Even after going to college and taking way more finance classes than you’d like, you may not totally be sure what all those financial terms actually mean. It’s understandable– few industries are as riddled with jargon as the finance industry, which makes crafting your own budget and savings plans pretty difficult.
Luckily, you don’t need to know everything to be successful with your money– just the basics. Whether you’re starting your first full-time job or have been out in the real world for some time, it’s useful to keep a few common terms tucked away in your tool belt. Here’s what you need to know:
401(k) are plans offered by companies and help you save for retirement. The money you set aside is tax deferred, and it’s frequently matched in part, meaning your company will dedicate their money to your account as well. (Free cash– woohoo!)
This terms stands for annual percentage rate, and it refers to how much interest you’re paying on the money you borrow. It's especially important to pay attention to when signing up for a credit card– the higher your APR, the more money you'll ultimately pay if you don't pay off your balance in full each month.
Your assets are items of value. Things like your car or major savings funds are good examples– and they're used to calculate your net worth.
This scary term means that you owe more money than you can afford to pay, and it generally occurs through the combination of mortgages, credit card debt, student loans, car payments and more. In short, it happens when you borrow too much. Declaring bankruptcy can solve hopeless financial situations, but it should be used as a last resort. When you file for it, it stays on your record for 10 years– and all of your assets are seized.
You've probably heard the words "stocks and bonds" used together, but they're actually pretty different. When you buy a bond, you're lending that company money. How that money is paid back is determined by the conditions you bought the bond under.
When you purchase a stock, you are buying a small part of the company. The price of each share is determined in part by how much people are willing to pay for them, how much they're selling them for and how well the company is anticipated to perform. For this reason, it's best to buy stock in companies you believe in– and to start small while you're learning!
Debt consolidation is a useful strategy when you've accumulated debt from multiple, high-interest sources (such as credit cards). It allows you to make one (usually lower interest) payment each month, reducing the amount of money you spend repaying your debts overall.
Five C's of Credit
You probably already know your credit score is important– it helps you land apartments, jobs, loans, and more. Lenders determine whether they will give you credit based on five factors:
- Capacity: Your ability to make payments in a timely manner.
- Conditions: The terms you're trying to secure.
- Collateral: Any assets you're willing to use as a guarantee (such as a car).
- Capital: Income and other sources of money.
- Character: Your general reputation.
They're essentially trying to determine how likely you are to pay your credit back. In terms of your credit score, there's another important thing lenders are trying to determine: how much debt you have in relation to how much credit you have.
Inflation occurs when the power of the dollar lowers and costs rise.
This is a retirement account for the self-employed.
This financial term is technically a debt. It's usually one that must be paid every month, like student loans or a car payment. Why are these payments called liabilities? Because you are liable to pay them– or not great things happen.
This term seems confusing at first, but it's actually incredibly useful in determining whether your earnings match up with your monthly expenses. It's simply your income minus your income tax and other deductions– the money left over, more or less, when you receive your paycheck.
Your net worth is your assets minus your debts. This probably goes without saying, but you'd ideally like to have as few debts as possible.
A Roth IRA is an individual retirement account (IRA) that you deposit after tax dollars. Money talk is complicated, we know. But when you break it into bite-sized pieces, it's much easier to understand. The good news? There's no better way to learn than by putting these terms into practice. Understanding your credit score, your net income and your company's 401(k) policies are a good place to start. You’ll be a financial whiz in no time!