NEW YORK (MainStreet) — Weeding through the arcane, confusing and complicated terminology used by personal finance and investing experts can be a chore.
The acronyms alone can make your head spin and make it even more difficult to get a good grasp of managing your finances. But deciphering the off-putting lexicon can help Main Street investors navigate their personal finances and even save some money down the road in interest and other ubiquitous fees.
Here are ten popular terms that we demystify.
Liquid assets are ones that you can access such as withdrawing money from a checking or savings account without paying a penalty to access it, unlike taking money out of a retirement account in most circumstances.
“Many people discover too late that putting their life's savings into a government controlled 401(k) or IRA is like putting their money in prison,” said Pamela Yellen, a financial security expert based in Sante Fe.
Though contributing to retirement is all the more necessary as consumers live longer and require additional funds to offset increased living and medical expenses, it's important for Americans to have money at the ready they can deploy. As a rule, consumers should have six months' worth of living expenses in an emergency fund.
This term is often misunderstood and is found in your credit card user agreement. The grace period does not refer to the amount of time a consumer has before the minimum payment is due. Instead, it is referring to the amount of time before interest is applied to a purchase.
“Understanding how this relates to the cost of borrowing will give cardholders an advantage when it comes to saving the most money,” said Bruce McClary, spokesman for the National Foundation for Credit Counseling, a Washington, D.C.-based non-profit organization.
This term means that if you have a debt that has not been paid and the lender determines that you are not likely to pay it, it is “written off as a loss by the creditor, usually after 120 consecutive days of non-payment,” he said.
This does not mean you are no longer responsible for the debt. It will also show up on your credit report and will lower your credit score.
“Charged off debt is commonly sold to third-party debt collectors who may legally collect that balance as long as the collection activity is within the statute of limitations and they are abiding by the rules established by the Fair Debt Collection Practices Act,” McClary said.
Financial counselors not only can teach you methods on how to improve money management, but they also can discuss how you can tackle paying down your debt. There is financial counseling available at low or no cost through the nonprofit network of National Foundation for Credit Counseling (NFCC) agencies at www.nfcc.org or by phone at 800-388-2227.
A certified NFCC counselor is able to provide budget counseling, credit counseling, debt management programs, housing counseling and student loan counseling among other topics, McClary said.
Debt negotiation or debt settlement
Some consumers use these companies when they have accrued a large amount of debt and feel like they cannot control it. These companies help consumers lower the principal, or the amount they charged on a credit card, and are often able to “save as much as 50% of the total debt before the fees are assessed," said Kevin Gallegos, vice president of the Phoenix operations for Freedom Financial Network, a consumer debt resolution company.
“Those who complete a debt settlement program generally can fully resolve their debt in two to four years,” he said.
The companies will negotiate with your creditors while you continue to save money for the settlement. The fee that consumers pay is typically a percentage of the debt “enrolled or of the debt reduced,” Gallegos said.
Several years ago, the FTC said debt settlement companies are required to charge consumers only the fees after the firm has “successfully settled a debt and the consumer accepts the settlement,” he said.
Some consumers opt to combine all of their debt into one, which means all your debt is “under one roof” and at a better interest rate, said Gallegos. This is something you can easily do yourself by finding a balance transfer offer at a lower interest rate than your existing one. Other options are to borrow from a retirement plan, life insurance policy, friends or family, obtain a personal loan, a home equity loan or refinance a home and take out additional cash, he said. Balance the options carefully especially if there are penalties, fees or taxes you have to pay.
Companies which offer to consolidate your debt usually have consumers make one monthly payment, which the consolidator then uses to pay creditors, Gallegos said. While consolidation might simplify paying bills, the fees can be “high,” he said.
Fiduciary versus Broker
Both fiduciaries and brokers are financial advisors who can manage investments for consumers. Fiduciaries are legally required to act in the client's best interests, and it is the “highest standard in wealth management,” said Elle Kaplan, CEO of LexION Capital, a New York-based asset management firm.
Brokers are held to a “much lower legal bar called suitability that enables them to make money off of commissions, markups and 12b-1 fees while managing your assets,” she said.
If you are a first time homebuyer, you should be aware that lenders examine the "seasoning" of the down payment to show that the funds have been in your bank account for 60 to 90 days, said Ray Brousseau, executive vice president of Carrington Mortgage Services in Santa Ana, Calif. The down payment represents the buyer's "skin in the game," or their personal risk, he said.
--Written by Ellen Chang for MainStreet