What do these terms mean?
A 401(k) is a retirement account typically provided through your employer. Around 50% of U.S. workplaces offer a 401(k) as part of the employee’s compensation. A portion of your wages is contributed to the account, and some employers match your contributions. The advantage of a 401(k) is that the money you save for retirement is not taxed until withdrawal, at which point it is taxed at a lower rate. If you are self-employed, you can also set up a Solo 401(k).
Interest, on the other hand, is the cost of borrowing money. It applies to financing a car, paying a mortgage or carrying credit card debt.
For example, if you don’t purchase a car but cannot pay the full amount upfront, the dealership may ask for a down payment and allow you to pay the rest in installments. The dealership will charge interest on the remaining amount you owe. Similarly, if you have credit card debt, the financial institution will charge interest on your balance.
Several factors influence the interest rate you pay. One is your credit score, which reflects your borrowing history and how well you’ve repaid debt in the past. A good credit score can help you secure lower interest rates, while a bad credit score can result in higher rates. Another factor is the Federal Funds Rate, which fluctuates based on the economy. Knowing the current can help you decide between a fixed interest rate, which remains constant, and a variable rate, which changes over time.
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