4 Finance Acronyms Explained
Finance acronyms are like a bad cold in the winter. You don't understand where it came from, you are unsure of how to process it, and you hope it would just go away. We feel the same. Finance professionals use acronyms like a unique code that make you feel inferior. You can get the wrong impression that handling money is only for the most highly educated individual.
Handling your money is not as difficult as it seems. Your job is educating yourself on the couple of "must know" acronyms so that you can wade through water and get to the good stuff. Here are four commonly used finance acronyms you need to know to handle your money better.
APR is Annual Percentage Rate. The annual percentage rate is the yearly rate charged to you by a credit card company or other loan issuers. When you borrow money to cover a cost such as your home, consumer purchases, or car, this rate takes effect. Loans can be offered as a fixed APR or as a variable APR. Fixed means the loan rate (ex: 3%) does not change over the lifetime of the loan. So, if you have a fixed 3% loan, you will pay that until your debt is ultimately paid off. Variable APR means the interest rate may change. So, if you have a 3% APR the company can change that to a 5% APR or higher.
It is imperative you understand your APR, especially for your credit cards. Your credit card may have an APR of 20-30%. For reference, the stock market only returns an average of 7-8% for the year. What does this mean? You can get in debt extremely easily and stay there if you don't understand the rates to borrow money. Getting yourself into debt is never a wise decision, but sometimes it is unavoidable. Please do yourself a favor and check your APR.
ROI is Return on Investment. ROI is the return referenced as a percentage (positive or negative) from an investment. The return on investment is relative to the cost that you paid for the investment.
For example, if you invested $1,000 in a business and a year later you sold your shares for $1,200, your return would be 20%. This is a simple calculation that is frequently referenced to establish if something is a "good" or a "bad" investment. This equation does have its limitations and does not factor into the equation time. Keep in mind; the average stock market return is 7-8%.
401k is a retirement plan established by your employer. 401k, the name, comes from the section of the IRS that permits this law. Creative! A 401k plan allows you to make contributions to a retirement plan that is tax-deferred.
What does tax-deferred mean? You don't owe taxes on the money you put into the account until you take it out. Most major companies allow you to invest in a 401k. There are positives and negatives when it comes to 401ks. The positives are that you can save for years to come for your retirement. The main con with a 401k is that you are unable to access your money in an emergency without a hefty penalty. You can be penalized up to 20% for taking your money out of a 401k in addition to taxes. You can pay up to 60% for accessing your own money in an emergency!
Invest in your 401k but be aware of its drawbacks before you put all of your retirement funds in one basket.
IRA is an Individual Retirement Account. There are several different types of IRA's. In an IRA, you can invest in a range of different financial tools (stocks, bonds, mutual funds, ETF's). Traditional and Roth IRA's are established by individual taxpayers where SEP and SIMPLE are established by small business owners and self-employed individuals. IRA's have investment and income limitations. SEP and SIMPLE. IRA's have investment and income limitations.
If you are in your early 20's, please invest in a Roth IRA! I think this is one of the best, if not the best, investment account on the market.
Did this clear up your confusion? If you still are having trouble deciphering these acronyms, contact me!
What acronyms do you have difficulty understanding?