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CAPITAL GAINS

Definition
Capital gains are the profit from a sale of property or an investment

Why It's Important
When you have investments, you are not taxed until you have capital gains.  Capital gains are only triggered when you make a sale at a profit.  This is the opposite of realized loss.  With both situations, a sale is what triggers each tax treatment.  Capital gains are a good problem to have because that means you are making money!  

There are two types of capital gains, long-term and short-term.  Short-term capital gains are taxed at your current tax rate.  Short-term means that you held the investment for less than a year (generally a no-no).  Long-term capital gains are after you have held your investments for longer than a year.  These get preferable tax treatment.  For instance, if I was a single tax filer and made $45,000, my short-term capital gains rate would be 22% while my long-term rate would be 15%.  See the difference!...

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UNIFORM SECURITY ACT

Definition

The Uniform Security Act is model  legislation for securities industry regulation at the state level.  Each state may adopt the legislation in its entirety or it may adapt it (within limits) to suit its needs.

Why It's Important

The USA, as it is commonly called, protects investors from unethical practices.  It also ensures that people that choose to give investment advice are properly registered to do so.  In order to register with the state, a potential advisor has to take a licensing exam, pay fees, and submit the relevant paperwork.  

Does being registered with the state fully protect investors?  Absolutely not!  Registered advisors are sometimes subject to disciplinary action.  It happens all the time!  Your best defense is education!  There are resources such as Broker Check that allow you to see what disciplinary actions if any, were enacted on your current or potential advisor.

If you suspect an advisor is...

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PAYDAY LOANS

Definition

A payday loan is a loan in which a lender gives the borrower a loan, typically under $500, that is due on the borrower's next payday.

Why It's Important

In my opinion, payday loans are a type of predatory lending.  They typically have high-interest rates and or fees.  These loans are extremely short term (ranging from 1 week to 4 weeks before the balance is due).  Most states have limitations on how much creditors can charge in fees.  These fees typically range between $10-$30 for every $100 borrowed.  Even at the low end, these fees are expensive.  Let's look at the numbers.  If we had a $15 fee per $100 borrowed, that would equate to an APR of about 400%.  It may not seem like the fees are a lot, but they do add up quickly!

Another disheartening point about payday loans is that the borrower is typically stuck in the cycle once they get in.  The lenders generally do not check the affordability of the loan.  In...

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MORTGAGE

Definition

A mortgage is a legal agreement by a bank or other financial institution and a debtor.  The financial institution lends money with interest and takes ownership of the property if the debtor defaults.  This is a type of secured debt.

Why It's Important

Most people that purchase homes, have to get a mortgage to afford it.  In my opinion, mortgages are a form of "good debt" although cash is always king!  There are different types of mortgages a borrower can get.  For instance, a borrower can get a 30-year conventional loan with a variable interest rate or a 30-year FHA loan with a fixed interest rate.  There are many combinations these loans can come in and your best defense is to learn as much as you can before using one to purchase a home.  Some of these terms will be covered in the upcoming Wednesday Words of the Week.

Personally, I have a 30-year FHA loan with a fixed Interest rate of 4.25%.  I would like to refinance at...

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KEOGH PLAN

Definition
A Keogh plan (also called HR10 plans) is a tax-deferred retirement plan for self-employed individuals or unincorporated businesses.

Why It's Important
It's important to note that contributions to these plans are tax-deductible up to a certain amount.  There are two types of Keogh plans.  One type is a qualified defined-contribution plan.  This type of plan is typically in the form of a profit-sharing plan.  The beauty is that a business doesn't have to generate profits to participate in this type of plan.  As of 2019, a business can put 100% of their income or up to $56,000 of funds into this plan.  Profit-sharing plans are only contributed to by the employer (yourself if you are self employed) not the employee.  It's a good way to squirrel away money when your company is doing well.

The other type of Keogh plan is a qualified defined-benefit plan.  These types of plans are similar to pensions in that you get paid out annually after...

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GEOMETRIC MEAN

Definition
The geometric mean is the average of a set of numbers.

Why It's Important
This is not to be confused with arithmetic mean.  The arithmetic mean is what you learned in school when your teacher taught you about "mean".  As a refresher, let's look at the following set of numbers: 3%,7%,10%,6%,4%.  You find the mean by adding all the numbers together (3+7+10+6+4=30%) then dividing by the total number of records (5).  The arithmetic mean in this scenario would be 6%.  In contrast, a geometric mean would be calculated as (1.03x1.07x1.10x1.06x1.04)^(1/5)=~5.5015%.  

Now that you have the concept, let's apply it to personal finance and investing.  The geometric mean is typically used to calculate the average return on investments.  You would look at the past annual rates and calculate the mean to find out what your overall return was over the time period.  

For example, let's say one year you enjoyed 10%, the next 15%, and the next 8%....

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HEAD AND SHOULDERS

Definition
The head and shoulders pattern in technical stock analysis is used to predict what the support level (lowest price it will potentially go before traders make it rise again) of a stock is.

Why It's Important
You probably saw this and wondered why I would be talking about a shampoo.  LOL!  This is one of many charting patterns that technical analysts use to make stock price predictions.  I will warn that this is an advanced investing topic so if it does not make sense, do not worry!  

As you can see from the chart below, the trend looks like a head and two shoulders.  The "neckline" is a support level.  The stock price hit that level then bounced up.  Then, it hit it one more time and bounced up before breaking through the support and trending downwards.  

This same charting pattern can also happen in the opposite way as shown below.  In this scenario, the neckline shows the price ceiling instead of the support.  It is the same...

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FIDUCIARY

Definition
A fiduciary is a person or organization that acts on behalf of another person or persons to manage assets.

Why It's Important
The term fiduciary has been thrown around a lot lately but do you really know what it is? A fiduciaries' responsibilities and duties are both ethical and legal. Once the advisor or organization says that they are a fiduciary, they have to act in your best interest. This means that they are not supposed to do things just to pad their pockets (make money).

What does an advisor not acting like a fiduciary look like? They may try to sell you products you don’t need to make a commission. They may initiate trades unnecessarily just to get commission (also called churning). It is important to stay educated and ask questions.

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EXPANSION

Definition
In economic terms, expansion is an increase in the level of economic activity.  It is a period of economic growth as measured by a rise in real GDP (Gross Domestic Product).

Why It's Important
An expansion means that the economy is doing good.  This typically coincides with the stock market.  Think about it.  If the economy is doing good, that means companies are generally doing good which means they are profitable.  It directly effects the stock market.  This is only one phase of the economic cycle.  

Are we currently in an expansion?  You can tell by figuring out if: 

  • Real GDP has grown for two or more consecutive quarters, moving from a trough to a peak
  • There is a rise in employment
  • There is a rise in consumer confidence
  • There is a rise in equity markets 

Expansion is also sometimes called a recovery and the economic cycle is sometimes called the business cycle.  Don't let the different terms...

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DURABLE POWER OF ATTORNEY

Definition
A durable power of attorney is a designation that is given to someone in order to handle financial transactions if another person becomes incapacitated and can't make decisions on their own.

Why It's Important
This is one of the main documents needed when you start thinking about estate planning. It is important to have a person in place as a durable power of attorney in case an accident happens tomorrow.  Who could you trust to take over your financial matters?  

What is the difference between a durable power of attorney and a general power of attorney? With a durable power of attorney, the document remains in effect if you are unable to think for yourself.  With a general power of attorney, it is only in effect while you are alive and competent.  If you have a general power of attorney, once you become incompetent, it loses its enforcement.  

I highly recommend going for a durable power of attorney from the beginning so you don't have to worry about...

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