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 really hope it would just go away. We feel the same. Finance professionals use acronyms like a special 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 and can easily be done. 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 4 commonly used finance acronyms you need to know to handle your money better.
APR is Annual Percentage Rate. This is the annual rate charged to YOU by a credit card company or other loan issuer. You are charged because you are borrowing money from a company to cover a cost (home, creditors, car) etc. 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 completely 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.
ROI is Return on Investment. This is the return is referenced as a percentage (positive or negative) from an investment. This is relative to the cost that you paid for the investment.
So, 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%.
401k is a retirement plan that 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 this 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. More on that at a later date.
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.
What acronyms do you have difficulty understanding?