You may be used to acronyms when it comes to texting your friends, but what about other aspects of your life? Certain situations and life events, like starting a new job and applying for an auto loan, involve several specialized financial terms and abbreviations.
Learning these unknown phrases can be intimidating, especially if you’re starting your first job and don’t want to be seen as the “new kid.” To prepare, start by brushing up on some of the most common ones.
Your employer may offer a retirement savings account called a 401(k). You add money to the account before you pay taxes on your earnings. Your employer can also contribute to your 401(k), although depending on the company, that benefit may not apply until after you’ve worked there for a certain amount of time. The money you contribute isn’t taxed until you withdraw it, which allows you to postpone paying some taxes until you’ve retired. You’ll decide which investments to purchase with the money in your 401(k), as The Wall Street Journal explains. Pro Tip: Don’t withdraw early from a 401(k) because you’ll have to pay some heavy penalties.
A traditional Individual Retirement Arrangement, an IRA, is another type of retirement savings plan. Because you sponsor the account, you can contribute to an IRA regardless of whether you have a 401(k) through your employer. However, factors like other employer retirement plans and income will determine if you’ll be able to postpone taxes on the full amount you put in. You can set up an IRA with a bank, a life insurance company, or a mutual fund, notes the IRS. Keep in mind, there are limitations on how much you can contribute annually. As with a 401(k), you’ll decide how to invest the money and you’ll be charged a penalty if you withdraw early.
The major difference between a Roth IRA and a traditional IRA is that you pay taxes on your money before you invest it with a Roth IRA. The perk, however, is that your investments are tax-free, as CNN Money reports. So long as you meet the requirements, you won’t pay taxes when you take the money out. However, if you withdraw your contributions early or without an approved reason, such as paying for college tuition or large medical bills, you’ll owe a percent in taxes. Fortunately, there is no other additional penalty.
When you take out a loan, you have to pay for interest over the duration of the loan, which is determined as either a fixed or a variable rate. If the loan has a fixed rate, it means the interest rate stays the same as you pay off the loan. If you take out an auto loan, for example, with a fixed rate, you’ll owe the same amount each month as the rate won’t increase or decrease down the line.
APR stands for annual percentage rate and is the rate you pay on a loan over an entire year, including both interest and fees. Lenders are required to tell you the APR on a loan so you can compare it with other available loans and see how much each one would cost you annually.
When you borrow money from a lender, collateral is what the company can take if you don’t pay back your loan. When you take out an auto loan, for example, the collateral is the car you’re buying. It serves as an additional form of security, notes the Small Business Administration.
These are just a few of the many financial terms you may come across. It’s always okay to look things up or ask questions, in order to be as informed as possible about your finances.