Money, financial know-how, and personal finance management is not taught in school, unless you are specializing in the subject in college. Even then, the focus is corporate finance, stock market, and investing. To really become knowledgeable about money management, you have to go through your own experiences, or learn from others. This includes understanding basic money terms and terminology.
To help you throughout your own personal finance experiences, and to allow you to understand what others may be teaching you, there are certain money terms you should be aware of. The CGS Team is sharing some common money terms that everyone should know. You can already feel a step ahead in the personal finance department by knowing what these terms mean.
Basic Money Terms
401k/403b – A 401k plan is a form of retirement savings offered by employers to their employees. A 403b plan is identical to a 401k plan except it applies to employees of government or tax-exempt organizations (churches, universities, hospitals, etc.). There are certain things you should know about your 401k plan specifically.
APR – Also known as “annual percentage rate”, APR represents the total cost of borrowing money annually. APR is most commonly found on your credit card and loan statements. APR is different from the interest rate in that it includes the total cost of borrowing money (rate and fees associated with borrowing), where the interest rate is just the interest charged on the loan.
APY – Also known as “annual percentage yield”, APY is the annual rate of return on a savings or investment that takes into account the effect of compounding interest. The percentage assumes that the funds will remain in investment/savings for a full 365 days.
Budget – A budget is a tool that tracks what money is coming in, what money is going out, and what is left over during a specific period of time (weekly, bi-weekly, monthly, and annually).
Compound Interest – Compound interest is the interest that is calculated on both the principal amount borrowed or saved, as well as the interest that accrues on that borrowed or saved amount. Compound interest on a savings or investment can help your money grow faster. Compound interest on a debt can result in you paying a lot more money that what was originally borrowed. Read Finance 101: Compounding Interest for more information.
Escrow – Escrow is a secure intermediary account for money when it’s moving between a buyer and seller during the home-buying process. Escrow can also mean an account that houses money for additional costs outside of the mortgage, like property taxes and homeowner’s insurance.
FICO Score – FICO is an acronym for Fair Isaac Corporation, which invented the FICO credit score. The 3-digit number that makes up your FICO score is what is used by most creditors when determining creditworthiness. It’s important to understand what is factored into your FICO score.
Itemized Deduction – An itemized deduction is any qualified expense that the IRS allows you to subtract from your gross income, reducing your taxable income. Itemized deductions can include mortgage interest you paid, medical and dental costs, or gifts to charity. Itemized deductions must be identified on a Schedule A form within your tax returns, and cannot be used in conjunction with a Standard Deduction.
Mutual Fund – A mutual fund is an investment vehicle made up of a pool of money collected from many investors for the purpose of investing in stocks, bonds, money market instruments and other assets. A mutual fund is made up of a variety of different stocks (or other investments).
Net Worth – A net worth is the total value of all assets less (or minus) the total value of all liabilities or debts. A net worth can be positive or negative. Learn how to calculate your own net worth.
PMI – Also known as “private mortgage insurance”, PMI is the insurance amount lenders require home-buyers to take if they are putting less than 20% down on the home they are purchasing. PMI protects the lender in case of a default on the mortgage.
Premium – A premium is the amount you pay an insurance company on a monthly, quarterly, semi-annual, or annual basis in exchange for protection from financial losses.
Standard Deduction – A standard deduction is a standard amount, set by the IRS each year, that can be used to reduce your taxable income if you decide not to itemize your deductions. Your standard deduction is based on your tax-filing status, and it’s the government’s way of ensuring that at least some of your income is not subject to tax.
Stock Options – Stock options offer employees of a company to take advantage in the growth of the company and its share price. Options are given for many reasons, including performance, length of service, sign-on bonuses and more. Options can also be purchased as a retirement assent.
Related: 11 Investment Terms Simplified
Don’t you feel more financially savvy already?! Take the time to learn and grow your financial knowledge base so you can become successful at managing your own finances. Are there any financial or money-based terms that you aren’t familiar with? Leave a comment below and we will clear it up for you!
