I see many questions from newcomers on the CHOOSEFI facebook page, that I have decided to see if I could create a dictionary. Will accept suggestions and help from anyone – Please!
AGI – Adjusted Gross Income – basically the bottom of page 1 of your 1040. This is all of your income (some of which can be losses) less some specific subtractions allowed for this calculation – for example, IRA contributions and 1/2 of SEP tax. This number is used to define limits for certain other lines on the form.
FI – Financial Independence – when the income from your investable assets exceeds your expenses, you have reach FI. There are stages of FI and variations. Will expand upon this in the future.
HCOLA, HCOL – High Cost of Living Area
IRA – Individual Retirement Account – one of several vehicles for building up a retirement portfolio (other examples are 401K, 403B, 457x). IRAs can be funded with pre-tax dollars (traditional) or post-tax dollars (ROTH IRA). For a traditional IRA, one does not pay tax on the dollars used to fund the IRA but pays tax when withdrawing from the IRA. A ROTH IRA is funded with post-tax dollars and no taxes are paid on the original dollars or the gains made. Which is better depends on your specific situation and is the subject of many blogs and articles (cite examples).
LCOL – Low Cost of Living area
Marginal Tax Bracket – the Tax Bracket your last dollar of taxable income falls into.
Market Capitalization (Market Cap) – The value of a company as the market sees it or what it would take to buy the whole company if you bought every share of stock. Uses a simple formula – Number of Shares of Stock * Share Price. If company XYZ issues 100 million shares and the current price is $20/share, the market cap is $2 billion (20 * 100 million).
Net Worth – Your assets minus your liabilities. The value of what you own minus your debt. There is not a universally accepted definition, but start with this: Add up the value of your:
- retirement accounts,
- house,
- checking and savings accounts including CDs,
- after tax (non-retirement ) brokerage holdings (stocks, bonds, mutual funds)
- rental properties (or other real estate)
Do not count the value of your cars or personal possessions. I don’t include jewelry or collectibles – others may disagree.
These are your assets.
Now, subtract all loans – car loans, mortgages, credit card debt, student loans – these are your liabilities.
The result is your net worth.
PMI – Private Mortgage Insurance – the penalty added to your monthly payment for not putting 20% down when obtaining a mortgage.
ROI – Return on Investment – what you got for what you risked. In today’s market, savings accounts, CDs, and bonds all have relatively low yields and therefore low ROI. The stock market returns about 7% over the long term (more with dividends re-invested) but there is more risk. In the short term, the stock market can have a negative ROI.
SALT – State and Local Taxes – little used acronym before the 2018 tax reform. In the 2018 tax world and beyond, the itemized deduction for (SALT + property taxes on primary residence) is limited to $10,000. For married couples filing jointly, the standard deduction is $24,000. So unless the couple has more than $14,000 in mortgage interest and charitable contributions, it is unlikely they will be itemizing deductions anymore (filling out Sch. A one their tax return).
SWR = Safe Withdrawal Rate – the amount one can remove each year from one’s investment portfolio (e.g. stocks, bonds, CDs, other cash) and not outlive it. Outliving one’s portfolio is of special concern for those who retire early as they will be living off the income this portfolio generates for many more years than a standard retiree. The Trinity Study (insert link here) described how one could increase the probability of making the portfolio last 30 years by starting with a 4% withdrawal rate and increasing with inflation. Several FI bloggers have been issuing caution for longer time periods, choosing 3.3-3.5%. (Cite’s needed).
Tax Bracket – The table which determines how much taxes you pay is series of increasing rates that cover chunks of income called brackets.
Taxable Income – Your AGI less your deductions (standard or itemized). For 2018 and beyond, very few taxpayers will itemize.