Don’t let your unfamiliarity of money management terms keep you from making smart, informed decisions. One major hurdle to improving your financial savvy is deciphering the terminology. After all, if you don’t know what your credit score means, how can you improve it? If you’re unsure of what mutual funds are, how can you invest in them? If you’re unaware of overdraft fees, how can you ensure you don’t accrue them? For a little clarity, School Nutrition turned to Kimberley Williams-Jones, SNA’s staff vice president, Finance & Information Technology. This inhouse expert was just the person to provide a brief, clear glossary of many of the financial terms you need to know—in the realm of investments, mortgages, credit cards and personal finances—in order to become masterful with your money. BANKING TERMS Credit Union A financial banking institution made up of a group of people with a common bond, such as service members, government employees or large corporations. Unlike banks that are open to the public, you must be a member of the particular credit union to access its services, but the membership guidelines for some are very broad. Examples of large credit unions include Navy Federal Credit Union, State Employees Credit Union and American Airlines Credit Union. Debit/Check Cashing/ATM Cards A PIN-based payment card issued by a bank to a customer with a bank account. It can be used for cash withdrawals, deposits and purchases. ATM cards may be restricted at some merchants, unless the business uses the same particular network used for the ATM card. But cards with the Visa® or MasterCard® logo can be used wherever Visa/MasterCard is accepted, such as restaurants or online, as well as at ATMs. Credit Card A credit card is issued by a bank or financial company to a customer after passing a credit check. This type of card lends a customer the funds to make purchases or cash withdrawals that must be paid back (with interest, if balances are not paid in full on the due date). The funds are not automatically withdrawn from your bank account as they are with debit cards. Money Order A payment order purchased by a consumer for a specific amount of money. It functions like a check, but you often must pay related fees. However, for those without a checking account, it is a safer alternative to mailing cash, and even those with a checking account may prefer to use a money order instead of showing the payee a checking routing/account number. Checking Account A bank account from which checks can be drawn against or connected to a debit, check cashing or ATM card. It is a safe alternative to cash, while still allowing you more liquidity than some savings accounts. Savings Account A bank account that earns some level of interest on the funds. Withdrawals may be limited by the bank and can only be made by the account holder. Overdraft When a bank account goes into a negative balance because the account holder withdrew more money than the account contained. This mostly happens with checking accounts, and banks are allowed to charge fees when customers overdraw their account. CREDIT TERMS Annual Percentage Rate (APR) A description of the annual rate charged for borrowing money over the specified period of a loan, including credit card purchases. This rate includes fees and the interest. Check your credit card statement to see the APR you are being charged on balances; it may be one rate for purchases and another rate for cash withdrawals. The Annual Percentage Yield is a calculation of the APR based on the period of one year; this is a good number to use to compare the offerings of different lenders. Bankruptcy The legal status for an individual (or business) when she or he does not have enough money to repay debts and gains relief from these by a judge. You must go to court and file a petition for this status and, if successful, most or all of your unsecured debts will be erased. However, bankruptcy does not eliminate child support or spousal support debts and doesn’t apply to certain tax debts and student loans. In addition, this status is considered a last-resort for debt relief, as there are long-lasting consequences; it will be difficult to be eligible for loans, credit and sometimes even bank accounts and jobs for up to seven to 10 years. Credit Rating/FICO Score An analysis of one’s ability to repay debt obligations. Debt information is maintained and reported by three credit monitoring organizations: Experian, TransUnion and Equifax. Based on data within a credit report, an assessment is made to measure a consumer’s credit risk based on such factors as history of repayment and the amount of credit/ loans the individual already carries. This risk assessment is given a FICO score; the higher the score, the less risk that a consumer will default. Default When the borrower does not pay back loans in accordance with specified terms. Principal The original amount of money on a loan. It does not include interest. MORTGAGE TERMS Down Payment The amount of money a borrower puts down toward the purchase price of a property. Banks typically require 20% of the purchase price as the down payment, or you have to pay Private Mortgage Insurance (PMI). Equity The difference between the appraised value of your home and how much remains to pay off the loan you took to purchase it. If a home is appraised for $150,000 and $120,000 remains on the loan, you have $30,000 worth of equity. If the home is appraised for $150,000 and $175,000 remains on the loan, you are underwater. Escrow Funds held by a third party, such as a bank, on behalf of two parties. The payment is not released until specified terms have been met. For example, when you pay your mortgage, a part of your payment may go into escrow for the bank to use to pay your property taxes on your behalf. Foreclosure Occurs when the bank takes possession of a mortgaged property due to the owner’s failure to pay. HELOC/Home Equity Loan A Home Equity Line of Credit (HELOC) is a loan that banks offer using the borrower’s home equity as collateral. The bank determines a maximum amount of credit that it will extend, and the borrower can draw down against the credit as needed. Like the HELOC, a Home Equity Loan is a loan against the equity of the property. This loan is considered a second mortgage, and it’s distributed to the borrower in one lump sum. Mortgage A loan that is secured by using real estate (e.g. your home) as collateral. If, as the borrower, you do not repay according to the terms of the loan, the bank can foreclose on the property. Pre-approval Before buying property, the lender evaluates a borrower’s finances to determine whether he or she will qualify for a loan, as well as the maximum amount of that loan. Private Mortgage Insurance (PMI) Insurance that protects lenders against a loss when a borrower defaults. Most lenders require borrowers to carry (and pay for) this insurance; the fee is included in your mortgage payments when you pay less than the traditional 20% down payment on a mortgage. Once the loan-to-value percentage reaches 20% equity, this insurance can be dropped. INVESTMENT TERMS Annuities (Fixed and Variable) An investment tool that, upon the fund reaching its maturity (the end of the designated time period of the financial agreement), an individual is paid a certain amount of money over a period of time that the money remains with the investment fund. Fixed annuities pay you a guaranteed amount each scheduled payment period, while variable annuities guarantee a minimum payment, with the rest of the payments varying depending on the performance of the investment. Bonds Loans made by investors (including individuals) to either companies or governments. They are issued for a specified period of time, ranging from 90 days to 30 years. Income from bonds is earned from interest and typically paid out every six months. You can buy electronic savings bonds on an individual basis (often given as presents for special occasions, such as a birth or wedding) or have bonds as part of your overall investment mix in, say, a 401(k). Certificate of Deposit (CD) A savings certificate issued by a bank and purchased for a specified period of time, which pays the holder a fixed interest rate at the end of the certificate’s term. Time periods range from one month to five years, and income is earned from interest. Funds in the CD cannot be withdrawn and used by you until after the term is up and you cash it in or transfer the money to another account or decide to reinvest it. Dividends A sum of money paid by a company to shareholders—owners of stock shares—that reflect the company’s profits. Dividends are often paid quarterly and provide a regular return, regardless of the way the price of the individual stock varies. Index A mock portfolio of securities for a particular market that is tracked to determine the state of the overall stock market. The most commonly recognized index is the Standard & Poor’s (S&P) 500, which tracks the stocks of the 500 most widely held stock on the New York Stock Exchange (NYSE). An index fund is a type of mutual fund that aims to match or be on track with the index, and investors might opt for this fund instead of making purchases of several individual stocks. Liquidity The ability of an investment vehicle, such as stocks, or bonds, to be easily converted to cash. This term also may be used in discussion of the features and terms of different types of bank savings accounts. Money Market A high-interest-bearing checking account that requires a larger minimum balance than a standard checking account. You earn income from interest, but this type of account allows very limited check-writing and withdrawals. Mutual Fund A type of investment made up of stocks and bonds and professionally managed by a fund manager. When you invest in a mutual fund, your money is pooled with other investors’ money. Each investor owns shares within the mutual fund that’s proportional to the amount of money invested. Income is earned from the dividends on stocks and interests on bonds. Periodic Interest Rate The interest rate attained on an investment over a specific period of time. Most interest rates are stated at the annual rate, while the periodic rate is a calculation of the annual rate. Rate of Return The financial gain or loss of an investment over a period of time. Risk The possibility that the return on investment would be greater if the investor is willing to take a chance; the greater amount of risk associated with an investment, the greater the return (in good times). Greater risk also means greater losses if things go south. RETIREMENT TERMS 401K/Pension Fund An employer-sponsored retirement account that allows employees to make contributions from their paychecks into the plan. In some cases, employers also make contributions. An employee often must work for a certain period time to be eligible, or vested, to access the employer-contributed funds. Fixed Income Income received from an investment or a retirement account that is the same amount each payment period; the amounts do not vary. “Living on a fixed income” usually means you do not have employment income. Individual Retirement Account (IRA)/Roth IRA An investment tool established by individuals to set aside funds to use in retirement. Traditional IRA tax contributions are tax deductible; the amount of your annual traditional IRA contribution is claimed as an adjustment to income that is taxable on your federal income tax return. On the other hand, Roth IRA contributions, are made after taxes, meaning annual contributions cannot be used to lower taxes; however, no taxes will be charged when you withdraw funds. You may want to use a Roth IRA if you can afford to pay the taxes now and are worried about being taxed when you are living on a fixed income. Matching Contribution A contribution that an employer makes to the employer-sponsored retirement account that is based on the amount of the contributions made by the employee. Instead of your employer making a set contribution (say, 4% of your salary), it opts to match what you are contributing, usually up to a certain level. Pretax Contribution Contributions made to a retirement account from your paycheck prior to state and federal taxes being withheld. The overall amount of your paycheck is lowered and then the taxes are calculated. TAX TERMS Exemptions An allowance that determines how much of an employee’s wages are exempt from being taxed; the more allowances (exemptions), the less income taxes paid. Your minor-age children are the most common exemptions that can be claimed. Earned Income/Earned Income Credit A refundable tax credit for low- to moderate-income working individuals or couples. The amount of the credit is determined by the number of children and family income. Withholdings The amount of an employee’s wages that is sent directly to state and federal governments for payment of income taxes. Factors used to calculate withholdings include the number of dependents you can claim, marital status, if you hold other jobs and if you are over age 65. If your exemption number is high—that is you want less of your paycheck sent to the government—then you may have to pay money come April 15. But if your number is low, you might get a big refund—but one that could have been earning interest or used to pay down debt in your household expenses throughout the year. Visit www.irs.gov for a calculator to help you determine the right number to tell your employer. OTHER TERMS WORTH KNOWING Collateral Something used to secure repayment of a loan; your home is automatically considered collateral when you take out a mortgage. But other loans—such as a pawnshop loan—may accept other personal property in exchange for a loan. If the loan is not repaid, the collateral is forfeited. Consumer Price Index (CPI) A weighted average index of prices that a consumer pays for retail goods. The CPI is often used by varying organizations as a cost-of-living indicator to make adjustments in payments or prices. For example, CPI might be used to determine income eligibility for government assistance programs or to determine salaries in collective bargaining agreements. It’s also used to assess poverty levels that determine free/reduced-price eligibility rates for school meals. Cost of Living Adjustment (COLA) An adjustment made to income as a response to the effects of inflation. Some salaries and pensions are affected by COLA calculations; these include Social Security. TO YOUR CREDIT: For CEUs toward an SNA certificate, complete the “To Your Credit” test on page 64.
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