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what is financing | financing is the process of providing funds for business activities making purchases or investing financial institutions such as banks are in the business of providing capital to businesses consumers and investors to help them achieve their goals the use of financing is vital in any economic system as it allows companies to purchase products out of their immediate reach put differently financing is a way to leverage the time value of money tvm to put future expected money flows to use for projects started today financing also takes advantage of the fact that some individuals in an economy will have a surplus of money that they wish to put to work to generate returns while others demand money to undertake investment also with the hope of generating returns creating a market for money understanding financingthere are two main types of financing available for companies debt financing and equity financing debt is a loan that must be paid back often with interest but it is typically cheaper than raising capital because of tax deduction considerations equity does not need to be paid back but it relinquishes ownership stakes to the shareholder both debt and equity have their advantages and disadvantages most companies use a combination of both debt and equity to finance operations types of financing equity is another word for ownership in a company for example the owner of a grocery store chain needs to grow operations instead of debt the owner would like to sell a 10 stake in the company for 100 000 valuing the firm at 1 million companies like to sell equity because the investor bears all the risk if the business fails the investor gets nothing 1at the same time giving up equity is giving up some control equity investors want to have a say in how the company is operated especially in difficult times and are often entitled to votes based on the number of shares held so in exchange for ownership an investor gives their money to a company and receives some claim on future earnings some investors are happy with growth in the form of share price appreciation they want the share price to go up other investors are looking for principal protection and income in the form of regular dividends funding your business through investors has several advantages including the following similarly there are a number of disadvantages that come with equity financing including the following most people are familiar with debt as a form of financing because they have car loans or mortgages debt is also a common form of financing for new businesses debt financing must be repaid and lenders want to be paid a rate of interest in exchange for the use of their money 2some lenders require collateral for example assume the owner of the grocery store also decides that they need a new truck and must take out a loan for 40 000 the truck can serve as collateral against the loan and the grocery store owner agrees to pay 8 interest to the lender until the loan is paid off in five years debt is easier to obtain for small amounts of cash needed for specific assets especially if the asset can be used as collateral while debt must be paid back even in difficult times the company retains ownership and control over business operations there are several advantages to financing your business through debt debt financing for your business does come with some downsides special considerationsthe weighted average cost of capital wacc is the average of the costs of all types of financing each of which is weighted by its proportionate use in a given situation 4 by taking a weighted average in this way one can determine how much interest a company owes for each dollar it finances firms will decide the appropriate mix of debt and equity financing by optimizing the wacc of each type of capital while taking into account the risk of default or bankruptcy on one side and the amount of ownership owners are willing to give up on the other because interest on the debt is typically tax deductible and because the interest rates associated with debt is typically cheaper than the rate of return expected for equity debt is usually preferred however as more debt is accumulated the credit risk associated with that debt also increases and so equity must be added to the mix investors also often demand equity stakes in order to capture future profitability and growth that debt instruments do not provide wacc is computed by the formula wacc e v r e d v r d 1 t c where e market value of the firm s equity d market value of the firm s debt v e d r e cost of equity r d cost of debt t c corporate tax rate begin aligned text wacc left frac e v times re right left frac d v times rd times 1 tc right textbf where e text market value of the firm s equity d text market value of the firm s debt v e d re text cost of equity rd text cost of debt tc text corporate tax rate end aligned wacc ve re vd rd 1 tc where e market value of the firm s equityd market value of the firm s debtv e dre cost of equityrd cost of debttc corporate tax rate example of financingprovided a company is expected to perform well you can usually obtain debt financing at a lower effective cost for example if you run a small business and need 40 000 of financing you can either take out a 40 000 bank loan at a 10 interest rate or you can sell a 25 stake in your business to your neighbor for 40 000 suppose your business earns a 20 000 profit during the next year if you took the bank loan your interest expense cost of debt financing would be 4 000 leaving you with 16 000 in profit conversely had you used equity financing you would have zero debt and as a result no interest expense but would keep only 75 of your profit the other 25 being owned by your neighbor therefore your personal profit would only be 15 000 or 75 x 20 000 | |
is equity financing riskier than debt financing | equity financing comes with a risk premium because if a company goes bankrupt creditors are repaid in full before equity shareholders receive anything | |
why would a company want equity financing | raising capital through selling equity shares means that the company hands over some of its ownership to those investors equity financing is also typically more expensive than debt however with equity there is no debt that needs to be repaid and the firm does not need to allocate cash to making regular interest payments this can give new companies extra freedom to operate and expand | |
why would a company want debt financing | with debt either via loan or a bond the company has to make interest payments to creditors and ultimately return the balance of the loan however the company does not give up any ownership control to those lenders moreover debt financing is often cheaper due to a lower interest rate since the creditors can claim the firm s assets if it defaults interest payments of debts are also often tax deductible for the company the bottom linemany businesses eventually need greater spending power in order to grow and financing is the most common method of attaining it there are pros and cons to both debt and equity financing and each company should carefully weigh the costs of each before making a decision | |
what is a finder s fee | a finder s fee also known as referral income or referral fee is a payment made to an intermediary in or the facilitator of a transaction the finder s fee is rewarded because the intermediary discovered the deal and brought it to the attention of interested parties or the intermediary brought the interested parties together and the transaction took place as a result the presumption is that without the intermediary the parties may not have found each other and the deal may not have occurred thus the intermediary or facilitator warrants compensation depending on the circumstance in which the deal is established or completed the finder s fee can be paid by either the transaction s buyer or seller understanding a finder s feea finder s fee is a reward and thus a form of incentive to prompt business contacts and other resources to communicate the needs or opportunities of a company or organization to potential clientele or partners while contracts are not required in such arrangements structuring and agreeing to terms for finder s fees can keep all parties in agreement on the scope of compensation that will be paid this may be especially useful for contacts who repeatedly attract business to the company the terms of finder s fees can vary greatly with some of those who pay them citing 5 to 35 of the total value of the deal being used as a benchmark in many cases the finder s fee may simply be a gift from one party to another as typically no legal obligation to pay a finder s fee exists a finder s fee is thus different from a commission and a service charge which are legally required to be paid to a person or business in exchange for completing a service a finder s fee is paid to an intermediary in a transaction as an acknowledgment of the role played by the intermediary in sourcing a deal and bringing it to an interested party examplesfinder s fees are used and paid in a wide variety of circumstances and for any number of business transactions 1 finder s fees may be used to reward business contacts who refer new clients or bring in new sales to a company for instance if a contact arranges a meeting between a potential buyer and the seller of a business they might receive a finder s fee a finder s fee can also apply to businesses that seek and gain investors through referrals from others 2 there can be a finder s fee included in deals where a company buys select assets or materials from another company for example perhaps a rental car company needs more sedans for its fleet a finder s fee could be paid to the person who arranges the purchase of used sedans from a competitor or from a business that no longer needs those vehicles 3 as another example say a movie production company is in the market to acquire more cameras lights and other equipment a finder s fee might be paid to a person or company if as a result of that intermediary connecting the company with a seller a transaction takes place 4 finder s fees might be offered when a company or party seeks to secure freelance professionals or contractors to complete projects 5 finder s fees also can occur with real estate transactions one individual could be looking to sell a property but not have any buyers in mind until a friend discovers a potential buyer if the transaction goes through and the potential buyer ends up purchasing the property the seller might give the friend a small percentage of the sale as a reward for finding the purchaser similarly real estate agents are allowed to give referral fees to other licensed professionals | |
when is a finder s fee paid | a finder s fee may be paid if someone plays a role in helping another person transact business | |
is a finder s fee legally binding | normally it is not unless a contract or legally binding agreement is made for a finder s fee to be paid between the person facilitating a sale and the person who wishes to make the sale | |
is a finder s fee always a monetary reward | no it isn t depending on the parties involved and the business transaction that closed the finder s fee could be a non monetary gift selected as a simple thank you the bottom linea finder s fee is some form of reward given to one party an intermediary who helps another party close a business transaction it can be financial compensation or a gift of some kind that acknowledges the role the intermediary played in facilitating a deal | |
what is finra brokercheck | finra brokercheck is a free online tool that helps individuals research brokers investment firms and financial advisers investors can obtain a variety of information including descriptions services offered credentials sanctions and registrations that may be helpful in the selection and vetting of an individual financial advice provider or brokerage firm brokercheck is offered and administered by the financial industry regulatory authority finra the largest non governmental securities firm regulator in the united states the data and information available in brokercheck come mainly from the central registration depository crd the securities industry online registration and licensing database which provides broker and brokerage information and the securities and exchange commission s investment adviser registration depository iard database 1understanding finra brokercheckfinra brokercheck contains information on approximately 3 380 brokerage firms 150 650 branch offices and over 620 850 registered securities representatives and is an explanatory tool that shows how to properly use and manage the information provided with finra brokercheck an investor can find a firm s history learn of any indiscretions and locate and identify popular choices among investors 21 | |
what information does finra brokercheck provide | for brokers currently registered with finra or at some time within the last 10 years finra brokercheck provides 1brokercheck provides information on investment firms including 1brokercheck does not contain any information that has not been disclosed to the crd system personal or confidential information or judgments or liens 3finra brokercheck additional resourcesin addition to brokercheck individuals considering hiring a broker or investment adviser should search the resources of their state securities regulators which also oversee and may require the registration of brokers or advisers finra also provides two additional supplementary databases finra arbitration awards online and finra disciplinary actions online | |
how often is brokercheck updated | registered brokers and brokerage firms are required to update their professional and disciplinary information in the central registration depository crd within 30 days and information is available in brokercheck the next business day 3 | |
what if my broker has complaints listed on brokercheck | brokers are required to notify finra of customer complaints that allege misconduct related to the sale of financial products even if the allegations are without merit it is advisable to consider how many complaints the broker has received over what period and whether the claim alleges specific acts of misconduct by the broker like unauthorized trading or the unexpected failed investment product a broker is allowed to provide comments and the investor should review those comments on the nature of the complaint an investor can also ask the firm broker or the firm s compliance department about the complaint 1 | |
how can i request a brokercheck report | finra brokercheck reports are free via online phone fax and by mail finra will collect personal information only in those situations where a request is made that a brokercheck report is mailed 3 | |
what is fire insurance | fire insurance is a form of property insurance that covers damage and losses caused by fire most policies come with some form of fire protection but homeowners may be able to purchase additional coverage in case their property is lost or damaged because of fire purchasing additional fire coverage helps to cover the cost of replacement repair or reconstruction of property above the limit set by the property insurance policy fire insurance policies typically contain general exclusions such as war nuclear risks and similar perils damage caused by a fire set deliberately is also typically not covered 1 | |
how fire insurance works | a standard homeowners insurance policy usually includes fire insurance homeowners insurance provides policyholders with coverage against loss and damage to their homes and possessions also referred to as insured property insured property includes the interior and exterior of the home and any assets kept on the property policies may also cover injuries that someone sustains while on the property if you have a mortgage your mortgage lender will likely require that you have homeowners insurance before it approves the loan even if your lender doesn t require it a homeowners insurance policy can offer beneficial protection you can also purchase fire insurance as a stand alone policy it covers a policyholder against fire loss or damage from a number of sources this includes fires caused by electricity such as faulty wiring and gas explosions as well as those caused by lightning and natural disasters the policy may also cover burst pipes and overflowing water tanks 12example of fire insurancemost fire insurance policies provide coverage regardless of whether the fire originates inside or outside the home the limit of coverage depends on the cause of the fire the policy reimburses the policyholder on either a replacement cost basis or an actual cash value acv basis for damages if the home is considered a total loss the insurance company may reimburse its current market value the insurance typically provides a market value compensation for lost possessions with the total payout capped based on the home s overall value for example if a policy insures a house for 350 000 the contents are usually covered for at least 50 to 70 of the policy value or 175 000 to 245 000 many policies limit the reimbursement amount for luxury items such as paintings jewelry gold and fur coats 3special considerationsa policyholder should check their home s value each year to determine if they need to increase their coverage amount keep in mind that you cannot get insurance for more than a home s actual value insurance companies may offer stand alone policies for rare expensive and irreplaceable items otherwise not covered in standard fire insurance 4many standard homeowners insurance policies include coverage for fire including providing for costs related to repairing your home and even additional expenses such as relocation in some cases you may want more extensive coverage if an insurance policy excludes coverage for fire damage a homeowner may need to purchase separate fire insurance especially if the property contains valuable items that cannot be covered with standard coverage the insurance company s liability is limited by the policy value and not by the extent of damage or loss sustained by the property owner fire insurance can provide extra coverage to offset any additional costs to replace or repair property that surpasses the limit set by homeowners insurance fire insurance policies provide payment for the loss of use of the property as a result of a fire they also often provide additional living expenses if the fire caused uninhabitable conditions finally they provide for damage to personal property and nearby structures homeowners should document the property and its contents to simplify the assessment of items damaged or lost in the event of a fire a fire insurance policy includes additional coverage against smoke or water damage due to a fire and is usually effective for one year fire insurance policies on the verge of expiration are usually renewable by the homeowner under the same terms as the original policy | |
is fire insurance different from homeowners insurance | fire insurance provides coverage for costs related to a fire whereas homeowners insurance protects against many other types of risks a homeowners insurance policy typically includes coverage for damage caused by a fire but a stand alone fire insurance policy may provide more extensive coverage | |
what is not covered in fire insurance | a fire insurance policy will not cover losses related to fires set deliberately fire insurance also only covers losses related to a fire so if your property suffers loss or damage from another cause it would not be covered | |
what type of property is covered by fire insurance | typically any fire damage to your home or its contents will be covered by fire insurance this includes property covered by candle fires grease fires electrical fires and others 1the bottom linefor many homeowners protection provided by a standard homeowners insurance policy will be enough to cover fire related losses including losses to the home structure or personal property consider consulting a financial advisor to see if a stand alone fire insurance policy may be helpful for your situation | |
what is a firm | a firm is a for profit business organization such as a corporation limited liability company llc or partnership that provides professional services most firms have just one location however a business firm consists of one or more physical establishments in which all fall under the same ownership and use the same employer identification number ein | |
when used in a title firm is typically associated with businesses that provide professional law and accounting services but the term may be used for a wide variety of businesses including finance consulting marketing and graphic design firms among others | theory of the firmin microeconomics the theory of the firm attempts to explain why firms exist why they operate and produce as they do and how they are structured the theory of the firm asserts that firms exist to maximize profits however this theory changes as the economic marketplace changes more modern theories would distinguish between firms that work toward long term sustainability and those that aim to produce high levels of profit in a short time firm vs companyalthough they appear synonymous and are often used interchangeably there is a difference between a firm and a company a company can be any trade or business in which goods or services are sold to produce income further it encompasses all business structures such as a sole proprietorship partnership and corporation on the other hand a firm typically excludes the sole proprietorship business it generally refers to a for profit business managed by two or more partners providing professional services such as a law firm in some cases a firm can be a corporation types of firmsa firm s business activities are typically conducted under the firm s name but the degree of legal protection for employees or owners depends on the type of ownership structure under which the firm was created some organization types such as corporations provide more legal protection than others there exists the concept of the mature firm that has been firmly established firms can assume many different types based on their ownership structures 1most firms will not operate as a sole proprietorship as this means the individual is personally liable for faults of the firm 2resources used by firmsthe objective of a firm to is convert inputs into outputs for this reason firms use a variety of resources to generate products services and offerings to clients these resources may include but aren t limited to activities of a firmthe activities of a firm can often be broken down into three categories business operating activities investing activities and financing activities these three categories are listed on a firm s statement of cash flow and are discussed further below the primary activity of a company and the primary section on a statement of cash flow is the operating activities section this section ties to the actual core business of the company these activities include selling products or incurring business expenses most of these activities are related to the income statement as these activities most often relate to a company s day to day operations and income in some cases the operating activities section of a statement of cash flow is negative if the amount is negative that means the company is using spending more cash than it is bringing in specific to business operations this also means the company must rely on the other two sections to ensure enough cashflow is coming into the company to maintain operations a statement of cash flow will not include non cash transactions be mindful that firms may have activity not impacting their bank balance but impacting their net profit investing activities are the long term cashflow activities a company incurs to plan for the future and ensure it has the infrastructure to scale operations examples of investing activities include acquiring equipment constructing office buildings or buying heavy equipment although these activities may not be required for day to day operations investing activities play an integral part in a firm s long term success consider a firm that makes its own goods by investing in a corporate warehouse and robust manufacturing plant the firm is more likely to achieve business operation success the last section of activities of a firm are the financing activities although these are also not usually part of the day to day operations of a firm the financing activities play an important in ensuring the long term financial health of a firm some financing activities are cash inflows while other are cash outflows for example firms may decide to award dividends to investors funded from net income of the firm alternatively firms may borrow money from lenders or issue equity to investors to raise capital to support the day to day operations | |
why is a business sometimes called a firm | the word firm has latin roots to the word signature indicating the word may have historically been used to describe the name of a company in addition the etymology of the word translates back to a business or a name of a business 3 | |
what are the 4 types of firms | a firm may take a variety of legal structures including sole proprietorships partnerships corporations or cooperatives the rules dictating the operations and organizational structure of the company is often heavily dictated by the legal type of the firm | |
what is the purpose of a firm | though an oversimplification the purpose of a firm is to make money a nonprofit is often not referred to as a firm therefore a firm s purpose is to facilitate trade between a manufacturer or retailer with a client a firm s purpose is to ensure a good or service is transmit to those who need it with the expectation that the firm can generate a profit along the way the bottom linea firm often refers to a company that sells a service to customers though sometimes a physical good may be transmitted as well the ultimate goal of a firm is to make money as a firm is often not a non profit the activities of a firm can usually be broken into the operating investing and financing aspects of the firm | |
what is a firm | a firm is a for profit business organization such as a corporation limited liability company llc or partnership that provides professional services most firms have just one location however a business firm consists of one or more physical establishments in which all fall under the same ownership and use the same employer identification number ein | |
when used in a title firm is typically associated with businesses that provide professional law and accounting services but the term may be used for a wide variety of businesses including finance consulting marketing and graphic design firms among others | theory of the firmin microeconomics the theory of the firm attempts to explain why firms exist why they operate and produce as they do and how they are structured the theory of the firm asserts that firms exist to maximize profits however this theory changes as the economic marketplace changes more modern theories would distinguish between firms that work toward long term sustainability and those that aim to produce high levels of profit in a short time firm vs companyalthough they appear synonymous and are often used interchangeably there is a difference between a firm and a company a company can be any trade or business in which goods or services are sold to produce income further it encompasses all business structures such as a sole proprietorship partnership and corporation on the other hand a firm typically excludes the sole proprietorship business it generally refers to a for profit business managed by two or more partners providing professional services such as a law firm in some cases a firm can be a corporation types of firmsa firm s business activities are typically conducted under the firm s name but the degree of legal protection for employees or owners depends on the type of ownership structure under which the firm was created some organization types such as corporations provide more legal protection than others there exists the concept of the mature firm that has been firmly established firms can assume many different types based on their ownership structures 1most firms will not operate as a sole proprietorship as this means the individual is personally liable for faults of the firm 2resources used by firmsthe objective of a firm to is convert inputs into outputs for this reason firms use a variety of resources to generate products services and offerings to clients these resources may include but aren t limited to activities of a firmthe activities of a firm can often be broken down into three categories business operating activities investing activities and financing activities these three categories are listed on a firm s statement of cash flow and are discussed further below the primary activity of a company and the primary section on a statement of cash flow is the operating activities section this section ties to the actual core business of the company these activities include selling products or incurring business expenses most of these activities are related to the income statement as these activities most often relate to a company s day to day operations and income in some cases the operating activities section of a statement of cash flow is negative if the amount is negative that means the company is using spending more cash than it is bringing in specific to business operations this also means the company must rely on the other two sections to ensure enough cashflow is coming into the company to maintain operations a statement of cash flow will not include non cash transactions be mindful that firms may have activity not impacting their bank balance but impacting their net profit investing activities are the long term cashflow activities a company incurs to plan for the future and ensure it has the infrastructure to scale operations examples of investing activities include acquiring equipment constructing office buildings or buying heavy equipment although these activities may not be required for day to day operations investing activities play an integral part in a firm s long term success consider a firm that makes its own goods by investing in a corporate warehouse and robust manufacturing plant the firm is more likely to achieve business operation success the last section of activities of a firm are the financing activities although these are also not usually part of the day to day operations of a firm the financing activities play an important in ensuring the long term financial health of a firm some financing activities are cash inflows while other are cash outflows for example firms may decide to award dividends to investors funded from net income of the firm alternatively firms may borrow money from lenders or issue equity to investors to raise capital to support the day to day operations | |
why is a business sometimes called a firm | the word firm has latin roots to the word signature indicating the word may have historically been used to describe the name of a company in addition the etymology of the word translates back to a business or a name of a business 3 | |
what are the 4 types of firms | a firm may take a variety of legal structures including sole proprietorships partnerships corporations or cooperatives the rules dictating the operations and organizational structure of the company is often heavily dictated by the legal type of the firm | |
what is the purpose of a firm | though an oversimplification the purpose of a firm is to make money a nonprofit is often not referred to as a firm therefore a firm s purpose is to facilitate trade between a manufacturer or retailer with a client a firm s purpose is to ensure a good or service is transmit to those who need it with the expectation that the firm can generate a profit along the way the bottom linea firm often refers to a company that sells a service to customers though sometimes a physical good may be transmitted as well the ultimate goal of a firm is to make money as a firm is often not a non profit the activities of a firm can usually be broken into the operating investing and financing aspects of the firm | |
what is a first mortgage | a first mortgage is a primary lien on a property 1 as the primary loan that pays for a property it has priority over all other liens or claims on a property in the event of default a first mortgage is not the mortgage on a borrower s first home it is the original mortgage taken on any one property it is also called a first lien if the home is refinanced then the refinanced mortgage assumes the first mortgage position understanding first mortgages | |
when an individual wants to buy a property they may decide to finance the purchase with a loan from a lending institution called a mortgage the lender expects the home loan or mortgage to be repaid in monthly installments which include a portion of the principal and interest payments the lender will have a lien on the property because the loan is secured by the home this mortgage taken out by a homebuyer to purchase the home is known as the first mortgage 4 | the first mortgage is the original loan taken out on a property the homebuyer could have multiple properties in their name however the original mortgages taken out to secure each of the properties comprise the first mortgage for example if a property owner takes out a mortgage for each of their three homes then each of the three mortgages is the first mortgage the loan to value ltv ratio on a home loan is a measure of the mortgage amount versus the appraised value of the home 5 if the ltv of a first mortgage is greater than 80 lenders generally require private mortgage insurance pmi in such a case it sometimes can be economical for a borrower to limit the size of the first mortgage to 80 ltv and use secondary financing to borrow the remaining amount needed 2the economics of paying pmi versus taking out a second loan largely depends on the rate at which a borrower expects the value of their home to increase pmi can be eliminated when the ltv of the first mortgage reaches 78 however a second lien which typically carries a higher interest rate than a first mortgage must be paid off this is usually accomplished by refinancing the first mortgage for an amount equal to the remaining balance of both the first and second mortgages the mortgage interest paid on a first mortgage is tax deductible this means that homeowners can reduce their taxable income by the amount of interest paid on the loan for the tax year however the mortgage interest tax deduction is only applicable to taxpayers who itemize expenses on their tax returns 3first mortgage requirementsfirst mortgage requirements can vary based on whether you re choosing a conventional loan or a government backed loan such as a federal housing administration fha u s department of agriculture usda or u s department of veterans affairs va loan these requirements can affect the type of property can also matter when getting a first mortgage fha loans for example allow you to purchase a one to four unit home with just 3 5 down and a credit score as low as 580 but the property itself must meet certain standards to qualify for the loan 6poor credit is not necessarily an absolute roadblock to getting a first mortgage but it can affect the loan terms that you qualify for and the interest rates that you pay first mortgage vs second mortgagethe term first mortgage leads one to understand that there could be other mortgages on a property a homeowner could take out another mortgage such as a second mortgage while the original and first mortgage is still in effect a first mortgage represents the primary debt owed on a property which serves as collateral for the loan a second mortgage is a junior lien that you take out against your home when you still have a first mortgage outstanding 7second mortgages are subordinate to first mortgages so if you sell the home for example any proceeds would go toward paying off the first mortgage then the second mortgage common examples of second mortgages include home equity loans and home equity lines of credit helocs you may take out one of these second mortgage loans if you wish to borrow against the accumulated equity in your home 7your ability to qualify for a second mortgage home equity loan or home equity line of credit heloc can depend on your credit scores income and how much equity you ve accrued in the home example of a first mortgagehere s an example of how a first mortgage loan works and what the addition of a second mortgage loan can mean assume a homebuyer secures a 250 000 first mortgage on a home property and after several years obtains a second mortgage for 30 000 on the same property the borrower defaults on his payments after he has already repaid 50 000 of the original loan amount and his property is foreclosed and sold to cover the loan given that the first mortgage is senior to the second mortgage if the proceeds from the sale of the property add up to 210 000 then the first mortgage lender will receive the balance owed which is 200 000 the second mortgage lender will then receive whatever is left in this case 10 000 and because a first mortgage is a primary claim that takes precedence over secondary claims second mortgages usually command higher interest rates than first mortgages do if you re struggling with mortgage payments then a loan modification short sale or deed in lieu of foreclosure are some of the options for managing first and second mortgage debt can i have two mortgages at the same time it s possible to have two mortgages at the same time a first mortgage can go toward purchasing a home either as a primary residence or as an investment property a second mortgage or home equity loan can go toward making upgrades or improvements to the property | |
is a second mortgage superior to a first mortgage | first mortgages take precedence over second mortgages for repayment if the borrower defaults this means that second mortgages are subordinate not superior to first mortgages on a home | |
what is the downside to a second mortgage | second mortgages increase a homeowner s monthly financial obligations they can also increase the risk of default if the homeowner is unable to keep up with both the first and second mortgage payments | |
is taking out a second mortgage a good idea | taking out a second mortgage could be a good idea if you ve researched borrowing options and you understand what you can afford to repay if however your income is unstable or you lack sufficient emergency savings to cover mortgage payments if you lose your job or become ill and can t work then you may want to reconsider a second mortgage loan the bottom linefirst mortgage loans make it possible for homebuyers to purchase homes and they take priority over any subsequent second mortgages that may be associated with the property when applying for a first mortgage it s important to understand the requirements to buy a house and what lenders are seeking it s also helpful to shop around to compare mortgage rates in order to find the best possible deal on a home loan | |
what is a first mover | a first mover is a service or product that gains a competitive advantage by being the first to market with a product or service being first typically enables a company to establish strong brand recognition and customer loyalty before competitors enter the arena other advantages include additional time to perfect its product or service and setting the market price for the new item first movers in an industry are almost always followed by competitors that attempt to capitalize on the first mover s success and gain market share most often the first mover has established sufficient market share and a solid enough customer base that it maintains the majority of the market examples of first moversbusinesses with a first mover advantage include innovators amazon nasdaq amzn and ebay nasdaq ebay amazon created the first online bookstore which was immensely successful by the time other retailers established an online bookstore presence amazon had achieved significant brand recognition and parlayed its first mover advantage into marketing a range of additional unrelated products according to forbes s the world s most innovative companies 2019 ranking amazon ranks second it has annual revenues of 280 billion and through the end of 2019 had a 20 annual sales growth rate ebay built the first meaningful online auction website in 1995 and continues to be a popular shopping site worldwide it ranked 43rd on the forbes list of innovative companies the company generates 287 billion in annual revenues with a 2 8 annual sales growth rate advantages of first moversbeing the first to develop and market a product comes with many prime advantages that strengthen a company s position in the marketplace for example a first mover often gains exclusive agreements with suppliers sets industry standards and develops strong relationships with retailers other advantages includedisadvantages of first moversdespite the many advantages associated with being a first mover there are also disadvantages for example other businesses can copy and improve upon a first mover s products thereby capturing the first mover s share of the market it costs approximately 60 to 75 less to replicate a product than it costs to create a new product also often in the race to be the first to market a company may forsake key product features to expedite production if the market responds unfavorably then later entrants could capitalize on the first mover s failure to produce a product that aligns with consumer interests and the cost to create versus the cost to imitate is significantly disproportionate | |
how a first notice of loss works | the first notice of loss fnol is a report that starts the process for you to receive a claim settlement for example if a thief steals your automobile and you carry comprehensive insurance you can file a claim against your policy to help pay for a new ride the first step in the claims process is to contact your insurance company or agent to report the theft this first contact is the fnol 12the fnol process varies by insurer with some providers you can make the initial contact by calling your insurance agent or a claims call center several major carriers enable you to file the fnol using their mobile apps others give you multiple options to file which can include through a website app email a phone call or postal mail 34 | |
what is required for an fnol | it s important to file the fnol as soon as possible but you need to prepare first before contacting the insurance company you first need to document your loss 5 for instance if a fire damages your kitchen take photos or videos of the damage if you have photos or videos of the insured asset taken before the incident make them available before submitting the fnol 2if you damage your car in an accident take photos and jot down notes about the location how the incident occurred and traffic and weather conditions also if someone witnessed the accident ask them for their contact information if a police officer responds to the accident ask them how you can get a copy of their report once you ve fully documented all losses you re ready to contact your insurer an fnol usually requires you to provide policy number date and time of theft or damage location of the incident police report number if any and your personal account of how the loss happened 6in the case of auto damage claims you also must provide information about the other party s insurance coverage during the fnol the claims adjuster may also rely on the accounts of the other driver and witnesses when determining how to settle the claim if you initiate the fnol over the phone the agent or claim representative will review your policy to see if it covers your losses they might also ask you a few questions about the extent of the loss and how the loss occurred | |
when making an fnol by phone ask the agent or representative about the next steps in the process and whether they need additional documentation or information from you or other parties take notes during the call | outcomes following the fnolafter the fnol the insurance company might send a claims adjuster to inspect your losses 5 it s the adjuster s job to determine the extent of losses and how much you will receive in a settlement it s important for you to be available during the adjuster s visit particularly if you were present when the losses occurred during the visit the adjuster might ask you additional questions and take pictures of losses sometimes an insurance agent adjuster or claims representative might ask you to submit additional documentation following the fnol comply as soon as possible to ensure a smooth claim process once the provider has all the information they need it will either issue a settlement payment or deny the claim if the insurer denies your claim it must inform you why it made the decision 78 if you believe the company hasn t treated you fairly you can file a complaint with your state s department of insurance state insurance codes set time limits that insurers must meet when dealing with claims for example once you make the fnol texas providers have 15 days to collect additional information and determine the validity of your claim 5if you receive a settlement it s important to understand how the insurer determines the dollar amount many auto and home insurance policies pay actual cash value which is the depreciated value of the asset for instance if you total a five year old vehicle and carry a collision insurance policy the insurer will determine the settlement amount based on its current market value some insurance companies offer replacement cost value coverage usually as an endorsement or rider to a standard policy 9in certain cases a carrier might make more than one settlement payment especially when paying homeowners claims for instance if your home sustains storm damage the insurer might make an initial payment to help get repairs started a second payment for personal property losses and a third payment to reimburse you for final construction costs technology and the fnolover the years technology has changed the way you report insurance losses and how insurers manage claims updates many large insurance companies enable you to make the fnol using an online claim submission application or a mobile app typically providers offer mobile apps for android and apple devices the functionality of mobile apps varies by insurer but many enable you to submit a claim using a smartphone or tablet with some apps you can also submit supporting documents and photos contact your agent chat with a claims adjuster and track the status of your claim some major carriers give you the option to choose a digital claim payment rather than a traditional paper check for instance your insurer might make a settlement payment via direct deposit into your checking account or through your bank debit card typically opting for an electronic settlement will ensure a faster payment special considerations | |
when a loss occurs contact your insurer as soon as possible if you intend to file a claim the quicker you report a loss the faster you ll receive a settlement payment some insurance companies recommend or require a fnol within a certain period for example a provider might recommend submitting a homeowners claim within six months of the incident that caused the loss 10 check the fine print of your insurance policies to determine whether your insurer sets a time limit on filing claims | be aware that your claims history is one factor insurance companies use when setting rates filing a single claim might not cause a rate increase for instance you might not face a rate increase following a storm damage claim however if you file an auto collision insurance claim for an accident deemed your fault you ll likely see a rate increase keep this in mind before making a fnol if you can afford to pay for losses out of pocket it could save you money overall | |
what is an example of a first notice of loss | let s say you crash your car into a tree for your collision insurance to pay for the damage you ll need to first file a claim insurance companies offer several ways to file a claim which can vary by carrier regardless of how you make the initial contact about the accident and losses this first contact constitutes the fnol it s the first step in filing a claim if the policy covers the loss the fnol will start the process for receiving an insurance settlement payment 11 | |
what is the difference between proof of loss and loss notice | the fnol loss notice is your first step in the claims process when a disaster occurs you must report losses to an insurance agent or company to start the claims process proof of loss is a later step in which you must provide details of the scope of the loss along with an explanation of losses the adjuster might require you to submit supporting materials such as photos or video of the damage 12can an insurance company reject a proof of loss if you provide false information in the proof of loss the insurer might reject it or even deny the claim 13 typically the insurance company requires you to submit the form within a specified period such as 30 or 60 days in some cases filing the form later than the due date may result in a claim denial however some state insurance codes prohibit a provider from denying a claim strictly based on a policyholder filing a proof of loss form after its due date 14the bottom linenormally the first step in the formal claims process the first notice of loss fonl is the initial report made to an insurance provider following loss theft or damage of an insured asset taking this step is key to getting reimbursed for costs that your insurance covers however if you never have to file a claim you will not have to file a first notice of loss | |
what is the first world | first world a term developed during the cold war in the 1950s originally referred to a country that was aligned with the united states and other western nations in opposition to what was then the soviet union and its allies since the collapse of the soviet union in 1991 the term s meaning has largely evolved currently it describes a developed and industrialized country characterized by political and economic stability democracy the rule of law a capitalist economy and a high standard of living understanding the first worldexamples of first world countries include the united states canada australia new zealand and japan several western european nations qualify as well especially great britain france germany switzerland and the scandinavian countries the ways that first world countries are defined can vary for example a first world nation might be described as aligned or amicable with western countries or those in the northern hemisphere highly industrialized possessing a low poverty rate and or high accessibility to modern resources and infrastructure various metrics have been used to define first world nations including gross domestic product gdp gross national product gnp mortality rates and literacy rates the human development index is also an indicator of which countries might be categorized as having first world status economically speaking first world countries tend to have stable currencies and robust financial markets making them attractive to investors from all around the world while they may not be purely capitalist first world nations economies tend to be characterized by free markets private enterprise and private ownership of property under the original cold war alliance designations the first world consisted of the u s western europe and their allies the second world was the so called communist bloc the soviet union china cuba etc the remaining nations which didn t align with either group were assigned to the third world most of africa asia the middle east and latin america however this definition includes many countries that are economically stable which does not fit the contemporary definition of a third world country criticism of the first world designationcontroversy exists around the use of the term first world to describe democratic countries in comparison with developing nations and those with political regimes that do not align with western nations there is a tendency toward using the phrase as a way to rank some nations above others in terms of geopolitical significance such references can lead to divisive tension in international relations especially as developing nations seek to negotiate with so called first world countries or appeal to the international community for support of their causes it is not uncommon for first world nations to press for international policies especially economic ones that will favor their industries and trade to protect or enhance their wealth and stability this can include efforts to influence decisions made in such forums as the united nations or the world trade organization wto designation as a first world nation does not necessarily mean a country has local access to certain luxuries or resources that are in demand for example oil production is a staple industry in many countries that historically have not been regarded as first world nations brazil for instance contributes substantial amounts of oil to the overall world supply along with other forms of production however the country is recognized as a developing industrialized state rather than as a first world nation in contemporary parlance developed or industrialized nation is considered a preferable term to first world country an antiquated modelthere is an argument to be made that the model of dividing nations into first second or third worlds represents an archaic and antiquated perspective since the end of the cold war the united states has become one of the world s superpowers and an increasing number of countries have embraced or are in the process of adopting american style democracy and capitalism these countries are neither abysmally poor nor exceedingly rich rule of law and democracy are their defining features as such it would be counterintuitive to describe them with the pejorative term of third world examples of these types of countries include brazil and india the original definition of first world as a country aligned with the united states has also led to some odd classifications of quite prosperous and advanced nations oil rich saudi arabia which has a higher per capita income than first world country turkey is still often technically slotted as a second or third world nation for example or at least denied the first world designation then there is the increasing problem of wealth inequality the high per capita income associated with the first world often belies an extremely uneven distribution of wealth in these nations several first world countries have poverty stricken regions where conditions are comparable to those in developing countries for example residents of appalachia and other rural areas of the united states often lack resources and essentials for a minimum standard of living even certain sections of large cities such as the south side of chicago or northern milwaukee s 53206 neighborhood feature impoverished conditions | |
what is the first world | while highly subjective first world is a term that consists of countries that may have the following characteristics stable democracies high standards of living capitalist economies and economic stability other measures that may be used to indicate first world countries include gross domestic product gdp or literacy rates broadly speaking countries that may be considered first world include the united states japan canada and australia among others | |
what defines a first world country | there is no universal way to define a first world country they are often characterized as industrialized and democratic nations these features are typically accompanied by stable currencies sound financial markets and modern infrastructure due to these factors first world countries often attract foreign direct investment and capital inflows | |
why is the term first world contentious | first world is a problematic term because it is outdated first coined during the cold war it referred to countries that were allies of the united states mostly other westernized countries as opposed to countries that aligned with the former soviet union because the economic indicators used to define the first world vary by their perspective the first world can represent an opaque concept of a country s economic stature for instance despite saudi arabia having per capita income that is nearly equal to portugal s it is often considered a second world nation the bottom linefirst world nations are those described as highly developed industrialized technologically advanced educated and wealthy in contrast to developing second world and less developed third world countries the first world is seen to enjoy many benefits such as a relatively high quality of life and prosperity the phrase first world country was popularized in the 1950s and 1960s during the cold war to describe developed countries considered to have the power to influence international politics through their economic technological and military strength the term was not explicitly political it described a grouping based on aggregate wealth or perceived power rather than an ideological outlook first world countries included australia canada france germany italy japan new zealand norway the united kingdom and the united states among others today the term has fallen somewhat out of favor as critics argue it is an outmoded model for understanding national development | |
what is a fiscal deficit | a fiscal deficit is a shortfall in a government s income compared with its spending a government that has a fiscal deficit is spending beyond its means a fiscal deficit is calculated as a percentage of gross domestic product gdp or simply as total dollars spent in excess of income in either case the income figure includes only taxes and other revenues and excludes money borrowed to make up the shortfall a fiscal deficit is different from fiscal debt the latter is the total debt accumulated over years of deficit spending it is also different from fiscal imbalance which is a measure of future difference between future debt obligations and revenue streams understanding the fiscal deficita fiscal deficit is not universally regarded as a negative event for example the influential economist john maynard keynes argued that deficit spending and the debts incurred to sustain that spending can help countries climb out of economic recession fiscal conservatives generally argue against deficits and in favor of a balanced budget policy in the united states fiscal deficits have been occurring regularly since the nation declared independence alexander hamilton the first secretary of the treasury proposed issuing bonds to pay off the debts incurred by the states during the revolutionary war at the height of the depression president franklin d roosevelt made a virtue of necessity and issued the first u s savings bonds to encourage americans to save more and not incidentally finance government spending in fact president roosevelt holds the record for the fastest growing u s fiscal deficits the new deal policies designed to pull america out of the great depression combined with the need to finance the country s entry into world war ii drove the federal deficit from 4 5 of gdp in 1932 to 26 8 in 1943 1 after the war the federal deficit was reduced and a surplus of 4 billion was established by 1947 under president harry s truman 2 the 2020 fiscal deficit of the united states was 3 1 trillion roughly three times the size of the 2019 deficit 3 in 2009 president barack obama increased the deficit to more than 1 trillion to finance the government stimulus programs designed to fight off the great recession 4 that was a record dollar number but actually was only 9 7 of gdp far under the numbers reached in the 1940s 1 in 2020 under president donald trump the deficit reached 3 1 trillion for the entire fiscal year due to a combination of tax cuts and increased spending amid the covid 19 pandemic and subsequent economic fallout 3 since world war ii the u s government has run at a fiscal deficit in most years as noted president truman produced a surplus in 1947 followed by two more in 1948 and 1951 president dwight eisenhower s government had small deficits for several years before producing small surpluses in 1956 1957 and 1960 president richard m nixon had just one in 1969 5the next federal surplus did not occur until 1998 when president bill clinton reached a landmark budget deal with congress that resulted in a 70 billion surplus the surplus grew to 236 billion in 2000 president george w bush benefited from a 128 billion carryover of the clinton surplus in 2001 5 | |
what is the fiscal multiplier | the fiscal multiplier measures the effect that increases in fiscal spending will have on a nation s economic output or gross domestic product gdp in general economists define fiscal multipliers as the ratio of a change in output to a change in tax revenue or government spending fiscal multipliers are important because they can help guide a government s policies during an economic crisis and help set the stage for economic recovery understanding the fiscal multiplierthe fiscal multiplier is a keynesian idea first proposed by john maynard keynes s student richard kahn in a 1931 paper and is depicted as a ratio to show the causality between the controlled variable changes in fiscal policy and the outcome gdp 1 at the core of fiscal multiplier theory lies the idea of marginal propensity to consume mpc which quantifies the increase in consumer spending as opposed to saving due to an increase in the income of an individual household or society fiscal multiplier theory posits that as long as a country s overall mpc is greater than zero then an initial infusion of government spending should lead to a disproportionately larger increase in national income the fiscal multiplier expresses how much greater or if stimulus turns out to be counterproductive smaller the overall gain in national income is when compared with the amount of extra spending the formula for the fiscal multiplier is as follows fiscal multiplier 1 1 mpc where mpc marginal propensity to consume begin aligned text fiscal multiplier frac 1 1 text mpc textbf where text mpc text marginal propensity to consume end aligned fiscal multiplier 1 mpc1 where mpc marginal propensity to consume example of fiscal multiplierlet s say that a national government enacts a 1 billion fiscal stimulus and that its consumers mpc is 0 75 consumers who receive the initial 1 billion will save 250 million and spend 750 million effectively initiating another smaller round of stimulus the recipients of that 750 million will spend 562 5 million and so on the total change in national income is the initial increase in government or autonomous spending times the fiscal multiplier since the marginal propensity to consume is 0 75 the fiscal multiplier would be four keynesian theory would thus predict an overall boost to the national income of 4 billion as a result of the initial 1 billion fiscal stimulus in addition to the fiscal multiplier economists use other multipliers to study the behavior of the economy including the earnings multiplier and the investment multiplier the fiscal multiplier in the real worldempirical evidence suggests that the actual relationship between spending and growth is messier than theory would suggest not all members of society have the same mpc for instance lower income households tend to spend a much greater share of a windfall than higher income ones mpc also depends on the form in which fiscal stimulus is received different policies can therefore have drastically different fiscal multipliers in 2009 mark zandi then chief economist of moody s estimated the following fiscal multipliers for different policy options expressed as the one year dollar increase in real gdp per dollar increase in spending or decrease in federal tax revenue 2 by far the most effective policy options according to this analysis are temporarily increasing food stamps 1 74 temporary federal financing of work share programs 1 69 and extending unemployment insurance benefits 1 61 2 these policies target groups with low incomes and as a result high marginal propensities to consume permanent tax cuts benefiting mostly higher income households by contrast have fiscal multipliers below 1 for every dollar spent given up in tax revenue only a few cents are added to real gdp special considerationsthe idea of the fiscal multiplier has seen its influence on policy wax and wane keynesian theory was extremely influential in the 1960s but a period of stagflation which keynesians were largely unable to explain caused faith in fiscal stimulus to wane beginning in the 1970s many policymakers began to favor monetarist policies believing that regulating the money supply was at least as effective as government spending following the 2008 financial crisis however the fiscal multiplier has regained some of its lost popularity the u s which invested heavily in fiscal stimulus saw a quicker and sturdier recovery than europe where bailouts were preconditioned on fiscal austerity | |
what is fiscal policy | fiscal policy refers to the use of government spending and tax policies to influence economic conditions especially macroeconomic conditions these include aggregate demand for goods and services employment inflation and economic growth during a recession the government may lower tax rates or increase spending to encourage demand and spur economic activity conversely to combat inflation it may raise rates or cut spending to cool down the economy fiscal policy is often contrasted with monetary policy which is enacted by central bankers and not elected government officials understanding fiscal policyu s fiscal policy is largely based on the ideas of british economist john maynard keynes 1883 1946 he argued that economic recessions are due to a deficiency in the consumer spending and business investment components of aggregate demand keynes believed that governments could stabilize the business cycle and regulate economic output by adjusting spending and tax policies to make up for the shortfalls of the private sector 1his theories were developed in response to the great depression which defied classical economics assumptions that economic swings were self correcting keynes ideas were highly influential and led to the new deal in the u s which involved massive spending on public works projects and social welfare programs in keynesian economics aggregate demand or spending is what drives the performance and growth of the economy aggregate demand is made up of consumer spending business investment spending net government spending and net exports according to keynesian economists the private sector components of aggregate demand are too variable and too dependent on psychological and emotional factors to maintain sustained growth in the economy 1pessimism fear and uncertainty among consumers and businesses can lead to economic recessions and depressions what s more excessive public sector exuberance during good times can lead to an overheated economy and inflation however keynesians believe that government taxation and spending can be managed rationally and used to counteract the excesses and deficiencies of private sector consumption and investment spending in order to stabilize the economy 1 | |
when private sector spending decreases the government can spend more or tax less in order to directly increase aggregate demand when the private sector is overly optimistic and spends too much too quickly on consumption and new investment projects the government can spend less or tax more in order to decrease aggregate demand | this means that to help stabilize the economy the government should run large budget deficits during economic downturns and run budget surpluses when the economy is growing these are known as expansionary or contractionary fiscal policies respectively during the great depression of the 1930s u s unemployment rose to 25 and millions stood in bread lines for food the misery seemed endless president franklin d roosevelt decided to put an expansionary fiscal policy to work he launched his new deal soon after taking office it created new government agencies the wpa jobs program and the social security program which exists to this day these spending efforts combined with his continued expansionary policy spending during world war ii pulled the country out of the depression 2types of fiscal policiesto illustrate how the government can use fiscal policy to affect the economy consider an economy that s experiencing a recession the government might issue tax stimulus rebates to increase aggregate demand and fuel economic growth the logic behind this approach is that when people pay lower taxes they have more money to spend or invest which fuels higher demand that demand leads firms to hire more decreasing unemployment and causing fierce competition for labor in turn this serves to raise wages and provide consumers with more income to spend and invest it s a virtuous cycle or positive feedback loop alternately rather than lowering taxes the government may seek economic expansion by increasing spending without corresponding tax increases building more highways for example could increase employment pushing up demand and growth expansionary fiscal policy is usually characterized by deficit spending deficit spending occurs when government expenditures exceed receipts from taxes and other sources in practice deficit spending tends to result from a combination of tax cuts and higher spending in the face of mounting inflation and other expansionary symptoms a government can pursue contractionary fiscal policy perhaps even to the extent of inducing a brief recession in order to restore balance to the economic cycle the government does this by increasing taxes reducing public spending and cutting public sector pay or jobs | |
where expansionary fiscal policy involves spending deficits contractionary fiscal policy is characterized by budget surpluses this policy is rarely used however as it is hugely unpopular politically | public policymakers thus face differing incentives relating to whether to engage in expansionary or contractionary fiscal policy therefore the preferred tool for reining in unsustainable growth is usually a contractionary monetary policy monetary policy involves the federal reserve raising interest rates and restraining the supply of money and credit in order to rein in inflation the two major fiscal policy tools that the u s government uses to influence the nation s economic activity are tax rates and government spending downside of expansionary policymounting deficits are among the complaints lodged against expansionary fiscal policy critics complain that a flood of government red ink can weigh on growth and eventually create the need for damaging austerity many economists simply dispute the effectiveness of expansionary fiscal policies they argue that government spending too easily crowds out investment by the private sector expansionary policy is also popular to a dangerous degree say some economists fiscal stimulus is politically difficult to reverse whether it has the desired macroeconomic effects or not voters like low taxes and public spending due to the political incentives faced by policymakers there tends to be a consistent bias toward engaging in more or less constant deficit spending that can be in part rationalized as good for the economy eventually economic expansion can get out of hand rising wages lead to inflation and asset bubbles begin to form high inflation and the risk of widespread defaults when debt bubbles burst can badly damage the economy this risk in turn leads governments or their central banks to reverse course and attempt to contract the economy fiscal policy vs monetary policyfiscal policy is the responsibility of the government it involves spurring or slowing economic activity using taxes and government spending monetary policy is the domain of the u s federal reserve board and refers to actions taken to increase or decrease liquidity through the nation s money supply according to the federal reserve board these actions are intended to promote maximum employment stable prices and moderate long term interest rates the economic goals the congress has instructed the federal reserve to pursue 3the monetary policy tools that the fed uses to increase or decrease liquidity and affect consumer spending and borrowing include 4who handles fiscal policy in the united states fiscal policy is directed by both the executive and legislative branches in the executive branch the president is advised by both the secretary of the treasury and the council of economic advisers in the legislative branch the u s congress authorizes taxes passes laws and appropriations spending for any fiscal policy measures through its power of the purse this process involves participation deliberation and approval from both the house of representatives and the senate | |
what are the main tools of fiscal policy | fiscal policy tools are used by governments to influence the economy these primarily include changes to levels of taxation and government spending to stimulate growth taxes are lowered and spending is increased this often involves borrowing by issuing government debt to cool down an overheating economy taxes may be raised and spending decreased | |
how does fiscal policy affect people | often the effects of fiscal policy aren t felt equally by everyone depending on the political orientations and goals of the policymakers a tax cut could affect only the middle class which is typically the largest economic group in times of economic decline and rising taxation this same group may have to pay more taxes than the wealthier upper class similarly when a government decides to adjust its spending its policy may affect only a specific group of people a decision to build a new bridge for example will give work and more income to hundreds of construction workers a decision to spend money on building a new space shuttle on the other hand benefits only a small specialized pool of experts and firms which would not do much to increase aggregate employment levels | |
should the government be getting involved with the economy | one of the biggest obstacles facing policymakers is deciding how much direct involvement the government should have in the economy and individuals economic lives indeed there have been various degrees of interference by the government over the history of the united states for the most part it is accepted that a certain degree of government involvement is necessary to sustain a vibrant economy on which the economic well being of the population depends the bottom linefiscal policy is directed by the u s government with the goal of maintaining a healthy economy the tools used to promote beneficial economic activity are adjustments to tax rates and government spending | |
what is a fiscal year fy | a fiscal year is a one year period that companies and governments use for financial planning and budgeting fiscal years are most commonly used by entities that depend on a cycle that doesn t correspond to the calendar year for example the u s government s fiscal year starts on oct 1 and ends on sep 30 it is structured this way so that the government can collect taxes accept funding requests from its agencies create a budget proposal and route the proposed budget through the appropriate channels to congress for approval investopedia julie bangunderstanding fiscal yearsa fiscal year is a period lasting one year but not necessarily starting at the beginning of the calendar year countries companies and organizations can start and end their fiscal years differently depending on their needs and practices fiscal years that vary from a calendar year are typically chosen due to the specific nature of the business for example nonprofit organizations often align their fiscal years with the timing of grant awards at the same time a for profit business might choose a year that ends after it traditionally has its largest revenue intake such as a retailer ending its fiscal year on jan 31 1fiscal years are referenced by their end date or end year for example to reference a nonprofit organization s fiscal year you may say fy 2024 or fiscal year ending june 30 2024 similarly if you referred to government spending that occurred on nov 15 2024 you would label that as an expenditure for fy 2025 according to the irs a fiscal year consists of 12 consecutive months ending on the last day of any month except december 2 alternatively instead of observing a 12 month fiscal year u s taxpayers may observe a 52 to 53 week fiscal year in this case the fiscal year would end on the same day of the week each year whichever is the closest to a certain date such as the nearest saturday to dec 31 this system automatically results in some 52 week fiscal years and some 53 week fiscal years fiscal years are commonly referred to when discussing budgets and are a convenient period to reference and review a company s or government s financial performance irs requirements for fiscal yearsthe default irs system is based on the calendar year so fiscal year taxpayers have to make some adjustments to the deadlines for filing certain forms and making payments while most taxpayers must file by april 15 following the year for which they are filing fiscal year taxpayers must file by the 15th day of the fourth month following the end of their fiscal year 3 for example a business observing a fiscal year from june 1 to may 31 must submit its tax return by sept 15 in the united states eligible businesses can adopt a fiscal year for tax reporting purposes simply by submitting their first income tax return observing that fiscal year at any time these businesses may elect to change to a calendar year however companies that want to change from a calendar year to a fiscal year must get special permission from the irs or meet one of the criteria outlined on form 1128 application to adopt change or retain a tax year 2examples of fiscal years for corporationsinvestors might ask what fiscal year is it and it can vary from company to company below are 10 k reports from popular companies with fiscal years that don t follow the calendar a 10 k is an annual financial performance report filed by publicly traded companies with the securities and exchange commission sec apple inc aapl ends its fiscal year on the last saturday of september 4microsoft corporation msft ends its fiscal year on the last day of june every year 5macy s inc m ends its fiscal year on the fifth saturday of the new calendar year 6 many retailers generate a large chunk of their earnings around the holidays which could explain why macy s chooses this end date | |
is a fiscal year the same as a calendar year | a fiscal year spans 12 months and corresponds with a company s budgeting process and financial reporting periods fiscal years can differ from a calendar year and are an important concern for accounting purposes because they are involved in federal tax filings budgeting and financial reporting requirements | |
what is an example of a fiscal year | the u s government s fiscal year begins on oct 1 and ends on sept 30 7 companies that rely on contracts from the government also may structure their fiscal years to end in late september conversely many tech companies experience strong sales volumes during the first half of the year which can explain why in many cases their fiscal years will end in late june | |
why use a fiscal year instead of a calendar year | for companies that rely on seasonal activity using a fiscal year may be beneficial this is because it allows revenues expenses and plans to align better for instance it is common for retail companies to end their fiscal year on jan 31 after the holiday season has ended this ends the year on a high note gives the company more starting capital to work with and keeps it from trying to prepare financial reports during its busiest sales period the bottom linea fiscal year is a one year period used by some businesses governments and nonprofits that ends on a date other than dec 31 reasons vary for why some entities might want a fiscal year different than the calendar year in certain circumstances a fiscal year might end on a specified day such as the last saturday of a particular month as opposed to the last day of a month in these cases it is possible for a fiscal year to sometimes be 53 weeks long entities that use a fiscal year file their taxes on the 15th day of the fourth month following the conclusion of their fiscal year | |
what is fiscal year end | the term fiscal year end refers to the completion of any one year or 12 month accounting period other than a typical calendar year a fiscal year is often the period used for calculating annual financial statements a company s fiscal year may differ from the calendar year and may not close on dec 31 due to the nature of a company s needs once companies choose their fiscal year end typically when they are first incorporating or forming their company it is required to stick with it year to year this allows accounting data to be consistent in terms of time frames investopedia jake shiunderstanding fiscal year endevery year public companies are required to publish financial statements for review by the securities and exchange commission sec these documents also give investors an update on company performance compared to previous years and provide analysts with a way to understand business operations financial statements are published after each company s fiscal year end which may vary from company to company fiscal year end vs calendar year endif a company has a fiscal year end that is the same as the calendar year end it means that the fiscal year ends on dec 31 however companies can choose the best fiscal year end for themselves designed with the needs of the company in mind companies that operate on a non calendar business cycle or have a supplier base that does so may choose a fiscal year end date that more appropriately coincides with their business operations for example many retail companies have a fiscal year that differs from the calendar year due to the heavy sales cycle during the holiday season because dec 31 coincides with heavy shopping by consumers a retail firm may have a hard time producing annual financial statements and counting inventories at that same time as manpower and resources are dedicated to the sales floor in this case the firm may choose an alternate fiscal year end date such as jan 31 rather than dec 31 as another example the best time for a luxury resort to report earnings is probably after vacation season so it may choose a fiscal year end of sept 30 whatever fiscal year end date is determined companies must make a decision when they file for incorporation as their fiscal year end date cannot be changed every year it is also important to note that the timing of a company s fiscal year does not change the due date on taxes for example taxes which are based on a calendar year end are still often due on april 15 regardless of a company s fiscal year end thus in many cases a dec 31 fiscal year end date is more conducive for calculating taxes due | |
what is the u s fiscal year end | the fiscal year of the u s government runs from oct 1 to sept 30 it is not the same as a calendar year 1 | |
what happens at the end of a fiscal year | at the end of a fiscal year a company reviews its entire annual bookkeeping it reconciles transactions makes adjustments verifies financial data and calculates all of the annual financial information such as income expenses revenue investments and more | |
how do companies choose their fiscal year end | most companies choose their fiscal year end based on the seasonality of their business some businesses are seasonal while others transact the same amount of business throughout the year businesses generally choose their fiscal year based on the period when they receive the most profit for example a business that earns most of its profit after the christmas holiday season may choose to end its fiscal year right after the bottom linethe fiscal year end of a company is the completion of a one year accounting cycle of the business it contains four quarters and usually runs from jan 1 to dec 31 some businesses have fiscal years that do not line up with a traditional calendar year as analysts rely on comparative data to identify trends and create forecasts they must be careful to compare two companies over the same time period if comparing two companies with different fiscal years analysts must adjust the data to ensure the information for both firms covers the same time frame so as not to skew the comparison one way or another this is especially the case for companies that do business in seasonal industries | |
what is the fisher effect | the fisher effect is an economic theory created by economist irving fisher that describes the relationship between inflation and both real and nominal interest rates the fisher effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate therefore real interest rates fall as inflation increases unless nominal rates increase at the same rate as inflation understanding the fisher effectfisher s equation reflects that the real interest rate can be taken by subtracting the expected inflation rate from the nominal interest rate in this equation all the provided rates are compounded the fisher effect can be seen each time you go to the bank the interest rate an investor has on a savings account is really the nominal interest rate for example if the nominal interest rate on a savings account is 4 and the expected rate of inflation is 3 then the money in the savings account is really growing at 1 the smaller the real interest rate the longer it will take for savings deposits to grow substantially when observed from a purchasing power perspective countries will closely monitor the consumer price index cpi when determining inflationary measures nominal interest rates and real interest ratesnominal interest rates reflect the financial return an individual gets when they deposit money for example a nominal interest rate of 10 per year means that an individual will receive an additional 10 of their deposited money in the bank unlike the nominal interest rate the real interest rate considers purchasing power in the equation in the fisher effect the nominal interest rate is the provided actual interest rate that reflects the monetary growth padded over time to a particular amount of money or currency owed to a financial lender real interest rate is the amount that mirrors the purchasing power of the borrowed money as it grows over time importance in money supplythe fisher effect is more than just an equation it shows how the money supply affects the nominal interest rate and inflation rate in tandem for example if a change in a central bank s monetary policy would push the country s inflation rate to rise by 10 percentage points then the nominal interest rate of the same economy would follow suit and increase by 10 percentage points as well in this light it may be assumed that a change in the money supply will not affect the real interest rate as the real interest rate is the result of inflation and the nominal rate it will however directly reflect changes in the nominal interest rate | |
when a country has a higher nominal interest rate than a different country the first country s currency should see depreciation against the second currency as the first currency will also be experiencing a period of increased inflation | the international fisher effect ife the international fisher effect ife is an exchange rate model that extends the standard fisher effect and is used in forex trading and analysis it is based on present and future risk free nominal interest rates rather than pure inflation and it is used to predict and understand the present and future spot currency price movements for this model to work in its purest form it is assumed that the risk free aspects of capital must be allowed to free float between nations that comprise a particular currency pair the ife was primarily used in periods of monetary policy where interest rates were adjusted more frequently and in larger amounts with electronic trading and the advent of the retail arbitrage trader the inconsistencies between spot exchange rates are more visible and thus the inconsistency is more quickly noticed and the trade becomes too crowded to be significantly profitable however the ife as well as additional methods of trade confirmation can be incorrectly assessed in this case even though there may not be an empirical advantage to a trade there may be a psychological one if the spot predictions have been incorrectly assessed and acted upon | |
what are the main causes of inflation | there are many causes of inflation but some of the most common ones are when prices rise due to an increase in the cost of production for example if a company receives goods from a different country and the cost of oil rises those goods become more expensive because they now cost the company more to receive demand will also determine inflation if many people rush to buy the same item or service the price will rise in the 2021 2022 environment inflation was mostly driven by fiscal policy | |
how do you profit from inflation | there are two schools of thought when it comes to inflation those who beat inflation and those who simply match it looking to match inflation is possible as a retail investor by investing in asset classes that are more likely to do well during such periods two common classes are real estate and commodities a fixed mortgage will do well in an inflationary environment as it devalues the payments required more commonly an investor will place their money in inflation indexed bonds such as treasury inflation protected securities tips those looking to actively beat inflation could consider value stocks and other companies that are easily able to pass on inflated costs to their consumers | |
how do you find the real interest rate | the real interest rate is essentially the nominal interest rate minus the inflation rate so if the nominal rate is 6 and inflation is 4 the real interest rate is 2 this interest rate can be calculated using currently available information but some businesses will plan for future interest rate and inflation environments so they know how to adjust their pricing in the event of an increase or decrease in inflation the bottom linethe fisher effect is a theory describing the relationship between both real and nominal interest rates and inflation the theory states that the nominal rate will adjust to reflect the changes in the inflation rate in order for products and lending avenues to remain competitive it is a theory that is sometimes applied to currency pairs in order to profit from price discrepancies through a trading style called arbitrage | |
what is the fisher transform indicator | the fisher transform indicator is a technical indicator that converts prices into a gaussian normal distribution it highlights when prices have moved to an extreme based on recent prices this may help in spotting turning points in the price of an asset it also helps show the trend and isolate the price waves within a trend the fisher transform indicator was created by john f ehlers formula and how to calculate the fisher transform indicatorfisher transform 1 2 ln 1 x 1 x where ln is the natural logarithm x transformation of price to a level between 1 and 1 begin aligned text fisher transform frac 1 2 ln left frac 1 x 1 x right textbf where ln text is the natural logarithm x text transformation of price to a level between 1 and 1 end aligned fisher transform 21 ln 1 x1 x where ln is the natural logarithmx transformation of price to a level between 1 and 1 now that you know the formula you can use the following steps to calculate the fisher transform indicator | |
what is fitch ratings | fitch ratings is an international credit rating agency based in new york city and london investors use the company s ratings to determine which investments are less likely to default and yield a solid return fitch bases the ratings on several factors such as what kind of debt a company holds and its sensitivity to systemic changes like interest rates understanding fitch ratingsfitch is one of the top three credit rating agencies in the world the fitch rating system is very similar to other rating agencies in that they all use a letter system the fitch rating system breaks entities into two categories investment grade and non investment grade the investment grade ratings are the non investment grade ratings are fitch ratings and sovereign nationsfitch offers sovereign credit ratings that describe each nation s ability to meet its debt obligations sovereign credit ratings are available to investors to help give them insight into the level of risk associated with investing in a particular country countries will invite fitch and other credit rating agencies to evaluate their economic and political environments and financial situations to determine a representative rating it s essential for countries to obtain the best sovereign credit rating possible particularly in the case of developing nations as it aids in accessing funding in international bond markets 2in 2018 fitch awarded the united states the highest aaa long term sovereign credit rating on the lower end was brazil with a bb 34 however in 2023 fitch downgraded the u s to aa a rating between aaa and aa that signifies a slight reduction in confidence that the country can pay its debts but the agency believes the u s is still a high quality investment with a low risk of defaulting 5country ratings are important because they can influence international investor sentiments which is why the u s downgrade to aa is significant fitch ratings of companies and othersfitch ratings also analyzes the issues of companies local governments and agencies and financial institutions for their creditworthiness for example the agency analyzed two of jacksonville florida s special revenue bonds awarding them an aa investment grade rating this means the municipality is rated between a low risk of default and a low expectation of default on its two issuances which total more than 290 million the bonds are intended to refund earlier bond issues and finance capital equipment and improvements in the city 6at the financial institution level fitch rated london based national westminster bank mortgage covered bonds at aaa with a stable outlook this rating is the highest available signifying fitch s confidence in the bank s bonds 7 | |
what are fitch ratings | fitch ratings are a system of creditworthiness ratings that gauge the ability of a country or business to pay off its debts | |
what does the fitch rating a mean | a rating of a means there is a low default risk and that a business or country is slightly more vulnerable to business or economic factors the plus symbol indicates that the entity s credit rating is higher than others given the a rating but not enough to warrant an upgrade to the aa rating 1 | |
what are moody s and fitch ratings | moody s and fitch ratings are two credit rating agencies that analyze how creditworthy a company is these ratings help investors make decisions about their investments both agencies provide sovereign credit ratings for countries to help international investors make investing decisions the bottom linefitch ratings is a credit rating agency that rates institutions corporations and countries for their creditworthiness the agency has been around for more than 100 years offering insights to investors worldwide 8 | |
what are the 5 cs of credit | the five cs of credit is a system used by lenders to gauge the creditworthiness of potential borrowers the system weighs five characteristics of the borrower and conditions of the loan attempting to estimate the chance of default and consequently the risk of a financial loss for the lender the five cs of credit are character capacity capital collateral and conditions joules garcia investopediaunderstanding the 5 cs of creditthe five cs of credit method of evaluating a borrower incorporates both qualitative and quantitative measures lenders may look at a borrower s credit reports credit scores income statements and other documents relevant to the borrower s financial situation they also consider information about the loan itself each lender has its own method for analyzing a borrower s creditworthiness most lenders use the five cs character capacity capital collateral and conditions when analyzing individual or business credit applications alison czinkota investopedia1 charactercharacter the first c more specifically refers to credit history which is a borrower s reputation or track record for repaying debts this information appears on the borrower s credit reports which are generated by the three major credit bureaus equifax experian and transunion credit reports contain detailed information about how much an applicant has borrowed in the past and whether they have repaid loans on time these reports also contain information on collection accounts and bankruptcies and they retain most information for seven to 10 years information from these reports helps lenders evaluate the borrower s credit risk 1 for example fico uses the information found on a consumer s credit report to create a credit score a tool that lenders use for a quick snapshot of creditworthiness before looking at credit reports fico scores range from 300 to 850 and are designed to help lenders predict the likelihood that an applicant will repay a loan on time 2 other firms such as vantagescore a scoring system created by a collaboration of equifax experian and transunion also provide information to lenders 3many lenders have a minimum credit score requirement before an applicant is approved for a new loan minimum credit score requirements generally vary from lender to lender and from one loan product to the next the general rule is the higher a borrower s credit score the higher the likelihood of being approved lenders also regularly rely on credit scores to set the rates and terms of loans the result is often more attractive loan offers for borrowers who have good to excellent credit given how crucial a good credit score and credit reports are to secure a loan it s worth considering one of the best credit monitoring services to ensure that this information stays safe prospective borrowers should ensure that credit history is correct and accurate on their credit report adverse incorrect discrepancies can be detrimental to your credit history and credit score consider implementing automatic payments on recurring billings to ensure future obligations are paid on time paying monthly recurring debts and building a history of on time payments help to build your credit score 2 capacitycapacity measures the borrower s ability to repay a loan by comparing income against recurring debts and assessing the borrower s debt to income dti ratio lenders calculate dti by adding a borrower s total monthly debt payments and dividing that by the borrower s gross monthly income the lower an applicant s dti the better the chance of qualifying for a new loan 4every lender is different but many mortgage lenders prefer an applicant s dti to be around 36 or less before approving an application for new financing it is worth noting that sometimes lenders are prohibited from issuing loans to consumers with higher dtis as well for example qualifying for a new mortgage typically requires a borrower have a dti of 43 or lower to ensure that the borrower can comfortably afford the monthly payments for the new loan according to the consumer financial protection bureau cfpb 5you can improve your capacity by increasing your salary or wages or decreasing debt a lender will likely want to see a history of stable income although switching jobs may result in higher pay the lender may want to ensure that your job security is stable and that your pay will continue to be consistent lenders may consider incorporating freelance gig or other supplemental income however income must often be stable and recurring for maximum consideration and benefit securing more stable income streams may improve your capacity regarding debt paying down balances will continue to improve your capacity refinancing debt to lower interest rates or lower monthly payments may temporarily alleviate pressure on your debt to income metrics though these new loans may cost more in the long run be mindful that lenders may often be more interested in monthly payment obligations than in full debt balances so paying off an entire loan and eliminating that monthly obligation will improve your capacity lenders may also review a lien and judgments report such as lexisnexis riskview to further assess a borrower s risk before they issue a new loan approval 63 capitallenders also consider any capital that the borrower puts toward a potential investment a large capital contribution by the borrower decreases the chance of default borrowers who can put a down payment on a home for example typically find it easier to receive a mortgage even special mortgages designed to make homeownership accessible to more people for instance loans guaranteed by the federal housing administration fha may require a down payment of 3 5 or higher and nearly 90 of all department of veterans affairs va backed home loans are made without a down payment 78 capital contributions indicate the borrower s level of investment which can make lenders more comfortable about extending credit down payment size can also affect the rates and terms of a borrower s loan generally larger down payments or larger capital contributions result in better rates and terms with mortgage loans for example a down payment of 20 or more should help a borrower avoid the requirement to purchase additional private mortgage insurance pmi 9capital is often obtained over time and it might take a bit more patience to build up a larger down payment on a major purchase depending on your purchasing time line you may want to ensure that your down payment savings are yielding growth such as through investments some investors with a long investment horizon may consider placing their capital in index funds or exchange traded funds etfs for potential growth at the risk of loss of capital another consideration is the timing of the major purchase it may be more advantageous to move forward with a major purchase with a lower down payment as opposed to waiting to build capital in many situations the value of the asset may appreciate such as housing prices on the rise in these cases it would be less beneficial to spend time building capital 4 collateralcollateral can help a borrower secure loans it gives the lender the assurance that if the borrower defaults on the loan the lender can get something back by repossessing the collateral the collateral is often the object for which one is borrowing the money auto loans for instance are secured by cars and mortgages are secured by homes for this reason collateral backed loans are sometimes referred to as secured loans or secured debt they are generally considered to be less risky for lenders to issue as a result loans that are secured by some form of collateral are commonly offered with lower interest rates and better terms compared to other unsecured forms of financing you may improve your collateral by simply entering into a specific type of loan agreement a lender will often place a lien on specific types of assets to ensure that they have the right to recover losses in the event of your default this collateral agreement may be a requirement for your loan some other types of loans may require external collateral for example private personal loans may require placing your car as collateral for these types of loans ensure you have assets that you can post and remember that the bank is only entitled to these assets if you default 5 conditionsin addition to examining income lenders look at the general conditions relating to the loan this may include the length of time that an applicant has been employed at their current job how their industry is performing and future job stability the conditions of the loan such as the interest rate and the amount of principal influence the lender s desire to finance the borrower conditions can refer to how a borrower intends to use the money business loans that may provide future cash flow may have better conditions than a house renovation during a slumping housing environment in which the borrower has no intention of selling additionally lenders may consider conditions outside of the borrower s control such as the state of the economy industry trends or pending legislative changes for companies trying to secure a loan these uncontrollable conditions may be the prospects of key suppliers or customer financial security in the coming years some consider the criteria that lenders use as the four cs because conditions may be the same from one debtor to the next it is sometimes excluded to emphasize the criteria most in control of a debtor conditions are the least likely of the five cs to be controllable many conditions such as macroeconomic global political or broad financial circumstances may not pertain specifically to a borrower instead they may be conditions that all borrowers may face a borrower may be able to control some conditions ensure that you have a strong solid reason for incurring debt and be able to show how your current financial position supports it businesses for example may need to demonstrate strong prospects and healthy financial projections | |
what are the 5 cs of credit | the five cs of credit are character capacity collateral capital and conditions | |
why are the 5 cs important | lenders use the five cs to decide whether a loan applicant is eligible for credit and to determine related interest rates and credit limits they help determine the riskiness of a borrower or the likelihood that the loan s principal and interest will be repaid in a full and timely manner | |
which of the 5 cs is the most important | each of the five cs has its own value and each should be considered important some lenders may carry more weight for categories than others based on prevailing circumstances character and capacity are often most important for determining whether a lender will extend credit banks utilizing debt to income dti ratios household income limits credit score minimums or other metrics will usually look at these two categories though the size of a down payment or collateral will help improve loan terms these two are often not the primary factors in how a lender determines whether to expend credit | |
which of the 5 cs refers to an individual s credit history | character refers to the composition of a borrower s financial history and financial health character incorporates a borrower s payment history credit score credit history and relationship with prior debtors | |
what are the principles of the 5 cs of credit that banks operate on | the main principle behind the five cs is to gauge the risk of extending credit to a borrower a lender needs to evaluate who they are lending money to why the borrower is asking for money and the likelihood of recovering loan proceeds another principle of the five cs is to determine how credit is priced borrowers with more favorable five cs may get better terms lower rates and lower payments borrowers who are riskier with poorer five cs may face unfavorable terms a lender also relies on the five cs to determine whether they want to conduct business with a borrower if a borrower s five cs are poor then the lender may decline to extend credit the bottom linelenders use certain criteria to evaluate borrowers prior to issuing debt the criteria often fall into several categories which are collectively referred to as the five cs to ensure the best credit terms lenders must consider their credit character capacity to make payments collateral on hand capital available for up front deposits and conditions prevalent in the market | |
what is the 5 year rule | the 5 year rule commonly refers to the withdrawal of funds from an individual retirement account ira but there are other types of 5 year rules learn more about the various definitions of a 5 year rule and how they may apply to you | |
how the 5 year rule works | you can withdraw contributions to a roth ira at any time however to withdraw earnings from your roth without owing taxes or penalties you have to have held the account for at least five years which is the 5 year rule old you must also be at least 59 the 5 year rule only limits when you can withdraw your earnings from your roth ira not your deposits your earnings include the interest dividends capital gains and any other income your roth investments have accumulated you can withdraw contributions at any time because they were made with money that has already be subject to income tax 1the time period for the 5 year rule starts with your first contribution to a roth ira including if it is from conversion from a traditional ira another type of 5 year rule applies when you convert a traditional ira to a roth ira you ll need to wait five years to do with with no penalties each conversion has its own five year period but irs rules stipulate the oldest conversions are withdrawn first the order of withdrawals for roth iras are contributions conversions and then earnings if you break the 5 year rule by withdrawing earnings or converting funds from a roth ira too soon your withdrawal will be subject to taxes at your current ordinary income tax rate plus a 10 penalty 1this can be a large additional tax if you were in the 24 tax bracket you would lose 34 of your roth ira s earnings evaporate in taxes and penalties because you withdrew the earnings before five years inherited iras vs traditional iras vs roth irasthe 5 year rule applies to one of several options when beneficiaries take distributions from an inherited ira whether it s a traditional ira or a roth ira heirs are required to take annual allocations from the account known as required minimum distributions rmds beneficiaries who inherit an ira can take distributions of either contributions or earnings without a penalty however this distribution may trigger a taxable event depending upon the type of ira you inherit and your relationship to the deceased if the ira wasn t held for five tax years by the original owner and you take a distribution any earnings or interest on the contribution will be subject to tax 2with the passage of the secure act starting in 2020 non spousal beneficiaries of an ira must withdraw all funds from the account within 10 years of the original owner s death before the secure act beneficiaries could stretch out the distribution period and delay paying taxes on distributions an estate planning strategy known as a stretch ira spouses beneficiaries who are not 10 years younger than the decedent a minor child of the plan participant a disabled person or a chronically ill person have more flexibility under the secure act they can transfer the existing ira into their name and defer distributions 21under the 5 year rule the beneficiary of a traditional ira will not face the usual 10 withdrawal penalty on any distribution even if they make it before they are 59 income taxes will be due however on the funds at the beneficiary s regular tax rate the new owner of the ira may roll all funds over into another account under their name cash it out in a lump sum or a combination within the five year window recipients may continue to contribute to the inherited ira account when those five years are up however the beneficiary would have to withdraw all assets a roth ira is also subject to a five year inheritance rule the beneficiary must liquidate the entire value of the inherited ira by dec 31 of the fifth year after the owner s death no rmds are required during this five year period if the beneficiary is taking distributions from an inherited roth ira that has existed for longer than five years all distributions will be tax free further the tax free distribution may be made up of earnings or principal for beneficiaries of a fund that hasn t met that five year mark withdrawals of earnings are taxable but the principal remains untaxed explore all you options with taking distributions from an inherited roth ira choose one that best suits your situation frequently asked questions faqs | |
what is the 5 year rule for roth ira | the 5 year rule for roth iras states that you cannot withdraw the earnings from your roth ira account unless it has been five years since you first contributed to your account | |
what is the 5 year rule for inherited ira | the 5 year rule applies to taking distributions from an inherited ira to withdraw earnings from an inherited ira the account must have been opened for a minimum of five years at the time of death of the original account holder | |
does the roth 5 year rule apply for those aged 59 or older | yes the account must be five years old for earnings within a roth ira to be distributed without owing taxes or penalties even if you re already 59 years old | |
what is the 2 out of 5 year rule | the 2 out of 5 year rule states that homeowners must have lived in their home for two out of the last five years before the date of sale in order to avoid or reduce capital gains taxes on the appreciated value of the home the bottom linea 5 year rule can apply to a number of situations but is most commonly used when referring to how you withdraw funds from an ira for guidance on the best ways to withdraw money from your tax advantaged account consider consulting with a financial advisor | |
what is a fixed annuity | a fixed annuity is a type of insurance contract that promises to pay the buyer a specific guaranteed interest rate on their contributions to the account by contrast a variable annuity pays interest that can fluctuate based on the performance of an investment portfolio chosen by the account s owner fixed annuities are often used in retirement planning | |
how a fixed annuity works | investors can buy a fixed annuity with either a lump sum of money or a series of payments over time the insurance company in turn guarantees that the account will earn a certain rate of interest this period is known as the accumulation phase | |
when the annuity owner or annuitant elects to begin receiving regular income from the annuity the insurance company calculates those payments based on the amount of money in the account the owner s age how long the payments are to continue and other factors this begins the payout phase the payout phase may continue for a specified number of years or for the rest of the owner s life there may also be death benefits | during the accumulation phase the account grows tax deferred then the account holder annuitizes the contract distributions are taxed based on an exclusion ratio this is the ratio of the account holder s premium payments to the amount accumulated in the account that is based on gains from the interest earned during the accumulation phase the premiums paid are excluded and the portion attributable to gains is taxed this is often expressed as a percentage this situation applies to non qualified annuities which are those not held in a qualified retirement plan in the case of a qualified annuity the entire payment would be subject to taxes a fixed annuity can be either an immediate annuity which starts paying out immediately or a deferred annuity which starts paying out at some point in time that is determined by the annuity contract benefits of a fixed annuityowners of fixed annuities can benefit from these contracts in a variety of ways the rates on fixed annuities are derived from the yield that the life insurance company generates from its investment portfolio which is invested primarily in high quality corporate and government bonds the insurance company is then responsible for paying whatever rate it has promised in the annuity contract this contrasts with variable annuities where the annuity owner chooses the underlying investments and assumes much of the investment risk once the initial guarantee period in the contract expires the insurer can adjust the rate based on a stated formula or on the yield it is earning on its investment portfolio as a measure of protection against declining interest rates fixed annuity contracts typically include a minimum rate guarantee because a fixed annuity is a tax qualified vehicle its earnings grow and compound tax deferred annuity owners are taxed only when they take money from the account either through occasional withdrawals or as regular income 1 this tax deferral can make a significant difference in how the account builds up over time particularly for people in higher tax brackets the same is true of qualified retirement accounts such as individual retirement accounts iras and 401 k plans which also grow tax deferred fixed annuities may be converted into an immediate annuity at any time the owner selects the annuity will then generate a guaranteed income payout for a specified period of time or for the life of the annuitant depending on the contract the payouts may continue for beneficiaries after the annuitant has died such as a surviving spouse and or dependents the life insurance company is responsible for the security of the money invested in the annuity and for fulfilling any promises made in the contract unlike most bank accounts annuities are not federally insured for that reason buyers should only consider doing business with life insurance companies that earn high grades for financial strength from the major independent rating agencies annuities often have high fees so it pays to shop around and consider other types of investments fixed annuities vs variable annuitiesfixed and variable annuities are similar they are tax advantaged insurance products that can support retirees with periodic payments this income in retirement can extend until death or after it for an annuitant s beneficiaries typically a surviving spouse is selected as the beneficiary of the account but others are also eligible including dependents and close friends however there are also differences between the two a fixed annuity is based on a guarantee you will receive a specific payment regardless of what the markets are doing during the payout phase your payments are fixed that isn t the case with a variable annuity which is affected by market performance during the payout phase your payments will be higher or lower depending on your investment choices a fixed annuity is the more conservative option as its growth is determined via a fixed interest rate and it ensures a regular predictable income stream it may be the right choice for someone with a lower risk tolerance however the upside potential is lower than what you might earn with a variable annuity which is the riskier option a variable annuity s asset mix which includes mutual funds offers more potential for growth than a fixed annuity s fixed interest rate however this comes with more volatility there are also more fees with a variable annuity choosing between a fixed or variable annuity will likely come down to your risk tolerance and what you want from your retirement criticisms of fixed annuitiesthe main downside for annuities is that you re likely going to pay relatively high fees take the surrender charge in particular during the annuity s surrender period which can run for as long as 15 years from the start of the contract if you withdraw over 10 of the account s value you will need to pay a hefty fee 2 annuity owners who are under age 59 may also have to pay a 10 tax penalty in addition to regular income taxes 3annuities are also relatively illiquid fixed annuities typically allow for one withdrawal per year of up to 10 of the account value for these reasons an annuity is appropriate only for long term investing and as a source of regular income not for regular spending or even one time large purchases such as the downpayment on a second home or to fund gifts for grandchildren other vehicles such as a high yield savings account for home purchases a living trust for certain gifts after your death or a 529 plan or a custodial account for gifts relating to educational expenses are more appropriate in these circumstances annuities are also inappropriate for money that an investor might need for a sudden financial emergency an emergency fund will typically be a better option in this situation | |
how does an annuity work | an annuity has two phases the accumulation phase and the payout phase during the accumulation phase the investor pays the insurance company via a lump sum or periodic payments the payout phase by contrast is when the investor receives distributions from the annuity typically on a regular basis as income payouts are on a standard periodic basis typically quarterly or annually | |
what is the difference between a retirement plan and an annuity | an annuity is an insurance contract whereas a retirement plan is not there are two main types of retirement plans defined contribution plans such as 401 k s and defined benefit plans which are also known as pensions an annuity s accumulation phase is similar to a defined contribution plan before retirement and an annuity s payout phase is similar to a defined benefit plan during retirement | |
is an annuity a good idea | this depends on your goals and circumstances because annuities typically come with relatively high fees they should typically be considered only after you have taken advantage of other retirement savings vehicles for example you could max out your 401 k the internal revenue service irs raises the contribution limits every year to account for inflation for 2024 if you re under 50 years old you can contribute up to 23 000 to your 401 k if you are 50 or older you can contribute an extra 7 500 in catch up contributions for a total of 30 500 for 2023 those limits are 22 500 and 7 500 respectively the bottom lineannuities are complex insurance contracts designed to sustain investors in retirement however they often carry high fees compared to other types of investments it s wise to make sure you understand all of the fees involved before you commit it also pays to shop around because fees and other terms can vary widely from one insurer to the next | |
what is a fixed asset | a fixed asset is a long term tangible property or equipment a company uses to operate its business fixed assets include buildings computer equipment software furniture land machinery and vehicles companies can depreciate the value of these assets to account for wear and tear fixed assets commonly appear on a company balance sheet as property plant and equipment pp e investopedia laura porteraccounting for fixed assetsa company s balance sheet statement includes its assets liabilities and shareholder equity assets are divided into current assets and noncurrent assets the difference of which lies in their useful lives current assets are typically liquid and can be converted into cash in less than a year current assets include cash and cash equivalents accounts receivable ar inventory and prepaid expenses fixed assets are noncurrent assets that are not easily converted to cash noncurrent assets also include long term investments deferred charges and intangible assets these assets won t be depleted or sold within the accounting period a fixed asset has a physical form and is reported on the balance sheet as pp e companies purchase fixed assets to produce goods or services for office and operating use or to rent to third parties fixed assets are depreciated while current assets are not depreciationfixed assets lose value as they age because they provide long term income these assets are expensed differently than other items tangible assets are subject to periodic depreciation while intangible assets are subject to amortization 1a certain amount of an asset s cost is expensed annually the asset s value decreases along with its depreciation on the company s balance sheet to match its long term value how a business depreciates an asset can cause its book value the asset value that appears on the balance sheet to differ from the current market value cmv land is a fixed asset that cannot be depreciated 1acquisition and disposalthe acquisition or disposal of a fixed asset is recorded on a company s cash flow statement under the cash flow from investing activities the purchase of fixed assets represents a cash outflow to the company while a sale is a cash inflow if the asset s value falls below its net book value it is subject to an impairment write down its recorded value on the balance sheet is adjusted downward to reflect that it is overvalued compared to the market value 2 | |
when a fixed asset reaches the end of its useful life it is usually disposed of by selling it for a salvage value this is the asset s estimated value if broken down and sold in parts in some cases the asset may become obsolete and will therefore be disposed of without receiving any payment in return the fixed asset is written off the balance sheet since it is no longer used | some companies refer to their fixed assets as capital assets | |
what is an example of a company with fixed assets | if a company sells produce the delivery trucks it owns and uses are fixed assets if a business creates a company parking lot the parking lot is a fixed asset however personal vehicles used to get to work are not considered fixed assets additionally buying rock salt to melt ice in the parking lot is an expense | |
why should investors care about a company s fixed assets | information about a corporation s assets helps create accurate financial reporting business valuations and thorough financial analysis investors and creditors use these reports to determine a company s financial health and decide whether to buy shares or lend money to the business fixed assets are important to capital intensive industries such as manufacturing which require large investments in pp e when a company reports persistently negative net cash flows for the purchase of fixed assets this could be a strong indicator that the firm is in growth or investment mode | |
what are other types of noncurrent assets | other noncurrent assets include long term investments and intangibles intangible assets can lack physical existence but can still be used long term these assets include goodwill copyrights trademarks and intellectual property | |
is a car a fixed asset | it depends on how the car is being used if the car is used in a company s operations to generate income such as a delivery vehicle it may be considered a fixed asset however if the car is used for personal use it is not considered a fixed asset and is not recorded on the company s balance sheet the bottom linea fixed asset is long term tangible property or equipment a company owns and uses to generate income these assets are not expected to be sold or used within a year and are sometimes recorded on the balance sheet as property plant and equipment pp e fixed assets are subject to depreciation whereas intangible assets are amortized fixed assets are often contrasted with current assets which are expected to be converted to cash or used within a year | |
what is the fixed asset turnover ratio | the fixed asset turnover ratio fat is in general used by analysts to measure operating performance this efficiency ratio compares net sales income statement to fixed assets balance sheet and measures a company s ability to generate net sales from its fixed asset investments namely property plant and equipment pp e the fixed asset balance is used as a net of accumulated depreciation a higher fixed asset turnover ratio indicates that a company has effectively used investments in fixed assets to generate sales investopedia crea taylorfixed asset turnover ratio formulathe formula for the fixed asset turnover ratio is fat net salesaverage fixed assetswhere net sales gross sales returns and allowancesaverage fixed assets beginning fixed assets ending fixed assets2 begin aligned text fat frac text net sales text average fixed assets textbf where text net sales text gross sales text returns and allowances text average fixed assets frac text beginning fixed assets text ending fixed assets 2 end aligned fat average fixed assetsnet sales where net sales gross sales returns and allowancesaverage fixed assets 2beginning fixed assets ending fixed assets the ratio is commonly used as a metric in manufacturing industries that make substantial purchases of pp e in order to increase output when a company makes such significant purchases wise investors closely monitor this ratio in subsequent years to see if the company s new fixed assets reward it with increased sales overall investments in fixed assets tend to represent the largest component of the company s total assets the fat ratio calculated annually is constructed to reflect how efficiently a company or more specifically the company s management team has used these substantial assets to generate revenue for the firm interpreting the fixed asset turnover ratioa higher turnover ratio is indicative of greater efficiency in managing fixed asset investments but there is not an exact number or range that dictates whether a company has been efficient at generating revenue from such investments for this reason it is important for analysts and investors to compare a company s most recent ratio to both its own historical ratios and ratio values from peer companies and or average ratios for the company s industry as a whole though the fat ratio is of significant importance in certain industries an investor or analyst must determine whether the company under study is in the appropriate sector or industry for the ratio to be calculated before attaching much weight to it fixed assets vary drastically from one company type to the next as an example consider the difference between an internet company and a manufacturing company an internet company such as meta formerly facebook has a significantly smaller fixed asset base than a manufacturing giant such as caterpillar clearly in this example caterpillar s fixed asset turnover ratio is of more relevance and should hold more weight than meta s fat ratio fixed asset turnover ratio vs asset turnover ratiothe asset turnover ratio uses total assets instead of focusing only on fixed assets as done in the fat ratio using total assets acts as an indicator of a number of management s decisions on capital expenditures and other assets a company s asset turnover ratio will be smaller than its fixed asset turnover ratio because the denominator in the equation is larger while the numerator stays the same it also makes conceptual sense that there is a wider gap between the amount of sales and total assets compared to the amount of sales and a subset of assets manufacturing companies often favor the fixed asset turnover ratio over the asset turnover ratio because they want to get the best sense in how their capital investments are performing companies with fewer fixed assets such as a retailer may be less interested in the fat compared to how other assets such as inventory are being utilized because the fixed asset ratio is best used as a comparative tool it s crucial that the same method of picking information is used across periods limitations of using the fixed asset ratiocompanies with cyclical sales may have worse ratios in slow periods so the ratio should be looked at during several different time periods additionally management could be outsourcing production to reduce reliance on assets and improve its fat ratio while still struggling to maintain stable cash flows and other business fundamentals companies with strong asset turnover ratios can still lose money because the amount of sales generated by fixed assets speak nothing of the company s ability to generate solid profits or healthy cash flow the fixed asset ratio only looks at net sales and fixed assets company wide expenses are not factored into the equation in addition there are differences in the cashflow between when net sales are collected and when fixed assets are invested in like other financial ratios the fixed ratio turnover ratio is only useful as a comparative tool for instance a company will gain the most insight when the fixed asset ratio is compared over time to see the trend of how the company is doing alternatively a company can gain insight into their competitors by evaluating how their fixed asset ratio compares to others example of fixed asset turnover ratioin the q3 2022 balance sheet below amazon reported owning 177 2 billion of property and equipment net of depreciation as of sept 30 2022 it also reported owning 160 3 billion of property and equipment as of dec 31 2021 in this simplified example we ll assume these are our starting and ending fixed asset balances this means amazon s average fixed assets for this example was 168 75 billion 1shown in the image below amazon also reported its net income for these periods for the fixed asset turnover ratio it doesn t necessarily matter what prior year sales were unless we were calculating last year s ratio to calculate this year s ratio all we need is the current net sales for the period ending in september 2022 this is 364 8 billion to calculate the fixed asset turnover ratio for amazon the 364 8 billion of net sales would be divided by the 168 75 average balance of fixed assets therefore the company s fixed asset turnover ratio is 2 16 this means that for this period for every dollar of fixed assets amazon owned it generated 2 16 of net sales | |
what is a good fixed asset turnover ratio | fixed asset turnover ratios widely vary by industry and company size therefore there is no single benchmark all companies can use as their target fixed asset turnover ratio instead companies should evaluate what the industry average is and what their competitor s fixed asset turnover ratios are a good fixed asset turnover ratio will be higher than both | |
should the fixed asset turnover ratio be high or low | companies with higher fixed asset turnover ratios earn more money for every dollar they ve invested in fixed assets for most a higher fixed asset turnover ratio is better | |
what is the main downside to the fixed asset turnover ratio | the fixed asset turnover ratio does not incorporate any company expenses therefore the ratio fails to tell analysts whether or not a company is even profitable a company may be generating record levels of sales and efficiently using their fixed assets however the company may also have record levels of variable administrative or other expenses the fixed asset turnover ratio also doesn t consider cashflow so companies with good fixed asset turnover ratios may also be illiquid the bottom linethe fixed asset turnover ratio is useful in determining whether a company is efficiently using its fixed assets to drive net sales the fixed asset turnover ratio is calculated by dividing net sales by the average balance of fixed assets of a period though the ratio is helpful as a comparative tool over time or against other companies it fails to identify unprofitable companies | |
what is fixed capital | fixed capital includes the assets and capital investments such as property plant and equipment pp e that are needed to start up and conduct business even at a minimal stage these assets are considered fixed in that they are not consumed or destroyed during the actual production of a good or service but have a reusable value fixed capital investments are typically depreciated on the company s accounting statements over a long period of time up to 20 years or more understanding fixed capitalthe concept of fixed capital was first introduced in the 18th century by the political economist david ricardo for ricardo fixed capital referred to any kind of physical asset that is not used up in the production of a product this was opposed to ricardo s idea of circulating capital such as raw materials operating expenses and labor in marxian economics fixed capital is closely related to the concept of constant capital fixed capital is the portion of total capital outlay of a business invested in physical assets such as factories vehicles and machinery that stay in the business almost permanently or more technically for more than one accounting period fixed assets can be purchased and owned by a business or they can be structured as a long term lease on the other side of the capital equation is that which circulates or which is consumed by a company in the process of production this includes raw materials labor operating expenses and more marx emphasized that the distinction between fixed and circulating capital is relative since it refers to the comparative turnover times of various types of physical capital assets fixed capital also circulates except that the turnover time is far longer because a fixed asset may be held for several years or decades before it has yielded its value and is discarded for its salvage value a fixed asset may be resold and reused at any time before its useful life is over which often happens with vehicles and airplanes fixed capital can be contrasted with variable capital the cost and level of which change over time and with the scale of a company s output for instance machinery used in production would be considered fixed capital as it would remain with a company regardless of current output levels raw materials on the other hand would fluctuate depending on output levels fixed capital requirementsthe amount of fixed capital needed to set up a business is quite particular to each situation especially from industry to industry some lines of business require a large number of fixed capital assets common examples include industrial manufacturers telecommunications providers and oil exploration firms service based industries such as accounting firms have more limited fixed capital needs this can include office buildings computers networking devices and other standard office equipment while production businesses often have easier access to the inventory necessary to create the goods being produced the procurement of fixed capital can be lengthy it may take a business a significant amount of time to generate the funds necessary for larger purchases such as new production facilities if a company uses financing that may take time as well to obtain proper loans this can increase the risk of financial losses associated with low production if a company experiences an equipment failure and does not have redundancy built in depreciation of fixed capitalfixed capital investments typically don t depreciate in the even way that is shown on income statements some devalue quite quickly while others have nearly infinite usable lives for example a new vehicle loses significant value when it is officially transferred from the dealership to the new owner in contrast company owned buildings may depreciate at a much lower rate the depreciation method allows investors to see a rough estimate of how much value fixed capital investments are contributing to the current performance of the company liquidity of fixed capitalwhile fixed capital often maintains a level of value these assets are not considered very liquid in nature this is due to the limited market for certain items such as manufacturing equipment or the high price involved and the time it takes to sell a fixed asset which is usually lengthy | |
what is the fixed charge coverage ratio fccr | the fixed charge coverage ratio fccr measures a firm s ability to cover its fixed charges such as debt payments interest expenses and equipment lease expenses it shows how well a company s earnings can cover its fixed expenses banks will often look at this ratio when evaluating whether to lend money to a business candra huff investopediaformula for the fixed charge coverage ratio fccr f c c r e b i t f c b t f c b t i where e b i t earnings before interest and taxes f c b t fixed charges before tax i interest begin aligned fccr frac ebit fcbt fcbt i textbf where ebit text earnings before interest and taxes fcbt text fixed charges before tax i text interest end aligned fccr fcbt iebit fcbt where ebit earnings before interest and taxesfcbt fixed charges before taxi interest |
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