I was watching TV one day with a few friends and they asked me what an APR was as we finished watching a Toyota commercial. I explained to them what it meant and then it dawned on me that not everyone has key finance knowledge to know and understand the meaning of some of the financial terms we toss around everyday. So I took it as an opportunity to make it into a blog post to define some of these key terms. As I was even writing this post, I had to look up a few terms myself just to make sure I had it right.
Annual Percentage Rate refers to an interest rate that’s tacked on to the borrowed money. For instance, if you borrow $10,000 and the APR is 5%, then you would end up paying $500 in interests at the end of one year. However, if you borrow $10,000 and the interest due is 5% at the end of one month, then the APR jumps to 79% (1.05^12). On the flip side, if you borrow $10,000 with an APR of 5% and pay back in one month, you would only end up paying 0.42%.
Refinance generally refers to your mortgage. When you refinance, you’re basically selling your house at a certain price and rebuying it at the same price, but with lower interest rate. Typically, it is encouraged to refinance when the new rate is more than 1 full percentage point less than your current mortgage rate. I refinanced my mortgage twice in the span of 4 years. My initial rate was 6.75% and refinanced at 5.5%. Then I refinanced again at 4.375%. I’m currently saving over $400 per month from my original monthly mortgage payment.
3. Fiscal Year
Fiscal year and calendar years are different. They both have 365 days in one year, but the “seasons” are different. Calendar year is broken down into four seasons. Fiscal year is broken down in four quarters. First quarter begins in October and ends in December. Second quarter lasts from January to March. Third quarter starts in April and ends in June. Fourth quarter is from July to September. Fiscal year is used by businesses and corporate companies due to government business taxation and laws. Although different countries adopt different months for their fiscal quarters, the same principle applies.
4. Balance Transfer
When you have a credit card debt and your APR (see above) is really high, say over 15-20%, then you should consider transferring your outstanding balance to a lower APR credit card. There are many 0% APR balance transfer credit cards that are available to all of us. The 0% promotional period is typically anywhere from 6 months to 18 months. There is usually a nominal 3-5% fee on the transfer but that will quickly be paid back when you don’t have to pay any more interest on your outstanding balance for 18 months.
5. Credit Card Rewards
Nowadays, you can’t find a credit card that doesn’t offer some sort of incentive rewards program along with the card. Even the debit cards are now rolling out with rewards program of their own. Grocery store chains and pharmaceutical chains also have their own rewards program for shopping there. Rewards are typically given out in either points or cash value. In most occasions, you can convert the points into cash, or redeem the points to purchase something else. I currently take advantage of my Discover Card rewards program as well as my Chase Freedom rewards program. I believe they’re both very excellent in terms of getting back on what you spend. Currently, Discover Card is offering $75 when you sign up for Discover More Card. Chase is offering $100 cash back when you sign up for Chase Freedom Visa Card. When looking for rewards credit cards, focus on what would be most beneficial to you. If you fly a lot, then you might consider frequent flyer rewards. If you like music, then music rewards might be more suitable for you. If you drive a lot, then gas rewards cards would make sense.
6. Emergency Savings
People generally open up a separate savings account, whether it’s online or brick and mortar bank, it doesn’t matter. The purpose of this account is not to earn money, but to have money safe and easily available emergency purposes. How much money to have in this account differs for each person, but typically, a 3-month salary is a good rule of thumb. I currently do not have an emergency savings account, but I recently opened a Discover Bank savings account for all my wedding stuff.
7. Cash Advance
When you take money out of your credit card, it’s called cash advance. Basically, you’re borrowing money from your credit card company, at premium interest rates, sometimes going as high as 30%. I would stay away from cash advance transactions at all costs. If you have too much credit card debt with high interest, consider transferring your balance to a 0% balance transfer credit cards.
When you own something, you have equity. If you have cash, you have equity. If you have a mortgage and is 50% paid off, you have 50% equity on the value of your home. So when people ask you how much equity you have in your property, they’re asking you how much of it is owned by you. The more equity you own, the higher your overall net worth becomes.
9. Certificate of Deposits
Otherwise known as CDs, these are very similar to savings accounts, but you’re not allowed to deposit or withdraw from them until the agreed CD term expires. There are 1 month CDs, 6 month CDs, and up to 5 year CDs. CDs often have higher returns in interest than your typical savings account so if you know you won’t need the cash for a few years, purchasing a CD might be a good savings solution. Currently, Discover Bank offers a 1.50% APR for 12-month Cd and Ally offers 1.47% APR for their 12-month CD.
10. Reverse Mortgage
Also known as Lifetime Mortgage, it is a loan that eats up the homeowner’s equity of their home. The homeowner makes no payments and all interest is added to the lien on the property. Only those who are above the age of 62 can qualify for this type of loan. There are many risks associated with this loan. Avoid reverse mortgage pitfalls and do your own due diligence before signing on the dotted line.