401(k) Plan: Start off knowing what exactly this plan actually is. A 401(k) plan is a tax-deferred retirement plan that is offered through your place of employment. The plan can be a cash election, profit-sharing, or stock bonus plan, or a salary reduction per paycheck plan. This plan will help you save for future retirement. Planning wisely will make for the best returns come retirement time.
Accrued Benefits: This describes the benefits an employee with a 401(k) plan has already amassed to date based upon their salary and work time put in thus far.
Annuity: This is a contractual agreement where the insurance company is held to make regular payments to someone for the rest of their lifetime or an agreed upon time frame.
Auto Enrollment: Sorry, you're not getting a new car. This is actually the practice of enrolling all eligible employees in a retirement plan without their request to participate. If the employee wants to opt-out, they must file a request with HR.
Brokerage Window: In some cases, this is the glass pane where you can peek into the broker's office, but for our purposes, a brokerage window is when a 401(k) plan allows for employees to invest in stocks and funds offered by a brokerage firm and part of the employer's plan.
Elective Deferral: The amount an employee contributed to a 401(k) plan, either pre-tax or as Roth contributions if the employer's plan offers a Roth option. *See "Roth" below.
Employer Matching Contribution: Some employers will put money towards their employees' savings plans. Matching contributions are usually a set percentage of what the employee puts in, up to a fixed limit.
Employer Discretionary Contributions: Employers may have a plan at the end of the year for increased matching contributions or profit sharing. These are tax-deductible expenses.
ERISA: This stands for The Employee Retirement Income Security Act, established in 1974. This act sets standards for 401(k) plan administrators and holds up the same rights and regulations for all plan participants across the board.
Fixed Match: No, not a tennis game with a pre-determined winner, but a matching employer contribution that must be contributed each year to an employee's plan as part of the agreement unless otherwise amended.
Individual Retirement Account (IRA): This is a retirement plan that is person and tax-sheltered. Employees who work for a company that doesn't offer a 401(k) may opt for an IRA instead.
Longevity Risk: We all hope to have enough money saved to cover our expenses for the rest of our lives, but a longevity risk is the chance of outliving one's savings. Hopefully, we are all covered for life by contributing as much as possible during our working years.
Participant: This is the person who is eligible to make contributions to a 401(k) plan or to share in an employer's contributions to a 401(k).
Plan Provider: This is the company or firm that develops and sells the 401(k) plan to your employer. This may be a mutual fund company, an insurance company, a brokerage firm, or another related financial services institution.
Plan Sponsor: In a nutshell, your employer. The plan sponsor is the party that offers the 401(k) plan to their employees. They are responsible for choosing the plan and the provider and which investment options will be delivered by the plan.
Pre-tax: Contributions are put into a 401(k) before taxes are calculated. The employee's gross pay is then reduced by how much is put into the plan.
Retirement Plan: This is a plan person makes to set aside income for use during retirement. A 401(k) is an example of such a plan.
Roth 401(k): This is a special feature of a 401(k) plan that lets employees make contributions on an after-tax basis. The money will grow tax-free and can be withdrawn tax-free once the employee reaches the age of 59½ and has had the account for 5 or more years.
Tax-Deferred: Until money is withdrawn from a 401(k), no federal income tax is paid on contributions or earnings.
Vesting: This is the period of time an employee must work for an employer before they are eligible for a 401(k). Some employers start immediately while others require a year or more of employment.
It's time to prep for retirement. With this 101 on 401(k), you're on the path to saving for the "golden years!"
When you take out a loan for a car, charge something to your credit card, or get a personal line of credit, there is going to be an interest rate that applies to your loan.
A lot of different factors go into what you will be charged, including your own personal credit score. But even those with flawless credit still see a minimum charge that they can't get around. That all goes back to the Federal Funds Rate.
One thing consumers rarely realize is that all of our banks are lending money to each other every night. Banks are legally required to maintain a certain percentage of their deposits in non-interest-bearing accounts at the Federal Reserve to ensure they have enough money to cover any withdrawals that may unexpectedly come up. However, deposits can fluctuate and it's very common for some banks to exceed the requirement on certain days while some fall short. In cases like this, banks actually lend each other money to ensure they meet the minimum balance. It's a bit hard to imagine these multibillion-dollar financial institutions needing to borrow money to tide them over for a bit, but it happens every single night at the Federal Reserve. It's also a nice deal for those with balances above the reserve balance requirement to earn a bit of money with cash that would normally just be sitting there.
The Federal Reserve
The exact interest rate the banks will charge each other is a matter of negotiation between them, but the Federal Open Market Committee (FOMC) (the arm of the Federal Reserve that sets monetary policy) meets eight times a year to set a target rate. They evaluate a multitude of economic indicators including unemployment, inflation, and consumer confidence to decide the best rate to keep the country in business. The weighted average of all interest rates across these interbank loans is the effective federal funds rate.
This rate has a huge impact on the economy overall as well as your personal finances. The federal funds rate is essentially the cheapest money available to a bank and that feeds into all of the other loans they make. Banks will add a slight upcharge to the rate set by the Fed to determine what is the lowest interest that they will announce for their most creditworthy customers, also known as the prime rate. If you have a variable interest rate loan (very common with credit cards and some student loans), it's likely that the interest rate you pay is a set percentage on top of that prime rate that your lender is paying. That's why in times of low interest rates (it was set at 0% during the Great Recession), a lot of borrowers should go for fixed interest rate loans that won't increase. However, if the federal funds rate was relatively high (it went up to 20% in the early 1980's), a variable interest rate loan may be a better decision as you would be charged less interest should the rate drop without the need to refinance.
The federal funds rate also has a major impact on your investment portfolio. The stock market reacts very strongly to any changes in interest rates from the Federal Reserve, as a lower rate makes it cheaper for companies to borrow and reinvest while a higher rate may restrict capital and slow short-term growth. If you have a significant portion of your investments in equities, a small change in the federal funds rate can have a large impact on your net worth.
Whether you're leaving a job involuntarily, departing for something new, or just want to prepare for the unknown, it is smart to understand all your options regarding your 401k.
Frugal gifting often gets a bad reputation. However, this shopping method does not make you cheap — it makes you practical. Frugal gifts often avoid waste and overspending and can be just as meaningful (if not more so) as any other present.
With the National Retail Federation predicting each consumer this holiday season to spend upwards of $1,000 on holiday gifts amidst an economic recession —this year might be the perfect time to reconsider your spending budget. We've formulated the ultimate list of frugal gift-giving ideas to get you started.