This guide is designed to help you master the money lingo, navigate through your financial journey, and empower you to make informed decisions about your money. Here, I'm breaking down thirty essential financial terms into simple, easy-to-understand language.
Banking and Daily Finance:
1. Income: Income refers to money that you earn from your job, investments, or business. This could be in the form of salaries, wages, interest earned, dividends, etc.
Tip: Diversify your income streams. Don't rely on just one source of income. If possible, consider part-time jobs, investments, or side businesses.
2. Expense: An expense is the cost of goods or services that are necessary to maintain your lifestyle. This can include rent, groceries, utilities, transportation, etc.
Tip: Try to keep track of your expenses, however small they might be. This can help you understand your spending habits and identify areas where you can save.
3. Budget: A budget is a financial plan that helps you track your income (money coming in) and expenses (money going out) over a certain period of time. This can be daily, weekly, monthly, or annually.
Tip: A good budgeting practice is the 50/30/20 rule: Spend 50% of your income on necessities, 30% on wants, and save the remaining 20%.
4. Savings Account: A savings account is a bank account where you can store money securely while earning a small amount of interest.
Tip: Start saving early, no matter how small the amount. Even a little money put aside regularly can grow over time due to compound interest.
5. Checking Account: A checking account is a bank account that allows for numerous withdrawals and unlimited deposits. It's typically used for daily transactions, like paying bills.
Tip: Avoid unnecessary fees by ensuring you're aware of minimum balance requirements or transaction limits.
6. Overdraft: An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero. In simple terms, it's when you owe the bank money.
Tip: Set up alerts with your bank to notify you when your balance is low. This can help you avoid overdraft fees.
Credit and Loans:
7. Interest Rate: This is the percentage of a loan or savings account balance that is either charged as interest by the bank when you borrow money or paid to you as interest when you save or invest money.
Tip: When saving or investing, look for accounts or investments with higher interest rates. When borrowing, look for loans with lower interest rates.
8. Debit Card: A debit card allows you to spend money by drawing on funds you have deposited in the bank. When you use a debit card, the money is instantly taken out of your account.
Tip: Always keep track of your account balance to avoid overdrafts, and only spend what you have in your account.
9. Credit Card: A credit card is a payment card issued by a financial institution, usually a bank, that allows cardholders to borrow funds to pay for goods and services.
Tip: Be mindful of your credit card usage. It's easy to overspend with credit cards because you don't see the money leaving your account immediately.
10. Minimum Payment: The minimum payment is the smallest amount of a credit card bill that a consumer can pay to remain in good standing with the credit card company. It's usually a small percentage of the total outstanding balance.
Tip: Always try to pay more than the minimum payment on your credit card bill. Paying only the minimum can lead to long-term debt due to compounding interest.
11. Annual Percentage Rate (APR): The APR is the annual rate charged for borrowing or earned through an investment. It's expressed as a percentage that represents the actual yearly cost of funds over the term of a loan.
Tip: When comparing loans or credit cards, compare APRs rather than just interest rates. The APR includes not only the interest rate but also any fees and charges.
12. Credit Score: A credit score is a number assigned to a person that indicates their creditworthiness based on their credit history. The higher the score, the more financially trustworthy a person is considered to be.
Tip: Make sure to pay all your bills on time, as late payments can significantly impact your credit score. Keep your credit card balances low, and don't open unnecessary credit lines.
13. Student Loans: Student loans are funds borrowed to pay for higher education. These loans usually have lower interest rates and more flexible repayment schedules compared to other types of loans.
Tip: Consider all other forms of financial aid, like scholarships and grants, before taking on student loans. If you do need to borrow, take only what you need for your education expenses.
Investment and Retirement:
14. 401(k) and IRA: These are special accounts where you can save money for when you retire. A 401(k) is often given to you by your job. When you put money into it, that money doesn't get counted as part of your income for taxes right now. An IRA is an account you can set up by yourself. Money you put into an IRA might lower the income you have to pay taxes on.
Tip: It's best to start putting money in these accounts as soon as you can. This is because the money you put in can grow over time. The longer the time, the more your money can grow.
15. Investments: These are things you buy with the hope that they will make more money for you in the future. Investments can be many different things, like stocks, bonds, mutual funds, or even real estate.
Tip: Don't put all your money in one type of investment. Spread it around in different types of investments. This way, if one doesn't do well, you still have others that might.
16. Stocks: When you buy a stock, you're buying a small piece of a company. If the company does well, the price of the stock goes up and you could make money.
Tip: If you're new to buying stocks, start with companies you know and understand.
17. Bonds: When you buy a bond, you're basically lending your money to a big company or government for a certain amount of time. In return, they promise to pay you back with a little bit extra as interest.
Tip: Bonds can be a safer way to invest. If you want to be careful with your money, investing in bonds might be a good choice.
18. Mutual Funds: A mutual fund is like a basket of different investments managed by a professional. When you buy a share of a mutual fund, you are buying a piece of all the investments in that basket.
Tip: Mutual funds can be a good way to spread out your risk and have your investments managed by a professional. But watch out for the fees they charge.
19. Insurance: Insurance is like a safety net. It's a deal you make with an insurance company: you pay them a little bit of money regularly, and if something bad happens (like a car accident or a health problem), they'll help cover the costs.
Tip: It's important to have insurance for things that could cost a lot if they go wrong, like your health, car, or home.
20. Premium: A premium is the money you pay to the insurance company to keep your insurance active. It's usually paid every month, every six months, or every year.
Tip: Always make sure to pay your premium on time to keep your insurance active. If you don't, the insurance company won't help pay for losses if something bad happens.
21. Deductible: The deductible is the amount you have to pay when something bad happens before your insurance starts to help. For example, if you have a $500 deductible on your car insurance and get into an accident that causes $2,000 in damage, you'll have to pay $500 and the insurance company will pay the remaining $1,500.
Tip: Be aware that a lower deductible usually means a higher premium and a higher deductible can mean a lower premium. Choose a deductible you could afford to pay if something were to happen
General Financial Planning:
22. Emergency Fund: This is money you save to help you cover unexpected costs. These could be things like car repairs, medical bills, or expenses during a job loss.
Tip: It's good to aim for an emergency fund that can cover 3-6 months of your living expenses. Start small if you need to and build it up over time.
23. Net Worth: This is what you get when you subtract what you owe (your debts) from what you own (your assets). It's a snapshot of your financial health.
Tip: It's a good idea to calculate your net worth once a year to see how it changes over time. This can help you track your financial progress.
24. Income Tax: This is money you have to pay to the government from what you earn. How much you pay often depends on how much you make.
Tip: If you have a job, make sure you understand how taxes are taken out of your paycheck. This can help you plan and avoid surprises at tax time.
25. Inflation: This is the rate at which the general level of prices for goods and services is rising. As inflation goes up, your money can buy less.
Tip: When planning for the future, remember to consider inflation. For example, if you're saving for retirement, think about how the cost of living might increase over time.
26. Deflation: This is the opposite of inflation. Deflation is when the overall level of prices is falling. This might sound like a good thing, but it often means the economy is in trouble.
Tip: During times of deflation, holding onto cash can be beneficial as it might have more purchasing power in the future.
27. Compound Interest: This is when the interest you earn on your money also starts earning interest. It's like a snowball effect.
Tip: The more time your money has to grow, the more powerful compound interest becomes. That's why starting to save and invest when you're young can make a big difference.
28. Appreciation: This is when something you own, like a house, becomes worth more over time.
Tip: Buying things that might increase in value, like a house or shares in a company, can be a good way to make your money grow. But remember, there's no sure thing – sometimes these things might not increase in value.
29. Depreciation: This is when something you own, like a car, is worth less as it gets older.
Tip: Keep in mind when you buy things that lose value over time, like cars or phones, they may not be worth much when you want to sell them. Think about this when deciding how much to spend..
30. Financial Literacy: This means knowing how to handle your money wisely. It includes skills like making a budget, understanding how to save and invest, and knowing how to use credit responsibly.
Tip: Keep learning about money and how to manage it. There are many free resources available online that can help you increase your financial literacy. If you are interested in podcasts here are two popular podcasts that are dedicated to students and their finances - The College Investor by Robert Farrington and The Dave Ramsey Show by Dave Ramsey.
There you have it, the 30 financial terms that will put you in the fast lane on the road to financial literacy. Remember, the journey of a thousand miles begins with a single step - or in this case, a single term. So don't wait for 'someday' to start mastering your money. Dive in, and start exploring.
And remember: your 20s aren't just for making mistakes, they're for making bank, too. Start early, start strong, and soon enough, you'll be not just surviving the financial game, but thriving in it. So, here's to making your money work as hard as you do. After all, you've earned it.