but not the obligation, to buy their
employer’s stock at a preset price and within a specified period or on a
specific date. Companies often use these as management incentives.
For example, if a manager helps boost the value of the company’s
stock above the price of his or her option, the manager can buy the
stock at the lower price and pocket the gain if they sell. But all
shareholders benefit from the increased value of the stock.
5.Handy insurance terms
#17. Permanent life insurance
A type of policy that
provides coverage over the lifetime of the insured and also offers an
investment component called cash value. You can withdraw or borrow
against that cash value after a surrender period. Premiums for permanent
life insurance are typically more expensive than for term life
insurance.
#18. Premium
The payments you make to an insurance
company in return for protection from financial losses within the scope
of your policy. You can pay premiums monthly, quarterly, semiannually or
annually.
#19. Private mortgage insurance
A type of policy
that mortgage lenders require when home buyers provide a down payment of
less than 20%. Also called PMI, this protects lenders against loss if
borrowers default on their payments, and the premiums increase the
amount homeowners pay each month. For some mortgages, once your
loan-to-home-value ratio reaches 80%, you no longer have to pay PMI, but
in some cases, it is permanent for the life of the loan.
#20. Term life insurance
A type of policy that
provides coverage over a set period, generally anywhere from five to 30
years. If you die within the set term, your beneficiaries receive a
payout. If you don’t, the policy expires with no value. The policy owner
can decide to renew coverage after the term is over and can cancel at
any time without penalty.
#21. Umbrella insurance
A type of policy that
provides additional liability coverage beyond what your home, auto or
boat insurance may provide. You might consider umbrella insurance if
you’re at risk for being sued for property damage or other people’s
injuries, such as if you hire a nanny or other employees to regularly
work in your home. Umbrella insurance can also protect your assets if
someone sues you for slander or defamation of character.
6.Handy tax terms
#22. AGI
Short for adjusted gross income, your AGI is
calculated as your gross income (e.g., what you earn from your job,
a pension or from interest on investments) minus certain
I.R.S.-specified deductions. You fill out your AGI at the bottom of page
one of Form 1040 when you file your taxes. Your AGI is used to
determine your taxable income, minus any additional I.R.S.-qualified
deductions that you’re eligible to take.
#23. Dependent
A person who is financially dependent
on your income, typically a child or an adult relative you may support.
You can claim a tax credit or exemption for these dependents when
filing your taxes, which reduces your taxable income.
#24. Itemized deduction
A qualified expense that the
IRS allows you to subtract from your adjusted gross income, which
further reduces your taxable income. Itemized deductions can include
mortgage interest you paid, medical and dental costs, or gifts to
charity. Itemized deductions must be noted on IRS form Schedule-A.
#25. Standard deduction
A standard amount that can
be used to reduce your taxable income if you decide not to itemize your
deductions. Your standard deduction is based on your tax-filing status,
and it’s the government’s way of ensuring that at least some of your
income is not subject to tax.
#Source:
25 Financial Terms Every Functioning Adult Should Know | Business Insider
Aug. 15, 2014, 11:04 AM
#
Δεν υπάρχουν σχόλια:
Δημοσίευση σχολίου