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Terms
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Definitions
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A
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Annual
Percentage
Yield (APY)
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APY is the amount of interest you will earn on a yearly basis expressed as a percentage.
The APY includes the effect of compounding. When comparing different accounts, you
should compare the APYs of the savings products, not the interest rates. The higher
the APY, the higher the interest you will receive. The interest you earn is considered
income and is taxable.
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B
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Bonds
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When you purchase a bond, you are essentially loaning money to a corporation or
to the government for a certain period of time, called a term. The bond certificate
promises the corporation or government will repay you on a specified date with a
fixed rate of interest.
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Budget
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A financial plan for saving and spending money.
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D
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Diversification
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Diversification means you spread the risk of loss in a variety of savings and investment
options. It is the concept of "don't put your eggs in one basket."
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F
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401(k) and 403(b)
Retirement Plans
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401(k) plans are retirement plans that some private corporations offer their employees.
A 403(b) plan is similar to a 401(k), but is offered to employees of some nonprofit
organizations.
In both types of plans, you choose to deduct part of your paycheck and place it
into the investment strategy you design. The plan allows you to choose different
types of investments, depending on how much risk you want to take. The money you
place into the account lowers your taxable income. The employer usually matches
a portion of your contribution, sometimes up to 50 percent. The funds grow tax-free
until the money is withdrawn during retirement.
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I
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Investment
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A savings option purchased for future income or financial benefit.
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Individual
Retirement
Account (IRA)
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An IRA is a retirement account that lets you save and invest money tax-free until
you withdraw it when you retire. You can contribute up to $2,000 a year. There are
different types of IRAs including traditional and Roth IRAs.
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L
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Liquidity
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Liquidity refers to the ease with which an asset (a thing of value) can be turned
into cash without losing its value. For example, cash is the most liquid; a certificate
of deposit (CD) may be liquidated, but you pay an early withdrawal penalty; a house
might be your least liquid asset because it takes time to sell.
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M
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Mutual Funds
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A mutual fund is a professionally managed collection of money from a group of investors.
A mutual fund manager invests your money in some combination of various stocks,
bonds and other products. The fund manager determines the best time to buy and sell
the products in the fund. by combining your resources with other investors in a
mutual fund, you can diversify even a small investment, which should reduce risk.
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R
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Risk versus
Return
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This means that the more risk you take in your investment, the higher the expected
return on that investment. However, there is also a higher risk that you might lose
the entire amount you invested.
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S
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Stocks
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When you buy stocks (shares), you become part owner of the company. If the company
does well, you might receive periodic dividends. Dividends are part of a company's
profits it gives back to you when you own stock in the company. If the company does
poorly, you might lose your money.
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U
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U.S. Savings
Bonds
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Savings bonds are one type of Treasury securities. They are a long-term investment
option backed by the full faith and credit of the U.S. government. Purchasing these
bonds is an easy way to save small amounts of money and are often purchased for
a child's education; however, they may be used for any purpose. Savings bonds can
be purchased at a financial institution for as little as $25 or through payroll
deduction.
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U.S. Treasury
Securities
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U.S. Treasury securities are debt instruments. When you purchase a Treasury security,
you are loaning money to the government. Treasury securities are backed by the full
faith and credit of the U.S. government, which means the government guarantees interest
and principal payments will be paid on time. Treasury securities include:
&bull Savings bonds, which can earn interest for up to 30 years, but can be
cashed after 6 months.
&bull Treasury bills, which mature in one year or less from their issue date.
&bull Treasury notes, which mature in more than a year, but not more than 10
years from the issue date.
&bull Treasury bonds, which mature in more than 10 years from the issue date.
&bull Treasury bills, notes and bonds are transferable, which means you can
buy or sell them in the securities market. You can buy Treasury bills, notes and
bonds for a minimum of $1,000.
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