401(k) Plan: This is a retirement plan formed by the US Congress in 1981 for businesses to enable people to invest money to save for retirement. The main benefit of the 401 plan is that the money invested does not get taxed until it is withdrawn. This allows all the interest earned during the investment period to earn more interest to get added to the principle and grow the entire investment. It is proper and common that companies offer matching investment money to attract and retain employees. The number “401” comes from the name given to the plan’s location in the federal tax code.

403(b) Plan: This is a retirement plan similar to a 401(k) but is centered on employees of schools, churches and tax-exempt organizations, not businesses.

A

Accountant: An accountant tracks the money coming into, and going out, of an enterprise or individual. They are responsible for forming financial reports to be viewed by their employers to evaluate the business and for satisfying the needs of state and federal tax departments. There are four specialties of accountants: management, public, government auditor and internal auditor.

Adjustable-Rate Mortgage (ARM): The interest rate can change, or adjust, over the life-time of the mortgage. However, the initial payments and interest rate will not change in the beginning of the loan. Who adjusts the rate? The lending institution does when it figures it needs to charge the borrower more money to cover its costs. The rate is governed by looking at an “index” or average of very large lending institutions. On top of the indexed interest rate your bank may charge an extra one or two percent of the loan mainly because they can!

Amortization: While this term has more than one meaning, generally it refers to the schedule of interest and principal payments related to a loan. The amortization schedule or “how it gets paid off” schedule makes it crystal clear how payments reduce the interest owed and increase of the value of the item being purchased. While the monthly payments may be exactly the same each month the money allotted to paying off the principle borrowed and the interest owed may vary. The first payments may have most of the payment going to the interest due with much less going to paying off the principle borrowed. The last payments may have most of the money paying off the principle and little being directed to paying the interest due.

Annual Percentage Rate (APR): This figure was created, and is mandated, by government to ensure that borrowers knew the precise percentage of interest they would be expected to pay when taking out a loan. This figure may also take into account add-on fees or extra costs imposed by the lender. A nominal APR refers only to the agreed upon interest costs. An effective APR considers the extra fees of taking out a loan as well as the added costs of compound interest. Without knowing the APR, a borrower could be paying for additional hidden and unknown costs associated with the loan.

Appraisal: A buyer of an item may have figured the value of an item and the seller may have his or her own idea of the item’s value. But both valuations can be based upon biased information or feelings. An appraisal done by a licensed appraiser is done by an expert who has no outside influence other than a knowledge of the market for that item and an appreciation for its inherent value. Common items that call for the work of an appraiser is jewelry, homes and businesses.  The appraiser comes up with a figure that expresses an item’s worth without the influence of the seller or buyer at that particular time.  This appraised value can be changed dramatically by outside factors that can quickly alter its market value or the price at which it can be sold in a short but reasonable period of time.

Assets: An asset is something of value that can be sold for cash. Commonly an asset is considered to be a physical thing like a machine or a building. It can also be considered as an intrinsic piece of “property” such as the brand of a company.  While fixed assets, like buildings, can’t be moved, current assets, like pallets of product or money in savings accounts, can. Long term assets have a long life-span. Deferred assets are things purchased now for future use. Intangible assets, like good will, are items you can’t hold or touch but which still have value.

B

Bad Debt: Money owed to a person or business is considered a good thing if it is reasonable that it can and will be repaid. That future payment can be looked at as a credit. But every person and every business usually find itself having to deal with bad debt, or money that cannot, or will not, ever be repaid and will eventually be written off as a loss. That’s very bad and that figure can be looked at as an unavoidable expense.

Bankruptcy: A declaration of bankruptcy may enable a debtor and creditor to renegotiate in good faith so that loans or debts can be repaid. It can also enable a debtor to walk away from a debt and a creditor to be left holding the bag!  While it is not a good predicament to find yourself in it can be looked at as a fair-safe or last-ditch effort to make sure people or businesses get paid some of what they are owed, albeit under different circumstances. A Chapter 7 bankruptcy wipes personal debt completely clean. A Chapter 13 bankruptcy allows debtors to keep their assets but agree to forming a plan to partially repay what is owed. Some Chapter 13 bankruptcies allow for payments of principle but no interest. A Chapter 11 bankruptcy is for the benefit of businesses so that they can restructure or renegotiate their debt and survive hard financial times.

Bitcoin: Who invented the dollar? Who invented the peso? The answer for both, and for all other hard currencies, is the nation that decided to use that form to buy and sell stuff in their country.  An individual person, however, invented Bitcoin in 2009 and after that a few others invented their own style of currency. Together they are called crypto-currencies or secret currencies. None of them utilize a central bank or a Fort Knox money fortress but are floating free in the internet cloud. They change value according to how popular they are at any particular time. You can sell and buy individual bitcoins or use them to buy stuff as long as everyone in the transaction has faith in the value and the currency. But like any other commodity, especially when it is unregulated by any nation, Bitcoin can increase or decrease in value from second to second. It can also be stolen or even lost if you can’t remember your password.

Bonds: A bond is a contract to borrow your money with a specific date to pay it back along with interest at a set percentage point. This loan is from you to virtually any government entity or business enterprise that issues this bond. They issue bonds simply because they need the money right now and promise to pay you back…later.

The federal government needs money for all sorts of reasons and issue bonds called treasury bills (T-bills) or treasury bonds. States, cities and companies do the same and issue bonds for their needs too. While the T-bills are considered safe investments all others may or may not be considered safe. It depends upon what is issuing the bonds. They may or may not be trustworthy to pay it back.  Usually, the more financially sound the issuer is the lower the interest rate is offered.

The bond holder can keep the contract until it matures or sell it before its maturity date. Why? Sometimes the going interest rate on the open market drops below the interest rate stated in your bond. That makes your bond more valuable enabling you to sell it for more that your original loan.

The interest you earn on some bonds is tax-free while others get taxed. All bonds are rated by credit rating agencies.

Brokers: A broker is someone who handles the job of buying and selling your investments. A broker is a licensed professional who has passed exams and whose work is overseen by financial watchdogs. You are not allowed to buy and sell investments on your own. You have to hire a broker. Why? Investing can be very complicated and it can be easy to make bad decisions. So, in order to add some stability into the system brokers act as your go-between to provide some level of expertise and safety. Plus, it’s easier for the financial world to deal with a “few” brokers than millions of individual investors.

There are three kinds of brokers: stock, commodity and option. Stocks involves shares of companies. commodities deal with hard goods like gold, corn and oil. Option brokers deal with more detailed buying and selling investment plans.  All brokers are licensed and monitored.

Bull and Bear Markets: When your country’s economy is doing great with lots of confidence, high employment, rising prices in the market(s), great expectations, etc. then that market scenario is referred to as a bull market. Think of the “running with the bulls” in Spain; they are running strong, with purpose and seemingly no one can stop them. Everyone is excited and jubilant (excepting the bulls themselves perhaps). Investors are saying “Wow”.

A bear market is just the opposite. Prices and confidence in the market(s) are dropping, high unemployment is occurring – Investors are saying “Whoa”.

These markets are examples of trends often lasting many years. During a bear market it might be a good time to invest while your stock prices are low. Conversely, during a bull market it might be a good time to sell while your stock prices are high. The trick is to figure out when each market begins to change to the other. Safe investors don’t worry about the markets ups and downs and just work the averages – mostly just buying and seldom selling as they build up their portfolio.

C

Cash Flow: It’s always better to have cash than not! A positive cash flow refers to money coming into a person’s wallet or a business’s bank account. A negative cash flow is the reverse situation and usually something to avoid. However, sometimes, a negative cash flow indicates an investment that will provide future greater positive cash flow such as income from rental investments. And sometimes, a positive cash flow could be an indication that debts aren’t being paid on time.  An accountant makes sense of it all and can keep individual tax payers and business owners fully aware of their financial health by interpreting “cash flow”.

Closing Costs: In addition to buying a piece of property you also have to “buy” the services of the bank where your loan originates. These extra costs are usually determined by a percentage of the purchase price of the property.  These percentages are called points. Two points translates to two percentage points. These points can vary from one lending institution to the next but are usually between two and four percentage.

Other closing costs, or costs imposed on the buyer when making the purchase, are categorized as non-recurring and recurring. A non-recurring cost is a one-time charge such as paying for a title, notary charge or a home inspection. Recurring costs are just that…they are repeated throughout the life of the loan usually at the discretion of the bank to protect their investment. A few examples of recuring costs relate to paying property taxes, property insurance and flood insurance. Once the mortgage is fully paid for, and the bank is free and clear, these liabilities still exist but are solely the responsibility of the property owner.

Collateral: Collateral is something that is promised to the lender in case the borrower is unable to repay a loan. In the case of a real estate loan the collateral is usually the property itself. In the case of a loan to buy a car the collateral can be the car. In investment stock purchases the collateral can be the stocks that are purchased. In all of these cases the collateral “secures” or protects the lender in case of default as the collateral is there for the lender to re-resell and recoup its position in the loan. Un-secured loans promise no collateral at all and, as such, the lending institution charges a higher interest rate than it would for a safer, secured loan.

Commodities: A commodity is a tangible thing-a real thing that has value and which can be purchased by an investor. Examples of these real things are agricultural products, mining metals and barrels of oil. Strategic investors in commodities pay a relatively small percentage (maybe 10%) of the product’s value to be able to place bets that the commodity will rise or fall in value. This can be extremely risky because the investors are betting on future occurrences, like weather, political stability, and always the marketplace, that are out of their control. The movie “Trading Places” depicts just such a scenario. The consensus of most investors was that the price of orange juice was going to rise due to an expected hurricane. So, they bet on the price of orange juice rising due to a smaller harvest. But when the hurricane failed to materialize, they lost much of their money in the gamble. But the two heroes in the move made out like bandits as they bet the opposite.

Common Stock: Stocks are shares of companies that represent the value of the company. An investor can buy shares with the anticipation that the company will have staying power in the marketplace and will even grow in value. The idea of a company forming shares is to invite investors to exchange their money for shares of the company’s stock. A share is just a piece of paper that represents partial ownership of the company.

There are two kinds of stock: common and preferred and the value of each fluctuate according to the value of the company. Common stock, however, is purchased knowing that the stock holder’s investment could drop like a rock, even to zero, if the company goes bankrupt.  The holder of preferred stock is somewhat protected in that, should the company declare bankruptcy, any available cash left over will be divided up between the preferred stock holders first before the common stock holders get a penny.

Common stock shares have their own value but also may, or may not, pay dividends, or payments, throughout each year to the stock holder.  Stock holders can, and often do, buy and sell their stock, as their values fall and rise in the marketplace.  Because there is more risk to owning common stock the owners of common stock usually have voting rights as to how a company does business while preferred stock owners do not.

Compound Interest: The miracle of compound interest is that one dollar invested to earn interest is worth significantly more in the future than one dollar spent today or hidden under a mattress. How much more depends upon how long and where that dollar stays invested.

Interest is the money paid to investors for the use of their money. The investor can withdraw that interest and spend it or keep in the account to add to the principle. In the first case the principle stays the same while in the second case the principle is increased by the value of the interest. Then not only will the original investment earn interest but the interest will earn interest too. It will compound or get proportionately larger each time the interest is paid and left alone. An investment to earn compound interest does not care how old you are when you start. All that is important is the time it is left alone to work its magic. While we all can’t seem to be wealthy now, we can all become wealthy later in life by utilizing the value of compound interest.

Consumer Price Index (CPI): As consumers we all shop on a regular basis. When we go shopping our basket is filled with basic things we usually purchase. The total cost of all those items in our basket is a base line used to determine if prices for the same items have increased or decreased over a set time period.  The CPI is calculated in the USA monthly by the US Bureau of Labor Statistics. Close to 48,000 consumer interviews come up with a list of items determined to be representative of the “typical” shopping cart. This value then gets rechecked every month in the USA to determine whether the CPI went up or down. Individual shoppers can do this on their own, by purchasing the exact same items every 30 days at the same store.  You can even name it using your own name such as Steve’s Price Index!

Cost of Living Index (COLI): While the Consumer Price Index gauges the rise and fall of prices of stuff in the shopping cart the Cost-of-Living Index gauges the rise and fall of prices of just plain living in a particular locality.  The COLI is published quarterly by a non-profit organization called the Council for Community and Economic Research (C2ER). The council has a staff of over 300 independent researchers measuring the cost of more than 60 goods and services divided into categories such as housing, food, utilities, health care, transportation and others. While C2ER, which formed in 1968, is not the only organization that tracks these expenses they seem to be the most reliable and transparent in their various methodologies.

Credit Bureaus: Who’s to know if you are a good or a bad risk when getting a loan? There are three US companies that do just that. They put together reports of our individual credit scores to be used by businesses that want to know whether we are good bets to loan money to in order to buy a car, a house or just obtain a loan to pay off a debt.  The lower the score is the higher the interest rate lenders can justify charging. The higher the score the less the risk is in granting a loan and consequently a lower interest rate may be charged.

The three most utilized credit bureaus are for-profit companies, Experian, Equifax and TransUnion, which are regulated and monitored by the US government. Each bureau issues credit reports which you can obtain for free, once per year, by going to annualcreditreport.com.  While the reports are free the scores are not.  Individuals should check their reports annually as mistakes can adversely affect your overall credit score and cost of doing business in the future.

Credit Score: This is the score given to an individual that “scores” their worthiness of getting a loan. The three credit bureaus mentioned above have their own methods of determining this score by checking out credit reports, your loan history, reports of bad debts, files for bankruptcy as well as consistently paying debts on time, making lots of money, having relatively few debts, etc. There are thousands of bits of data the credit bureaus amass on any one person to come up with a three-digit credit score. Higher scores are better than lower scores.  Your credit score can not only determine whether you can get a loan but at what interest rate may be imposed on that loan. Officially, credit scores are called FICO scores. FICO is named after the two entrepreneurs, Bill Fair and Earl Isaac, who invented the system and formed the Fair Isaac Corporation. Now you know!

D

Debit or credit Cards: Both cards do the same thing to enable the holder to buy things without using case. In the case of debit cards, the money is withdrawn from your checking account while with credit cards their companies are actually loaning you the money for the purchase. Some credit cards will not charge you interest for 30 days while others will charge you interest from the day of purchase. Both cards can offer “points” for prizes or discounts. The main difference to be aware of is that if your debit card is used fraudulently the bank has the option of not covering the fraudulent purchase and the card holder is liable for all debts. The credit card companies usually have a minimum payment that is due when a fraudulent purchase is made and they will cover the remainder of the purchase.

Deed: A deed is a legal document that stipulates who is the seller and who is the buyer of a particular piece of real estate. It also lists a description of the property. There are five kinds of deeds, quitclaim, warranty, grant, transfer on death (TOD) and tax deeds. All deeds are required to be notarized.

A quitclaim deed is the basic form of a deed whereby the seller signs off on all his or her ownership of the property but not the responsibilities. A grant deed transfers ownership along with a guarantee that the property is free and clear of encumbrances. A warranty deed warrants or promises that the property being conveyed has no outstanding claims or liens in place and that the grantor will be responsible for paying for legal action if there are. A Transfer on Death Deed allows for the transfer of property without having to go through probate court and is relatively simple to complete. In a tax deed a government entity can take control of the property to sell it to pay the delinquent property taxes.

Defined Benefit Plan: Essentially this is a plan for retirement set up by the employer who guarantees a set amount of money to be distributed to the employee during retirement. These plans may or may not require the employee to contribute during his or her employment. While there is a limit or maximum amount of money that can be distributed to the retiree it cannot be changed and is guaranteed. Conversely, there is no limit to how much money the employer can deposit into this plan which enables the company to enjoy tax benefits by writing-off those contributions on its tax return. The company has the ability to invest all contributions to earn money to pay for this plan but if the investments turn sour it does not alleviate the employer’s guarantee to pay what’s owed to the retiree.

Defined Contribution Plan: This retirement plan is set up with defined (specific and agreed upon) contributions coming from the employer. The employee can contribute as well in which case the employer matches part or all of the money contributed by the employee. Money in the plan can be invested in any way at the employee’s discretion and the future payouts at time of retirement are affected by how well the investments have performed.

Depreciation: This is a real-life accounting process of determining the value of an asset after it has been purchased and used -like my car. I figure no matter how fancy my new car is when I buy it, in ten years it will be worth no more than a bucket of rust. So, the cost of the car is reduced or depreciated each year over a ten-year period. For business accounting and taxing purposes, the amount of the depreciation each year is deducted from your taxable assets.  As regards my own personal accounting, at the end of the ten-year period my car is “worthless” and I need to buy a new one. Some assets have shorter term depreciation periods and some have longer periods of depreciation; it all depends upon the tax laws and the way you or your accountant decide to follow them.

Depression: How do I evaluate my ability to buy stuff? I check the money in my wallet, my bank accounts and my investments. My financial value or power is determined upon how much money I have before I spend it. How do you measure a country’s economic power or value?  You add up all the money it spends on services, goods, research, investments and labor, also known as the Gross Domestic Production (GDP). The country’s value or economic power is determined on what has already been bought. When a country’s economy loses its value to the tune of dropping 10% in one year, or is in a recession for three years in a row, it is called a national economic depression.

Digital Currency: Imagine that every product in the world had a price based upon the one form of payment. That is exactly the concept behind the invention of a digital currency like Bitcoin.

But just like there are numerous forms of currency other than the US dollar there are also many forms of digital currency. The market place will eventually decide those options. With digital currencies the need for transaction fees for exchanging one currency for another is gone as both parties agree to buy and sell using that one digital (online) currency regardless as to where the buyer or seller resides.

At the time of transaction digital currency only exists in the internet cloud and at the time of a transaction buyers and sellers are aware of the value exchanging ownership. If you want to take your stash of digital currency offline you need to put it into something physical, like a thumb-drive, which can be stolen. When you want to change your digital currency into hard currency you need to be aware of the exchange rate within that country. While some people regard digital currency as being relatively safe it is not regulated or guaranteed and can drastically lose value on the open market in an instant.

Diversifying: A person who only bets on one horse to win the race is not diversifying his or her investment. A person who bets on more than one horse to come in either first, second or third is spreading out the risk. Diversifying is the practice of investing in more than one option at a time in order to spread out the risks involved in the market. Different options for investment can be stocks, bonds, money funds, real estate, commodities and on weekends, horses!

Dividend: A dividend is a percentage of a stock investment earned by the investor. Companies that pay dividends do so based upon the stocks that are invested and send the dividend to the investor in the form of a check or by reinvesting it in the stock.  Not all companies that sell stock pay out dividends. The government encourages investment by making income from qualified dividends taxed at lower tax rates than income from other sources. While some investors make money when they sell their stock as it rises, others just rely on making money, at least for the short term, from the dividends themselves.

Down Payment: A lending institution wants some assurance that the borrower has financial standing and is a good risk for a loan. The down payment is a percentage of the value of the item being purchased, whether it is a house or a car.  The percentage can range from a few percentage points to 20 percent or more. The higher the percentage of the down payment the more risky the loan is deemed to be.

E

Electronic Fund Transfer (EFT): This is a process of sending money from one account to another electronically. The sender can be the federal government issuing Social Security checks or yourself taking money out of your checking account and putting it into your savings account. EFTs are about 90% cheaper than writing a check and instantaneous not requiring a waiting period to clear the bank.

Employee Stock Option (ESO): Employers can sell employees shares of stock in the company for a special deal called an employee stock option.  The option expires in a set amount of time such as ten years but at any time of that period the employee can buy the stock at the value it was first offered. The employee can make a good profit if the stock has risen in value and he buys it at the original price. However, if the value of the stock drops there is no profit to be had and the opportunity is lost. The more improved the company becomes the greater the incentive of participating in the ESO.

Equity: Equity is the value of a piece of property (usually real estate) after all debts have been paid. Debts include liens and the amount due on the remaining mortgage. If your home is worth $500,000 and you owe $499,000 then the equity is $1. Equity is also adjusted by the fair market value of the property when it is sold. A higher selling price will give the owner more money than was originally invested, resulting in an increased amount of equity. Home owners can take out a loan(s) using their home equity as collateral. This is called a Home Equity Line of Credit (HELOC). This loan is drawn on at the home owner’s discretion but it can also be reduced or deleted by the lending institution.

Escrow: This is a centuries old term that refers to a third-party holding money in trust while a transaction is completed. It acts as a safeguard to ensure that those who owe money and those who expect payment will be covered by a payout from that trust when the time comes. This is commonly utilized during real estate sales as money is held aside from either the buyer, seller or both in order to pay for property taxes and insurance premiums which occurred during the sales period.

F

Fair Credit Billing Act: From time-to-time credit card companies do make billing mistakes and this act provides the time and the legal protection for you to dispute these incorrect charges. Wrong mailing addresses resulting in late fees, charges due to incorrect reporting and even fraudulent charges amassed by someone who stole your card or your personal information, all are addressed by this act giving you time to clear your name and correct your account in a timely manner.

Fed Funds Rate: All US banks are connected by the Fed Funds Rate due to the fact that the federal government allows the banks to borrow or loan money back and forth to each other. Banks do that so that they do not run afoul of the law that stipulates they must have a certain amount of money set aside to cover their debts. These set-aside monies are called reserves. When the Fed Funds Rate rises the cost of borrowing money rises and banks are less able to loan out money to individuals or companies. A lowering of the Fed Funds Rate does the opposite making money cheaper for people to borrow to build businesses that will improve the economy.  All the banks need to be able to borrow money from, or lend to, each other so they have sufficient reserves if a crisis ever develops at any time.

FICO Score: FICO is the acronym for a privately held American company called Fair Isaac Corporation. The “F” stands for Bill Fair and the “I” refers to Earl Isacc, the two entrepreneurs who, in 1956, invented this system of scoring an individual’s credit.  “CO” stands for corporation. Its sole product is your personal FICO score that measures your credit worthiness. The score is based upon five criteria: personal payment history, the total money owed, your credit history, recent requests for credit and the overall mix of accounts you have opened to borrow money. The vast majority of financial institutions relay on the score to award loans…or not!

Financial Statement: The way to judge the financial condition of any company is to study its official financial statement which is comprised of four sections. The Balance Sheet weighs the company’s owner equity, liabilities and assets on any one particular day. The Profit and Loss Statement, which is also known as the income statement, reports on the expenses and income (sales) over a certain time period such as a month. The Cash Flow Statement involves the company’s financial position in regards to cash flow, investments and loans. The Retained Earnings number is the amount of money left after all income and expenses are accounted for. It is the available reserve that the company can look at to use as it sees fit. A financial statement filled with numbers often comes with a written report of the health of the business to be used when discussing it with investors or banks.

G

Good Debt: Owing money to people, businesses or institutions can be considered good debt if can reasonably lead to positive returns either financially or personally. The term good debt can apply to paying tuition to attend higher education to increase your future salary, buying real estate to get rental income or a location for your business, or even paying upfront for an online course in paying piano.  The dividing line between calling a debt good or bad is your ability to pay off that debt in a timely manner and/or realizing a benefit from getting into debt in the first place. Good intentions don’t matter in this formula as they can lead to terrible future consequences if not thoroughly planned and executed.

H

Home Equity: Whatever amount you own of your home, free and clear of all debts related to the home, that amount is your home equity. If your mortgage is $300,000 and you still owe $200,000 on the mortgage then your home equity is $100,000. It really is that simple. Every time you make a future payment you increase the amount of your equity by the amount of the principle contained in that payment. When the actual value of your home increases or decreases due to market changes in your area then your equity will also rise or fall too. Your equity amount will allow you to take out a one-time home equity loan or a home equity line of credit that you can increase or decrease at will, of course, with the bank’s approval.

Hyperinflation: Hyper means a lot! In this case it means a lot of inflation as regards to the value of the local money supply. It is normal for prices to rise in a stable economy…not too little, not too much…but just enough to cover rising expenses.

National governments print money to distribute to banks to lend out to borrowers to buy stuff. People buy homes, cars, commercial buildings, etc. Cities borrow money to build airports, fix bridges, construct parks, etc.

During stable economic times the government prints just enough money for the demand for it. Sometimes, governments print more money than is needed to finance socialist programs, building unnecessary projects, etc. The money gets printed but there is no real demand for it from the citizenry. The money shows up in higher paychecks, or increased government payments but since there is no real demand for it, stores raise prices to match the increased supply of the money. That can cause gradual inflation that can grow unless unchecked by lending banks or a more fiscally responsible government.

Sometimes governments need a lot of money very quickly in order to finance wars. If you don’t get the money then you will lose the war. Or they choose to have a money supply that is not backed up by any “real” commodity such as gold stored in the bank vault. Once prices rise and they are not constrained by policy then they can rise in ever increasing rates causing hyper-inflation. As a result, the local currency decreases in value as not enough demand can absorb the increased amount of money that is floating around.

When everybody has more physical money in their wallets the stores feel the pressure to increase prices to get it.  You get more money into circulation but you also get higher prices that will suck up its value. The result – hyperinflation. Increased prices based on no increased demand chasing no increased production.

I

Individual Retirement Account (IRA): This is an account that is encouraged by the federal government for people to invest their money over many years to earn interest and/or asset appreciation to support themselves in retirement. The encouragement comes by the IRS not taxing your money contributed to the account or not taxing your money when it is withdrawn. A traditional IRA enables you to invest your money into stocks, bonds, annuities, etc. every year you can. The amount you invest is deducted from your taxable income. When you withdraw your money at the time of retirement the money is then taxed. A ROTH IRA does just the opposite. There is no deduction off your taxes and you invest your after-tax money into your various IRA investments. Upon retirement, however, you can withdraw your money tax free. Which IRA you decide to set up depends a lot on what tax bracket you anticipate being in when you retire.

Income Statement: It’s called an “income” statement but can also be a report of “not-enough income” too. This accounting report reports on the financial health of a company over a set period of time such as one, two or even three years. It reports expenses incurred during that period along with the income. When those figures are combined the accountant can come up with a net income or a net loss for that time period. The balance sheet form is similar but only reflects the finances as reported on one particular day. The income statement covers a longer period of time and is made up of two separate reports: a report on the operating expenses and income (associated with current or recent numbers) and a report on the non-operating expenses and income (associated with events or plans yet to occur but still germane to the company’s financial health.

Income Tax: For the government to do things it needs money to pay for those projects and it obtains that money from various sources. One such source is from a tax on your, or a business’s, income.

Initial Public Offering (IPO): When a privately held company decides to sell shares, or stock, to the public, the first time this is done is called the IPO. Businesses make this decision to raise money from outside investors usually to plow back into the company to pay for additional product research, development or plant construction. Without outside investors the business owners would need to do that themselves which can be very costly and risky. The businesses hire consultants, accountants and financial firms to form the IPO so that federal regulations are satisfied and investors make informed decisions.

Insolvency: This is a status one step before an official declaration of bankruptcy. It means that the financial status of the company or individual is not looking good and may not be able to pay its bills. To declare an insolvent position enables the creditors and the debtor to renegotiate to place the company in a more favorable position. The insolvent business may also take steps to drastically cut costs, increase prices or reconfigure its business model to stay financially afloat and become solvent once again.

Interest Rate: Grocery stores sell milk, clothing stores sell shirts and banks sell money.  Lending institutions sell money in the form of loans and charge a fee expressed as a percentage of that loan. That’s how they make a profit in order to stay in business. Interest rates vary according to the demand for the loans. If there is a booming economy and lots of people or businesses want to borrow money then the bank will charge a higher interest rate – because they can. Or if the economy is not good then banks may charge a lower interest rate to encourage business growth.

Internal Revenue Service (IRS): While there are many kinds of taxes which we must be aware of only one deals with a tax on our income. This is the name of that section of the federal government that is given the duty to collect income taxes from businesses and people. It is part of the Department of the Treasury. The IRS does not write the tax laws – That is the responsibility of the US Congress. Income taxes are usually paid by April 15 but provisions for extensions and quarterly payment plans are available. Currently the income tax percentage that is levied increases the more a taxpayer makes.

A progressive tax increasingly (progressively) charges a higher interest rate the higher the income reported. If the tax rate is uniform for all taxpayers those earning less will pay proportionally a higher percentage of their income than those earning higher incomes and this is referred to as a regressive tax.  Those with higher income will pay more money to the IRS using the same tax percentage than those with lower incomes. However, special tax laws, exemptions, write-offs, deductions, etc.  can legally be applied to lower the overall tax paid.

Investor: Anyone can be an investor who is interested in making money by purchasing something now and selling it later at a higher price for a profit. The investor can purchase shares of a company, bonds from a city or even something simple as a collection of baseball cards from his brother in hopes that they may increase in value. While some investments, like stocks, are purchased for resale other investments, like rental units, are purchased to bring steady income. All investments involve risk, some more than others. But the practice is educational and can be recreational as long as the potential risk is kept at a minimum. Betting at the race track can also be seen as a form of investment too but it is not recommended for the long term.

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Lenders: Lenders loan out money to people who need to borrow it. A lender can be one person like your parent who may or may not want repayment with interest. A lender can be a group of people called a Mutual organization that gives its members low interest rates and good terms. A lender can also be a bank, savings and loan, even the federal government that has general or specific reasons to put their money at risk. Borrowers can also be businesses which need money to finance short-term projects or long-term plans. Even banks need to borrow from other banks just to keep their own books balanced and sound.  There’s a lender for every borrower and their terms vary as much as their needs.

Liabilities: A liability is a debt owed by a company to its creditor(s). After it is paid off the item for which that liability existed becomes an asset. The debts which can be paid off in less than one year are called short term liabilities while the long-term liabilities, like real estate mortgages, can last many years. A liability becomes an asset after the debt is paid off. When the debt produces an income producing enterprise and the income exceeds the monthly payments then that liability is considered an asset even though the complete loan has not been paid in full.

Lien: A lien is the name given to the fact that money, which is used to purchase something, is owed to a third party and needs to be paid in full before ownership of the item purchased can be established by the buyer. That third party is often a bank that lent money for a borrower to purchase a car or a piece of property.

Consensual liens are agreeably entered into by all parties involved in a deal. Non-consensual liens are legally forced onto participants to insure payment.

Liquidity: This term refers to the speed an asset can be converted to cash without losing much, if any, of its value. The degree of liquidity is dependent upon the reputation of the market in which it trades, the number of qualified potential buyers and the speed at which the sale can be accomplished.  Liquidity is best explained by describing various examples of asset liquidity.

A house may take weeks, months or even years to sell so it is considered not liquid or illiquid. It will also be subject to losing its value if the market for the house drops. The value of a painting is subject to its perception by the public and may or may not sell quickly or at “full value”.  A share of stock, however, can be sold and converted into cash in hours or less but will incur a commission payable to the stockbroker but it is considered reasonably liquid but its value rises or falls according to the vagaries of the market.  Shares invested in a money market fund are extremely liquid as they are already considered as cash and can be sold instantly.

Life Insurance: This refers to a policy, or contract, that you buy from an insurance company that will pay your estate a certain amount of money upon your death. The insurance company is betting that you will live a long time so they can use your monthly payments to make investments and earn more money than what they will be required to pay at that time. You, the policy holder, are ensuring that your estate will not be left penny-less when you die. Term life insurance is a policy that lasts for a certain number of years. It is the least expensive form of life insurance and is intended to cover expected expenses such as your children’s education and funeral expenses. Whole life insurance is more of an investment in that the payoff lasts for your lifetime. It is more expensive than term, but it does continue to be available as long as you live. A small dividend may be a part of the policy.

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Mortgage: A mortgage is the name given to a loan to buy property using property as collateral for the loan. The mortgage itself is split into equal payments containing both interest and principal. Mortgages can last from three to thirty years. There are three standard types of mortgages: Fix-ed rate, variable and balloon payment mortgage.

A fixed-rate mortgage offers an interest rate that does not change over the life-time of the mortgage. The percentage of the loan payment that is devoted to interest and principal will vary over time but the monthly payment will remain the same. Most often the percentage of the payment that goes into paying the interest is higher in the beginning of the mortgage than at the end. This is because the bank wants to gather as much of it as possible should your ability to pay off the mortgage decreases over time.

A variable rate mortgage offers an interest rate that will change periodically over the lifetime of the mortgage.  A balloon reset mortgage can demand full payment (at a predetermined future time) of the mortgage due unless the borrower agrees to pay a different (higher) interest.

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Net Worth: When you go fishing and catch a big one, reel it in and scoop it up with a net, watch the water leak out and take out the sea weed and then what do you have left in the net? The fish and only the fish. That’s net worth for fishermen.

Your financial net worth is everything you have left after you figuratively remove all your debts. Add up the value of your house, car, boat, stocks and bonds-everything that has resale value – add it all up. Then subtract all the debts you have – Credit card, IOU’s, mortgage amount due, money you owe on your car loan, etc. What’s left is your net worth.  A positive net worth will allow you to more easily obtain a loan than a negative net worth.

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Portfolio: A portfolio is a fancy name for your collection of investments. Stocks, bonds, real estate holdings, mutual holdings, etc.

Portfolios are guided by principles and goals set forth by the portfolio managers who use formulas involving income and risk assessment along with investor requests to determine the composition of the collection.  A good portfolio’s ultimate endgame is to amass a value that will provide a comfortable and secure income for the owner upon retirement.

Portfolios do not, however, include the money hidden under the mattress which really is a liability and not an investment.

Power of Attorney: A Power of Attorney refers to temporary legal power which is given by a person to someone they trust to handle their affairs when they cannot. When you are out of the country or in the hospital it helps to have someone willing and able to “sign the check” for you and do anything else as directed in the agreement. That power can be revoked at any time but is null and void upon the death of the grantor. A “durable” Power of Attorney lasts indefinitely and is usually awarded when the grantor is deemed by the courts as being unable to handle personal and financial matters. That power, however, can be revoked at any time but is null and void upon the death of the grantor.

Prime Rate: The prime rate is the interest rate that banks charge their most trustworthy commercial borrowers who are typically very large companies that by virtue of their size, borrowing history and management are considered as least likely to fail. Smaller companies or individuals pay a little bit more than the prime rate when they borrow because they run a higher risk of not being able to repay their loans. There is no one prime rate but this figure is often reported as the average of prime rates as quoted by commercial banks.

Principal: This term has three usages and therefor three definitions.

• The principal of a loan is the amount that was originally borrowed. The borrower usually repays the loan in monthly payments comprising of a percentage of the loan’s principal along with interest due.
• The principal of a bond is the original amount of the bond purchased. The bond holder is the one who loaned the money that the bond buyer agrees to repay along with interest at a future date. For example, a ten-year bond is repaid with interest in ten years.In both of the above cases the value of the original loan can vary on the open market but the principal always stays the same.
• The principal(s) of a company is the most senior owner or director of the business and is ultimately responsible for the company’s performance.The principal of your high school will never forget that you were the one who broke the window in the school’s gym. You eventually confessed that you caused the damage.  Honesty is the best policy and one of life’s most important principles to follow.

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Refinance: When taking out a loan to buy a house you agree on a plan to pay it back. The plan entails monthly payments comprised of principal and interest to be paid over a period of time.

To refinance is a decision made by the borrower to replace the original loan with one that has different terms. With a refinanced loan you can change the interest rate, length of the loan and the monthly payment. One or all three factors could be changed to your benefit. You can also switch your financial institution too!

Regardless as to what the refinanced loan will look like the lending institution will charge a fee for the new loan plus, perhaps, a penalty for an early end of the original loan. The costs may or may not outweigh the advantage of obtaining a new, refinanced, loan.

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Social Security: The Social Security Administration was established in 1935 to collect money through payroll taxes to help support retirees, the disabled and the family survivors of deceased wage earners. The name of the payroll tax is called FICA which stands for Federal Income Contributions Act tax. Normally the employee and the employer contribute the same percentage to the fund while self-employed people shoulder the entire amount. As long as the money collected can cover the money being paid out it forms a good retirement plan. But when the government takes money from the fund and does not pay it back then it is destined to die from mismanagement.

Stocks: When a company wants to gather investment money from the general public it sells “shares” of itself. A share is just a manufactured paper document that describes one share at a particular price. When you purchase the share, your money is invested in the company which then controls how it is spent. In return, the company gives you voting rights within the company as to how it gets operated. The word “stock” is the same as the word “share” and the two are used interchangeably. The stock’s value rises or falls depending upon how well the company is performing. You can sell the stock for a profit when the value rises or suffer a loss when the value drops. Dividends, paid quarterly, are another way to earn money from your investment.

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Tax Bracket: The amount a taxpayer earns will fall into a category that gets taxed a certain percentage of income. Lower categories get taxed by a lower percentage of your income while higher categories get taxed at a higher percentage. These categories are called brackets. Low-income earners will see just one bracket to consider. Those people who earn high incomes will often find their income taxed over more than one bracket. The higher the bracket the nigher the percentage of tax levied against the income that falls into that bracket.  Tax brackets are also formed for companies, corporations and trusts. The opposite of having tax brackets is a “flat tax” whereby all taxpayers pay the same percentage on their income.

Tax Deductions: A legal way to reduce your taxes is by reducing your taxable income. The IRS allows certain expenses to be deducted from your annual income which will give rise to a lower tax. Why do they allow this? Most of the time the government will give the business these deductions to lower its tax so that it can stay in business without a burdensome tax payment. Deductions are allowed for personal taxpayers just to make the tax burden more fair. Typical business deductions are for the cost of goods sold, vehicle expenses, business travel expenses and depreciation of equipment. Typical personal deductions are for costs incurred related to the business in which they are employed like uniforms, or for dependents in their household. Other deductions are for property taxes, donations, medical costs, etc.

Tax Exemption: The end result of a tax exemption is the same as a tax deduction…lowering the amount of tax due. While a tax deduction depends upon the value of the item deducted, an exemption is predicated on a dollar amount as related to a particular tax law. There are many exemptions allowed and your tax advisor will know which may or may not apply to you.

Trust: A trust is a legal arrangement whereby a person (trustor) legally gives a second party (trustee) control over the trustor’s assets to manage for the benefit of others.  The assets are often investments that earn income for the beneficiaries who may assume control of the assets once they are of legal age, 18.

There are two kinds of trusts: A testamentary trust is set up for the eventual death of the trustor and a living trust is set up for the trustor while he/she is still alive. Both trusts are intended for beneficiaries upon the death of the trustor. The living trust is also referred to as a revocable trust meaning that the terms of the trust can be withdrawn (revoked) or changed while the trustor is still living.

Why do this? Trusts are often formed when the trustor wants his/her assets to be properly managed without the input of the trustor.  The trustor may be sick or unable to control the portfolio of assets. The assets held within a trust are usually less public and not prone to prying eyes. Investments within the trust will make money and the earnings are disbursed by the trustee. A trust expires when the trustor dies at which time the will determines the distribution of estate’s assets.

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Wall Street: Yes, it is a street in New York City but it defines an area seven blocks long that is the center of America’s financial makers and shakers. It has tremendous international influence like no other district in the world and is the home of federal financial departments as well as private investment firms, stock exchanges and corporations. The “wall” in Wall Street was built out of wood by the Dutch in 1653 to thwart the encroachment of the English and Native Americans. It was removed in 1699 but the area’s significance and influence continued to grow.  In 1792 24 area merchants and financial dealers signed the Buttonwood Agreement formalizing this financial center of Wall Street – right next to the Buttonwood tree where they met.

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