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For Newbies: FI Acronyms Defined

Are you new to the Financial Independence (FI) community? If so, the many investment acronyms bandied about on FI blogs and podcasts probably have your head spinning.

And not just investment acronyms. Financial independence bloggers and podcasters use an alphabet soup of acronyms for terms relating to real estate, health insurance, taxes, and more.

Even now, over a year into my own deep dive into FI, I often come across acronyms that leave me scratching my head and saying, “Whah?”

Through the FI After 50 Facebook page, which I started in order to build community for older people on the journey to financial independence, I’m learning something new every day. But even there, the investment acronyms members use in their posts often interrupt the flow of my reading and learning as I stop to google their meanings.

Wouldn’t it be great, I often think, if there were a list of  commonly used  acronyms for easy reference – specifically ones often used by people in the FI community?

So I decided to create one.

Some of these are investment acronyms and some refer to tax, insurance, or real estate terms. Others are acronyms commonly used on Facebook or other social media sites, that people of a certain age may not recognize.

Please let me know in the comments what I’m missing, and I’ll update the list with your suggestions.

FI-Related Acronyms Defined

 

ACA – Affordable Care Act (also known as Obama Care)

The ACA is a U.S. law that was passed in March 2010 with the goal of expanding health care coverage to many people previously unable to afford it. 

It expands Medicaid coverage (although some states have not signed on to this expanded coverage) and provides subsidies to people who don’t have insurance through an employer and who meet certain income limits. 

The place to start if you’re researching health insurance options under the ACA is healthcare.gov.

 

CEF – Closed End Fund

Like a mutual fund, a CEF pools a group of stocks. However, after an initial public offering, the CEF’s parent company does not issue any additional shares and will not buy back shares. Instead, they are traded on the market like equities. CEFs are actively managed and can charge expense ratios. 

 

CD – Certificate of Deposit

Banks and other financial institutions offer CD’s, where you can park your money for a specific period of time during which you will earn interest at a pre-determined rate. You will usually have to pay a fee if you withdraw money from the CD before the term is up. 

If you’re going to need cash in six months to a couple of years it may make sense to buy a CD. Make sure you shop around for the best rates and lowest fees.

 

COBRA – Consolidated Omnibus Budget Reconciliation Act

Wow, that’s a mouthful. The meaning of COBRA isn’t quite as complicated as the name the acronym stands for. 

COBRA is a health insurance program that enables people who lose their job or have their hours reduced (and therefore become ineligible for insurance offered by the employer) to be able to keep their coverage for 18 to 36 months. 

The individual must pay for the insurance – more than it cost when their employer was paying for a part of their premiums, but often less expensive than buying an individual or family plan. Click here for more details.

 

DIY – Do It Yourself

There’s a subculture in the FI community of DIYers who save money by doing their own home renovations and repairs, car repairs and maintenance, haircutting, and more. They use youtube to learn any skills they need and buy their tools used or get them through sharing libraries.

 

DIY - Do It Yourself

 

ESG Funds – Environmental, Social, and Governance Funds

ESG funds are mutual funds or ETFs that hold stocks in companies scoring high on environmental and social justice issues. A number of different rating organizations, including Morningstar, MSCI, and others, use indices ranging from fossil fuel and tobacco involvement to a company’s carbon footprint in order to provide ESG scores.

If you feel strongly about these issues and want your investments to reflect your values, you might want to consider researching some ESG funds. Just be careful of fees.  

 

ESOP – Employee Stock Ownership Plan

Companies can set up trust funds to hold shares of its stock, which they then distribute to employees as part of their remuneration package. Usually, employees can cash out these ESOP shares once they’re “vested” (have been at the company for a certain period of time).

While it’s great for people to reap the benefits of their employer’s growth, FI influencers advise against depending on an ESOP as their sole investment. The value of shares may not keep up with the market. Also, if the company goes out of business, not only will employees lose their jobs but they could lose any ESOP funds owed to them.

 

ETF – Exchange-Traded Fund

ETFs are investment vehicles composed of a group of stocks or other assets that follow an index. Unlike a mutual fund, shares in an ETF can be bought and sold throughout the day on the market. Traditional mutual funds, on the other hand, are priced and traded only at the end of each trading day.

Note: the funds most commonly recommended by FI influencers – Vanguard’s VTSAX and Fidelity’s FZROX – are not ETF’s.

If you’re like me, still trying to wrap your head around the pro’s and con’s of ETFs vs. traditional mutual or index funds, read this overview

 

FA – Financial Advisor

Many people in the FI community recommend managing your finances without the help of a paid professional. They suggest opening “set it and forget” investments like low-fee index or target funds, where you set up auto pay to add to your portfolio every month without thinking about it.

If you feel the need to work with a financial advisor, hire a fee-only professional rather than someone who can make a commission off of selling you a financial product. Always ask if the advisor is a fiduciary, meaning they must act in your best interest. If the answer is “no,” walk. Immediately.

 

HCOL – High Cost of Living

In the FI community, people often discuss geo-arbitrage – moving out of high cost of living areas to places where they can live for less, either domestically or abroad.

 

HELOC – Home Equity Line of Credit

Unlike a loan for a specific amount that you receive in one lump sum, a HELOC is a line of credit that you can tap incrementally as needed, up to a certain limit. 

As the name suggests, HELOCs are secured by your house. If you take one, make sure you can pay it back or the bank may end up owning your home.

 

HOA – Home Owner’s Association

When you buy a condominium, or a home in certain subdivisions or planned communities, you become a member of the Home Owners’ Association. 

HOAs enforce rules and collect fees, and they can levy special assessments that you and other home owners will be responsible to pay. Read all the rules carefully and make sure you understand the fee structure before signing on the dotted line.

 

HSA – Health Savings Account

If you have a high-deductible health insurance plan, you may be eligible to open an HSA and gain a double tax-advantage. You won’t pay taxes on the money going into the account or on any earnings coming out. 

Any unused money in an HSA rolls over from year to year; you don’t have to spend it down each year.

You can use any funds in the account to pay for co-payments, co-insurance, deductibles, and other health related expenses (except insurance premiums). If you withdraw funds for non-medical uses, you will have to pay a 20% penalty as well as taxes. If you’re over age 65, however, you would only have to pay taxes.

 

HRA – Health Reimbursement Arrangement

HRAs are employer-funded plans that reimburse employees for certain medical expenses. The employers can deduct contributions to HRAs from their taxes, and employees can make withdrawals tax free. 

Unused amounts in an HRA can be rolled over to the next year, although employers can set limits on the amount eligible to be carried over. 

HRAs are not portable; when employees leave a company, they can not take any amounts in their HRA with them.

 

IPO – Initial Public Offering

When a company transitions from private to public, it issues stock on an exchange for the first time. This provides the company with access to a lot of money, but also confers responsibilities including meeting SEC regulations and shifting from a focus on a small number of investors to satisfying thousands, or even millions, of shareholders’ expectations.

 

 

IRA – Individual Retirement Account

IRAs are tax-advantaged investment vehicles. With traditional IRAs, the amount you contribute each year can be deducted from your taxable income, but withdrawals will be taxed. With Roth IRAs, you can’t deduct contributions, but you can withdraw money tax-free. 

You can open an IRA at many brokerage firms, including Vanguard, Fidelity, Schwab, and others. You have many choices regarding how you want your IRA contributions to be invested. Possibilities include index funds, other mutual funds, bond funds, ETFs, and more.

You can only open and invest in an IRA if you meet certain income and other eligibility requirements. If you withdraw money from your IRA before you reach the age of 59 1/2, you will pay a penalty. You also must make mandatory withdrawals starting at age 72 if you have a traditional IRA. 

 

Roth IRA and Traditional IRA

 

LCOL – Low Cost of Living

The counterpart to HCOL, LCOL areas often have lower housing costs and lower or no state income taxes.

 

MAGI – Modified Adjusted Gross Income

Your MAGI is your adjusted gross income with certain deductions added back in. 

It’s an important number, as it determines your eligibility to contribute to a Roth IRA. It also determines whether you can deduct contributions to a traditional IRA if you and/or your spouse have an employer-sponsored retirement plan. In addition, it affects your eligibility for tax credits that would lower your health insurance premiums if you buy insurance through the ACA.

 

MFJ – Married Filing Jointly

On FI chat groups, people will often discuss the relative benefits of different tax filing status categories, including MFJ, Married Filing Separately, Head of Household, or Single.

 

OOP and MOOP – Out of Pocket and Maximum out of Pocket

If you live in the U.S. and buy health insurance from the ACA – or even if your employer provides it – your policy likely does not cover all costs. You probably have a deductible, co-payments, and co-insurance. These are considered your “out of pocket” costs (OOP). 

Your policy’s maximum out of pocket cost (MooP) is the total amount you could be required to pay in a year. The insurance company covers 100% after you’ve paid that maximum amount.

 

OP – Original Poster

When a person posts on a Facebook group, members of the group who respond to the post often refer to that person as the “OP.” They may say something like, “I think what the OP meant was …”

 

PC – Personal Capital

I’m not putting plugs for individual companies or products on this list, but I’ve included Personal Capital because you’ll see “PC” often on FI blogs and Facebook groups. 

Personal Capital is a company offering money tracking tools. Many people use, and recommend, their retirement calculator and planner.

 

PITI – Principal, Interest, Taxes, Insurance

The total amount you’ll pay on your property, usually monthly, including principal and interest on your loan, plus property taxes and homeowner’s insurance. 

 

PMI – Private Mortgage Insurance

Banks and mortgage companies usually require you to purchase PMI if you put down less than 20% of a home’s value as a down payment. This insurance protects the lender in case you stop making payments on your loan. 

 

REIT – Real Estate Investment Trust

REITs are companies that own income-producing real estate. Individuals can invest in REITs, buying shares on the stock market or through mutual funds or ETF’s. Investors receive dividends on the income the REIT produces and share in any capital gains.

 

ROI – Return on Investment

Simple: the amount of money your investment makes.

 

RMD – Required Minimum Distribution

If you have a tax-deferred investment plan like an IRA or a 401K, you can’t keep the money in it forever. At age 72, (or 70 1/2 if you reached that milestone before January 1, 2020), you have to start making withdrawals (required minimum distributions). 

 

SEP – Simplified Employee Pension Plan

Like an IRA, a SEP is a tax-deferred retirement savings plan. Self-employed people or those with small businesses can open one. 

Only employers can contribute to a SEP, and must contribute the same percentage of salary to all eligible employees. Within certain rules, employers or self-employed people can deduct the amount they put into a SEP from their taxes.

Withdrawals are taxed, and if you take money out of your SEP before age 59 1/2, you will pay a 10% penalty.

 

TLDR or tl;dr – Too Lazy, Didn’t Read

Commonly used at the beginning of a Facebook post, this term originally meant “too long; didn’t read” or “too lazy; didn’t read.” Now, however, people often use it to mean “here’s a summary of a longer post.” 

 

Too Long Didn't Read

 

TSP – Thrift Savings Plan

Available to federal employees and members of the uniformed services, TSP’s are taxed-deferred savings plans, similar to 401K’s. Money in a TSP will be taxed upon withdrawal. However, participants can choose a Roth TSP, making after-tax contributions that will be tax-free when withdrawn. 

TSPs offer six different investment options, including an S&P500 index fund.

 

VTSAX – Vanguard Total Stock Market Index Fund

I’m not including the names of specific investment vehicles in this list except for VTSAX, as it’s the darling of many FI investors. You will find it bandied about on many FI blogs and podcasts. 

VTSAX is Vanguard’s low-cost, total market index fund, providing investors with exposure to the entire U.S. equity market, including small-, mid-, and large-cap growth and value stocks.

 

What Do Those Numbers Mean?

In addition to the alphabet soup of acronyms you’ll see in FI literature and online, some numbers may also have you running to Google to find out what they mean. 

Here are a few:

401K

 

401K

Ok, you probably already know what this one means, but just in case …

A 401K is a tax-advantaged retirement plan that many companies offer as a benefit to employees. If employees choose to enroll, the company will deduct a portion of their salary from their paycheck and invest it in their plan. 

Many employers match the amount that employees contribute, up to a certain amount. Always take the match!

There are two kinds of 401K plans – traditional and Roth. With a traditional plan, employee contributions reduce their taxes for the year the contribution is made, but they must pay taxes upon withdrawal. With a Roth 401K, employees pay taxes on any amounts contributed, but all withdrawals are tax free.

 

403B

Similar to a 401K, a 403B is a tax-advantaged retirement plan. 

Available to certain employers, including non-profits, religious groups, school districts, and governmental organizations, 403B plans cost less to administer, so employees of eligible organizations might save on fees. 

Whether investing in a 401K or a 403B, always ask about fees and look for options with low expense ratios.

 

457

This is a tax-deferred retirement plan offered to employees of state and local governments and some non-profits. 

Participants can contribute up to 100% of their salary, as long as they don’t exceed annual limits ($19,500/year as of 2020; those 50 and older may be able to contribute an additional “catch up” amount of $6,500). 

While withdrawals are taxable, a key benefit of a 457 plan is that early withdrawals (taken before age 59 1/2) are not penalized.

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