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adjustable rate mortgage (ARM)
Long-term loan you use to finance a real estate purchase, usually a home,
but also a small business, performance space, or co-op (be creative).
The interest rate on an ARM is adjusted during its term. The initial rate
is usually lower than the rate on a fixed-rate mortgage for the same term,
so it may be easier to qualify for an ARM. You take the risk, however,
that interest rates may rise--but it's also possible that the rates may
drop, decreasing your payments.
adjusted gross income (AGI)
Your total income from taxable sources minus deductions. Taxable income
includes salary and other employment income, interest and dividends, and
long- and short-term investment gains and losses. Deductions include unreimbursed
business and medical expenses, contributions to a deductible individual
retirement account (IRA), and alimony.
after-tax contribution
Money you put into your 401(k) or other employer sponsored retirement
savings plan in addition to your pretax contribution. Any earnings on
the after-tax amount accumulate tax deferred; however, you can't roll
over after-tax contributions into an IRA, and figuring the tax that's
due on your required distributions may be more complicated than if you
had made only pretax contributions.
alpha
Estimate of a stock's potential price increase based on the rate at which
the company's earnings are growing. Some folks look for stocks whose alphas
are high, which means the stocks are undervalued and have the potential
to provide a strong return.
amortization
The literal translation of the word is "bring to death". To
amortize a loan, your payments must be large enough not only to pay interest
that has accrued but also to reduce the principal amount you owe. An amortization
schedule is a little calendar that will show how much of the loan
and the interest on it remains after each payment's made.
annual percentage rate (APR)
What credit costs, as a percentage of the loan amount broken down per
year, rather than as a dollar amount. An APR includes fees, so it's a
more telling method of measuring the cost of borrowing money than looking
solely at interest rates.
annuity
Annual income you receive from any investment source, as well as the source
itself. Some tax-deferred retirement savings plans are called annuities.
asset
Assets are everything you own that has any monetary value, plus any money
you are owed. They include money in your checking account, your stocks,
bonds, and mutual funds, your equity in real estate, the value of your
life insurance policy, and any personal property that people would pay
to own. Yes, that includes your collection of Flaming Lips bootlegs.
audit
Professional, independent examination of a company's financial statements
and accounting documents according to generally accepted accounting principles.
When an individual is audited, though, it's the IRS going over their tax
returns, usually to question the accuracy or acceptability of the information
the returns report.
average daily balance
When a credit card company uses your average daily balance to charge
you, they're dividing, every day, the balance you owe by the number of
days in your billing cycle and multiplying the result by the finance charge
to determine what you owe for that day. When a bank or credit union calculates
what you've earned, it divides the amount in your account at the end of
each day by the number of days in the period and multiplies the result
by the interest rate.
balloon mortgage
Real estate loan for which the final payment is much, much larger than
the payments that are made over the mortgage term. You might choose a
balloon mortgage if you anticipate refinancing at the end of the
term, if you'll have enough money to pay off the loan in a lump sum (if
it's for a business, perhaps), or if you can only afford the smaller monthly
payments that come with a balloon mortgage. Of course, if you can't
afford larger payments, how will you pay the balloon payment at
the end?
bankruptcy
Legal acknowledgment that you are insolvent, or unable to pay your
debts. If you file for Chapter 7, liquidation bankruptcy, most
of your assets are sold to repay the debts. However, some debts are
not reduced by a declaration of bankruptcy, including past due federal
income taxes, alimony, and higher-education loans. With Chapter 11
bankruptcy, also called reorganization bankruptcy, you work with
the court and your creditors to set up a plan to pay off some or all of
the debt over a specific period of time, such as three to five years.
Similarly, when you hear that a company is reorganizing or is "in Chapter
11," it means it has filed for bankruptcy. Either way, both forms
of bankruptcy will damage your credit rating for several years.
beneficiary
The person or organization receiving what's left of your assets (your
life insurance, retirement fund, or pension plan, for example) when you
die. Naming your favorite nonprofit, such as the Women's Resource &
Action Center, as a beneficiary of your IRA is another way to be
a philanthropist if you can't afford to give during your lifetime.
beta
The higher the beta, the more sharply the value of the investment
can be expected to fluctuate in relation to a market index--it's a measure
of an investment's relative volatility. In recent years, a number of experts
have disputed the validity of assigning and using a beta value
as an accurate predictor of stock performance.
blind
trust
Elected officials often set up blind trusts to reassure the public
that political decisions are not being made for personal financial benefit,
since the officials have given up control over how their investments are
being managed, or even what those investments are.
blue chip stock
Stock of large, well-regarded US companies. Mutual funds that invest in
blue chip stocks are blue chip funds.
bond
Actually, bonds are loans that you and other investors make
to the issuers (like Uncle Sam) in return for the promise of being paid
interest, usually but not always at a fixed rate. The issuer also promises
to repay the debt on time and in full.
broker
Intermediary between buyer and a seller. A stockbroker works for a brokerage
firm, and acts as an agent, handling client orders to buy or sell stocks,
bonds, commodities, and options in return for a commission. Brokers are
licensed in the state where they work and must be registered on the exchange
or market where they work. They must also pass a uniform examination administered
by the National Association of Securities Dealers (NASD).
cafeteria plan
Some employers offer these, more formally known as flexible spending
plans. Cafeteria plans give you the option of choosing the
percentage of your pretax income to be withheld from your paycheck, up
to the limit the plan allows, and allocating the money to the parts of
the plan you want to participate in. For example, you can set aside money
to pay for medical expenses that aren't covered by insurance, for child
care, or for additional life insurance coverage. As you incur these kinds
of expenses, you are reimbursed from the amount you have put into the
plan. Since you owe no income tax on the money you contribute, you actually
have more cash available for these expenses than if you were spending
after-tax dollars. However, you must estimate the amount you're going
to contribute before the tax year begins, and you forfeit any money you've
set aside but don't spend.
call
An issuer's right to redeem bonds it has sold before the date they mature.
Also used when a bank makes a secured loan--it reserves the right to demand
full repayment of the loan ("calling the loan") should
you default on your interest payments.
capital
Any funds used to generate income or make a long-term investment, such
as money put into an IRA, or a down payment on a house.
capital gain
Profit made on the sale of an asset, such as stock, or your house. For
example, if you buy 100 shares of stock for $20 a share and sell them
for $30 a share, you get a capital gain of $10 a share, or $1,000 in total.
Long-term capital gains (on assets owned over a year) are taxed at a lower
rate than your other income while short-term gains (on assets owned less
than a year) are taxed at your regular rate. Capital gains taxes are often
an issue for the wealthy (and those hoping to be) when federal tax cuts
are debated.
cash surrender value
A cash value life insurance policy accumulates a cash surrender value
Ñ the amount the insurance company returns to you if you drop your coverage.
If the cash surrender value is more than the amount youÕve paid in premiums,
you may owe income tax on your gain. Same goes for cash surrender value
on mutual funds.
certificate of deposit (CD)
Timed deposits offered by banks and insured by the FDIC. You generally
earn compound interest at a fixed rate, which is determined by the current
interest rate and the CD's term, which can range from a week to several
years. You usually have to pay a penalty if you withdraw funds before
your CD matures, often equal to the interest that has accrued up to the
time you make the withdrawal.
collateral
Assets used to guarantee a loan. If you default on a loan, the collateral,
or some portion of it, becomes the property of the lender. For example,
if you borrow money to buy a car, the car is the collateral. If
you default, the lender can repossess the car and sell it to recover the
amount you borrowed.
community property
In nine US states anything acquired during a marriage is considered community
property, or owned jointly by the married couple. This includes debt.
For example, if you're married, live in Arizona, California, Idaho, Louisiana,
Nevada, New Mexico, Texas, Washington, or Wisconsin, and your partner
goes wild with the Visa, half of that bill is your responsibility, even
if you never saw the items purchased. In a divorce, the value of the community
property, or the debt, is divided equally. However, property you owned
before you married or that you received as a gift is generally not considered
community property. Here's to living in sin!
compound interest
Interest which is calculated not only on the initial principal (the
money you put in) but also the accumulated interest of prior periods.
Compound interest earnings are reported as annual percentage
yield (APY).
consumer confidence index
Measures how a representative sample of 5,000 US households feel about
the current state of the economy, and what they anticipate the future
will bring. The survey focuses specifically on the participants' impressions
of business conditions and the job market.
credit rating
Independent statistical evaluation of your ability to repay debt based
on your borrowing and repayment history. Credit grantors use a point system
to evaluate your credit history, sometimes on a scale of 0 to 9, or 9
to 0, but in other cases on a scale of 300 to 900. If you always pay your
bills on time, you are more likely to have good credit and therefore may
receive favorable terms on a loan or credit card, such as relatively low
interest rates. If your credit rating is poor because you have
paid bills late or have defaulted on a loan, you are likely to get less
favorable terms or may be denied credit altogether.
credit report
Information about your use of credit and matters of public record are
used by Experian, Equifax, and Transunion to create credit reports,
which are then sold to qualified recipients. Yes, it is a business, which
is why we're seeing more use of credit reports in the past ten years--buyers
(companies/banks offering credit) can save money on defaulted loans, and
credit reporting agencies can make money selling your information. Remember
that you have a right to see your credit history if you have been turned
down for a loan, and that you may ask questions and make corrections.
A counselor at Consumer Credit Counseling
Service can help you order your free credit report, and teach you
how to interpret it.
depreciation
Decline in value over time of things like buildings and business equipment.
You can write off the cost of such an asset over its estimated useful
life on your tax return.
disclosure
The fine print. Lenders are required by law to explain the costs of credit,
and banks to explain the costs of opening and maintaining an account.
Publicly traded corporations also have to provide all the information
they have available that might influence your decision to invest in the
stocks or bonds they issue, and mutual fund companies are required to
disclose the risks associated with buying shares in their funds.
dividend
Money paid out to you by a company you own shares in; usually yearly or
quarterly. Sometimes you can use your dividend to buy more shares in the
company, if they have a dividend reinvestment program (DRIP). This is
often better than taking the money, and having it taxed dramatically.
You may also be paid dividends by your mutual fund company, but those
in particulare are not taxable.
dow jones industrial average (DJIA, "The Dow")
Tracks the performance of thirty blue chip US stocks. Yeah, just thirty--so
why is it such a big deal? Because those thirty companies own other companies,
and a lot of money gets tied up in a just a few hands. Though it is called
an average, it is actually a price-weighted index, which means the gains
and losses of the highest priced stocks are counted more heavily than
gains and losses of lower priced stocks.
educational savings account (ESA)
$2000 a year can be put into an ESA for a minor, to be used for
qualified educational expenses at any level of education. The contribution
is not tax deductible, but earnings in the ESA can be withdrawn
tax free if they're used to pay educational expenses anytime before the
beneficiary reaches age 30.
efficient market theory
The idea that a stock's current price really shows what investors know
about the stock, and also that you can't predict a stock's future
price based on its past performance. Index funds, designed to match the
performance of a particular market segment, are partly based on efficient
market theory.
equity
Ownership. If you own stock, you have equity in a tiny bit of the company
that issued it. Also the amount that you've actuallypurchased of
a large item bought on loan--if you have a $80,000 home and still owe
$60,000 on your mortgage, your equity in the home is $20,000.
escrow
"Holding place" for assets being used as collateral, or for
capital used in a purchase. An escrow agent holds the assets or
money in an escrow account. If you put a down payment on a house,
that money is held in escrow until the sale is complete or the
deal falls through.
estate tax
Called the "death tax" by politicians and pundits who'd wanted
to see it go, which it will by 2010--though it will be back in 2011 unless
congress votes it down again, so it will probably affect you if you think
you'll live past 2011. Currently, if you die and your assets
(house, money) - your debts (and costs of settling the estate) = over
$1 million, taxes
are owed on the amount over $1 million, unless you happen to be legally
married to a US citizen, in which case s/he be willed your estate tax
free.
european central bank (ECB)
Bank of the European Monetary Union (EMU) and progenitor of the euro.
The ECB, which is based in Frankfurt, Germany, issues currency,
sets interest rates, and oversees other aspects of monetary policy for
the EMU. The EMU's National Central Banks (such as the Banque de France
and the Deutsche Bundesbank), together with the ECB, form the European
System of Central Banks, and play an important role in implementing monetary
policy, conducting foreign exchange operations, and maintaining the foreign
reserves of member states.
exchange rate
Ratio of one currency's value to another's, usually expressed in percentage
points. Important if you're planning to travel, or if you're interested
in the global economy. Rates change daily and can be found in newspapers
and on financial websites.
fair market value
Price generally agreed upone for an asset or service, assuming that both
buyer and seller are reasonably well informed of market conditions, that
neither is under undue pressure to buy or sell, and that neither intends
to defraud the other.
federal deposit insurance corporation (FDIC)
Established after the Depression in order to guarantee the availability
of money and investments from banks, even if they fail. Individual accounts
are guaranteed up to $100,000, but you can have more than that guaranteed
at one bank through multiple accounts, such as an IRA along with a money
market account.
federal housing administration (FHA)
Since 1937, makes home ownership possible for more people. Consolidated
into the Department of Housing and Urban Development (HUD), the FHA
sets credit standards and loan limits, monitors loan quality and availability,
and insures lenders against mortgage losses. Also lends FHA Mortgages,
for which closing costs are limited and the down payment is lower. If
you don't qualify for a traditional mortgage because of credit problems
in your past, you may be able to get an FHA Mortgage.
federal insurance contributions act (FICA)
Act requiring employers to withhold money from employee paychecks for
Social Security. FICA authorizes withholding of 6.2% of every paycheck
you receive, up to an annual cap set by congress. (It's $87,000 for 2003.)
Your employer is required to contribute an equal percentage. If you're
self-employed, you pay as both employer and employee, or 12.4%. Don't
forget to save for this...
financial planner
Lovely, talented person who evaluates your finances and helps you develop
a plan to meet your immediate needs and your long-term goals.
fixed annuity
You can buy a fixed annuity contract issued by
a life insurance company, which pays out a guranteed income after you
retire. You pay the required premium, either in a lump sum or over a period
of time. The insurance company invests its assets, including your premium,
so they will have money available to pay you a fixed rate of return beginning
when you plan to retire.
fund network
Offers access to thousands of different mutual funds, allowing you more
control over your investments, and a greater ability to diversify your
funds and choose who you're going to let use your money more carefully.
go public
To open the opportunity to buy shares in a company to the general public
and not just the initial investors/founders in an initial public offering
(IPO).
grace period
Days between the time a credit card bill is sent to you, and when it's
due. If you have a grace period, you'll owe no interest on purchases made
during that time if you paid your balance in full last month. If your
credit card has no grace period, you'll be charged interest from the moment
you buy something with your credit card until you pay your bill even if
you don't have an unpaid balance.
guarantor
If you have a low income or need help with your credit history, you may
need to have a co-signer, or guarantor, to get a loan. This way
if you don't pay your bills, or if you suffer unexpected financial trouble
that can't be dealt with because of your low income, someone else is liable
for the debt and the lender is more likely to get paid.
hardship withdrawal
Making a withdrawal from your 401(k) to cover urgent expenses. Allowances
the IRS makes for hardship withdrawals include buying a house,
covering medical expenses, and paying for college. However, if you're
younger than 59 1/2, you have to pay a 10% penalty, plus tax, on the amount
you withdraw.
index fund
Mirrors the performance of a stock or bond index, such as Standard & Poor's
500-stock Index (the S&P 500). The fund includes all of the stocks in
the index, or a good sample of them, and buys and sells only when the
securities in the index change. Because it's just designed to imitate
the performance of the Index, not outperform it, the fund will do well
when the market's doing well and poorly when the market is doing poorly,
instead of beating it.
individual retirement account (IRA)
Investment option which offers tax-free earnings. If you are working,
or are married to someone who is, you can put up to $3,000 per year in
an IRA. At 50+? You can put in another $500 each year. There are
two types of IRAs, traditional and Roth, which have different qualification,
contribution, and withdrawal rules. For example, you can contribute to
a traditional IRA regardless of your income, while there are income
limits for contributing to a Roth IRA. You can find out more about
what kind of IRA is right for you by talking with some mutual fund
companies, such as TIAA-CREF, and
others which you can check out at quicken.com.
insider trading
A term you'll hear in the news from time to time. This is when company
management, its board of directors, or anyone else who owns at least 10%
of the company in stock buys or sells its shares. It's still legal if
it's based on public knowledge, but it's illegal if it's based on secrets
only those inside the company would know. This kind of trading is also
illegal for anyone who gains knowledge of company actions which have not
been made public, including lawyers, journalists, and bankers.
interest rate
The percentage of your money that you earn when it's invested. If you
multiply the interest rate by the face value or balance, you find
the annual amount you receive. For example, if you buy a bond with a face
value of $1,000 with a 6% interest rate, you'll receive $60 a year. It
works the same way, in reverse, when you borrow money.
international monetary fund (IMF)
Set up by the UN in 1944, the IMF's activities are funded by "developed"
nations, like the US, and were designed to assist "developing"
nations with loans, but also make those nations beholden to the funding
nations, which is the source of a great deal of criticism from those concerned
about globalization.
keogh plan
Keogh plans are retirement plans for self-employed people such as artists,
activists, freelancers, and small-business owners. Keogh plans are sort
of complex, so it's a good idea to get help from a financial advisor in
setting yours up.
leverage
Using a small amount of your own money to make an investment of much larger
value, such as borrowing 90% of the cost of a home. If you sell the house
for more than you were loaned, you make a profit. Buying stock on margin
is a type of leveraging, as is buying a futures contract or an
option. Very risky, because stock (and houses for sale) don't always sell
for as much as you'd planned.
liability
The opposite of assets. The amounts you owe to creditors, such as credit
card debt, car loans, and educational loans. When you figure your net
worth, you subtract your liabilities, or what you owe, from your assets.
liquid assets
Money you can have in hand quickly, either because it's cash you have
available, money in bank accounts, or stocks and bonds that can be easily
sold.
load
Commission paid to a broker or financial advisor when you buy shares in
a mutual fund. A charge when you buy the shares is called a front-end
load; if you pay when you sell, it's a back-end load. A level
load is the term used when you pay a portion of the commission each
year you are investing.
market price
The price at which a stock is currently selling.
market timing
The strategy of day traders (a popular "occupation" in
the boom time of the late '90s). The idea is to take quick profits by
buying low and selling high in the moments between stocks' price changes.
It's particularly risky because there's really no way for day traders
to predict market changes, and a seemingly minor mistake can turn into
a financial nightmare.
matching funds
If you have investments through your 401(k) or another employer-sponsored
retirement plan, your employer may match or contribute a percentage
of the amount of money you put into the account. You should always put
in as much money as your employer will match if you possibly can.
maturity date
The date a bond or CD comes due and can be cashed in or rolled over without
penalties.
merger
Important to understand if you want to know how corporations get so much
power. If two companies pool their assets by exchanging their stocks,
it's called a merger. Interesting to note that a merger is usually
tax-free, which means that people who own stock in either of the companies
don't owe capital gains tax on the exchanges shares. This seems great
for those of us who have relatively little invested in a company, but
it's really great for the folks at the top who have millions of dollars
worth of stock in it.
money market account
Basically a bank account which also draws interest. Usually have a higher
minimum balance and limits on the number of withdrawals per month, but
these accounts usually pay interest at rates like mutual funds, with FDIC
protection.
mutual fund
Managed investment that sells shares to investors and pools the capital
it raises to purchase stocks, bonds, or money market securities, depending
on the investment objectives of the fund--which can include social responsibility,
low-risk, or any number of factors to choose from. Mutual funds
make it possible to diversify, meaning that you can spread your
money out between real estate, high-risk stocks, bonds, and other investments.
It's also nice to have your money managed. Look at the prospectus
for a fund to see what its objectives are, and what fees are associated
with investing in it.
national association of securities dealers automated quotation (NASDAQ)
Computer network where stock prices are listed and updated through the
day.
national debt
Total value of all Treasury bills, notes, and bonds that the federal government
owes to investors. Some of this the government owes itself, to funds such
as the Social Security, Medicare, Unemployment Insurance, and Highway,
Airport and Airway Trust Funds. The rest is held by individuals, institutions
and other governments. Different from the federal budget deficit, which
is any federal spending that exceeds federal income in a fiscal year.
net worth
Assets - liabilities (that is, what you have minus what you owe).
nondiscrimination rule
401(k) plans and other qualified retirement plans must follow nondiscrimination
rules, which means that highly paid employees can't be given more generous
benefits than other employees. To get around this, though, many businesses
offer nonqualified plans to which antidiscrimination rules don't apply.
overvaluation
If a stock's price seems too high based on its earnings history and other
measures, it's overvalued. Overvaluation is usually followed by
a dramatic drop in the stock's price. This is the "tech bubble"
that analysts sometimes refer to when talking about the stock market in
the late '90s era of internet start-ups.
portfolio
If you own more than one security, you have an investment portfolio.
A portfolio is built by adding stock, bonds, mutual funds, and other investments.
The idea is to invest in things you think will go up in price (of course),
thus building the value of your portfolio. You should also try to have
lots of different investments in your portfolio, thereby diversifying
it and ensuring that no matter the economic climate, at least some of
your investments should be doing all right.
power of attorney
Actually a noun--a document that gives someone the authority to act for
you or on your behalf. It might be your investment broker or your lawyer,
or your partner or your mom. A power of attorney must be notarized
by a notary public (you can usually find one in a bank) to be legal. It's
usually a good idea to consult an attorney to be sure the document you're
signing will give the person you're designating the necessary authority
to act for you.
pretax contribution
Money that you put into a retirement savings plan or other benefit plan
before your income taxes are calculated. Your taxable earnings are reduced
by the amount of your contribution, which reduces the income tax you owe
that year.
price-to-earnings ratio (P/E)
The ratio of a company's earnings to its share price. It's figured out
by dividing the current price per share by the earnings per share. A stock's
P/E, also known as its multiple, gives you a sense of what
you are paying for a stock compared to its earning power.
prime rate
Starting point for interest rates on loans. For example, a credit card
company may charge you the prime rate plus ten percentage points
in interest on your balance. The prime rate is determined by the federal
funds rate, which is the interest banks charge each other to borrow
money overnight.
principal
Chunk of money you invest, face value of a bond, or the balance you owe
on a debt, aside from the interest.
privatization
Changingover a government enterprise to a private one by selling shares
to investors. The idea is that privately-run businesses are more efficient
that beaureaucratic government-run organizations, but it also means that
public utilities and the like end up owned by a few wealthy people, rather
than all taxpayers.
profit sharing
Retirement plan in which workers contribute to their employer's stock,
and then reap the benefits when the company makes a profit. The employer
may add up to the annual limit to each employee's profit-sharing account
in any year the company has a profit to share, though there is no obligation
to make a contribution in any year. Don't invest too much in profit sharing,
as it's possible that the company could go under (Enron, anyone?) and
leave you out to dry.
public company
The stock of a public company is owned and traded by any and all
investors. In the opposite, a privately held company, the stock
is held by company founders, employees, and sometimes venture capitalists
(people with lots of money, who invest in new companies that they believe
will make money).
qualified plan
A qualified retirement plan is an employer sponsored plan that
meets the requirements established by the IRS and Congress. Pensions,
profit-sharing plans, and 401(k)s are all examples of qualified plans.
Qualified plans are also nondiscriminating, which means that they
don't treat higher-paid employees better than those who are less well
compensated. A nonqualified plan may be available to some employees
and not others. Nonqualified contributions are made with after-tax dollars,
although any earnings in the plan are tax deferred. Mandatory federal
withdrawal rules that apply to qualified plans do not apply to nonqualified
plans. This helps the wealthy make even more money.
rally
Big, quick recovery in the price of a stock, or of a whole market, after
a period of decline or sluggishness. Just a short-term reference, a rally
does not necessarily mean that the gains will continue in the long run.
random walk theory
Idea that it is useless to try to predict changes in stock prices. The
term is based on the notion that information that people use to decide
whether to buy or sell stocks, thus affecting changes in their prices,
is as random as a wandering walk. This goes against financial analyst's
belief in the use of predictors such as past changes in stock values to
guess the future performance of a stock.
rate of return
Annual income on an investment.
real interest rate
The interest rate earned on an investment minus the rate of inflation.
For example, if you're earning 7% on a bond, and the inflation rate is
2%, your real interest rate is 5% (which is good--it's higher than
the rate of inflation).
realized gain
If you sell an investment for more than you paid, you have a realized
gain. For example, if you buy a stock for $20 a share and sell it for
$40 a share, you have a realized gain of $20 a share.
refinance
If interest rates drop below the rate you paid when you took a student
loan, mortgage or other long-term loan, you might refinance the
loan to take advantage of the lower rate. You would get a new loan, and
use that money to pay off the original, leaving yourself with a loan of
the same size, but with a lower interest rate.
return
Your return is the profit you make on an investment, usually expressed
as an annual percentage.
risk
Typically, the greater the risk on an investment, the greater the
potential returns. Having some high-risk investments in your portfolio
(particularly balanced with lower-risk investments like real estate) makes
sense when you're young and have many years to make money on your investments,
but as you grow closer to retirement less risk is preferable, so that
you know the money will be there when you need it.
rollover
Moving your investments from one fund to another is called a rollover.
This may come up if you change jobs and need to move your pension into
an IRA, or if your CD matures and you move the money into a mutual fund.
Using the rollover option will save you a good deal in taxes.
roth IRA
The Roth IRA is a variation on a traditional IRA which allows you to withdraw
your earnings completely tax free any time after you reach age 59 1/2,
provided your account has been open at least five years. You may also
be able to withdraw money earlier without penalty if you qualify for certain
exceptions, such as using up to $10,000 toward the purchase of a first
home. And since a Roth IRA has no required withdrawals, you can continue
to accumulate tax-free earnings as long as you like. You can put up to
$3,000 of earned income (pre-tax) into your Roth IRA.
rule of 72
Compounded annual rate of return times the number of years must equal
roughly 72 for the investment to double in value. If
you were to invest $1,000 at 6%, the "rule of 72" says your money
will double in 72 divided by 6, or 12 years.
Student Credit & Money Management Services
Iowa Memorial Union
Room 203
Iowa City, IA 52242
319-335-3239
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