Money talk: finance terms for beginners

What's the difference between net income and net worth? What does APR stand for? Get a definition of some common finance terms.

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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)

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!)

APR

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.

Assets

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.

Bankruptcy

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.

Bonds

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.

Stocks

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

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

Inflation occurs when the power of the dollar lowers and costs rise.

Keogh

This is a retirement account for the self-employed.

Liability

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.

Net Income

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.

Net Worth

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.

Roth IRA

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!

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In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities). Fixed income securities also carry inflation risk, liquidity risk, call risk and credit and default risks for both issuers and counterparties. Lower-quality fixed income securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Foreign investments involve greater risks than U.S. investments, and can decline significantly in response to adverse issuer, political, regulatory, market, and economic risks. Any fixed-income security sold or redeemed prior to maturity may be subject to loss.
Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal. Please see SP202 in the CDL for overview of use and proximity.
This article was written by a Rent.com Contributor from Forbes and was licensed as an article reprint. Article copyright June 5, 2015 by Forbes
The statements and opinions expressed in this article are those of the author. Fidelity Investments cannot guarantee the accuracy or completeness of any statements or data.
This reprint is supplied by Fidelity Brokerage Services LLC, Member NYSE, SIPC.
The third party provider of the reprint permission and Fidelity Investments are independent entities and not legally affiliated.
The images, graphs, tools, and videos are for illustrative purposes only.
Fidelity Brokerage Services Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917
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