Most high schools don't teach how to balance checkbooks or navigate loans, though plenty of young people wish they had more access to formal financial education.
While it would be impossible to fit an entire economics class in one article, the first step to grasping more complicated financial concepts is to learn the fundamental terminology.
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Understanding basic financial terms can help you make the most informed choices about your fiscal path. Here are just some of the most frequently used terms you'll need to know.
A popular retirement plan offered by many employers, a 401(k) allows you to set aside a certain percentage of your paycheck into a retirement fund, before taxes.
Some companies will match a portion of your yearly 401(k) savings as an incentive for participating in the program. The funds in your 401(k) are then invested into different ventures, such as bonds, money market accounts and stocks. However, you will not lose your savings if your employer files for bankruptcy.
You will receive the money as a tax-free annuity once you retire, but if you choose to withdraw the funds before turning 59.5 years old, you will have to pay taxes on it.
Image: Flickr, 401(K) 2013
Annual Percentage Rate (APR) is the rate of charge or interest, usually as it applies to credit cards. Different cards have different APRs. It's important to know which rate you're entering into, since it will affect the price you have to pay. Credit card companies can apply APRs to late payments, purchases and cash advances.
"APR financing" refers to the price you pay with the APR rate included, a price added top of taxes, essentially. For example, if an ad indicates a car costs $30,000 with 0% APR for 60 months, it means your payment (with taxes, dealer's fees and tags included) will not include APR during those first 60 months, as you pay off the car. If the deal instead comes with an APR rate of 0.8%, you'd add about $2,400 to the lease, which will be integrated into the car payments.
An annuity is a continuing, fixed annual payment for a certain amount of time, from one party to another. You can receive annuities from insurance companies or retirement funds. For example, one may receive an annuity from a deceased family member's life insurance policy.
Assets are anything you own that can be sold or converted into cash. Some assets include real or personal property, cars and other vehicles, jewelry or investments, such as a 401(k). Unless your stamp collection or old action figures are super rare, those don't count as assets, however.
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The web contains a seemingly endless lineup of credit score reporting sites, each with its own catchy jingle and commercial. It might seems like a lot of fuss, but your credit score is important. It essentially indicates to lenders how trustworthy you are, in other words, how likely you are to pay back your loans and debts. Your credit score can affect your ability to make bigger purchases down the road, such as cars or houses.
The easiest way to build credit is to qualify for a credit card and pay off the balances on time. The most common score is the FICO score, which is determined by payment history, credit use, types of credit use, length of credit history and applications for credit. The score ranges from 300-850.
The three major official reporting companies are TransUnion, Equifax and Experian. You'll also find unofficial free credit scoring sites, like CreditKarma and Credit Sesame. However, keep in mind some of these "free" sites might ask for a credit card, so make sure to cancel the service before your trial period ends, if you wish.
Your Debt-to-Income (DTI) ratio is especially important for mortgages. There are two types of DTI: the front-end ratio and the back-end ratio. The front-end is the percentage of your income that would go to paying housing-related costs, such as mortgage and real estate taxes, while the back-end represents how much of your income is going to other debts, such as credit card bills and car payments. If either of these ratios is too high, it might keep you from getting a mortgage.
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An Individual Retirement Account (IRA) is a retirement plan that in not sponsored by an employer. Since you are solely responsible for adding money to an IRA, you have a wider ranger of investment options. Like the 401(k), most IRAs are tax-deductible.
A liability means you owe money or payments to another person or establishment. For example, student loans are a liability — you have to pay back the sum of the loan, plus interest.
Liquidity is the degree to which you can sell or convert your assets into money, when needed. Liquid assets refer to those assets which are easily bought and sold, making them easy to convert. It's often smarter to invest in liquid assets, like bonds and stocks, than assets which take longer to sell, called illiquid assets.
Image: Flickr, 401(K) 2013
While the concept seems a little abstract, every person is worth a monetary sum, but not for your organs or your potential productivity. Your net worth is actually your value if you were to sell all your assets and pay off all your debts. While you're probably not going to give up everything you own and liquidate all your assets, it can be useful to know how much you're worth when considering big financial decisions.
Calculate net worth by subtracting your total debt from the sum of your total assets. If you get a negative number, you have more debts than income, which is typical for many recent grads. A positive number means you're making or have more than your debts, meaning you have more of a budget for paying off loans.
Checking accounts are simple — they're places to hold your money for quick access. A savings account works a little differently. While your money is still accessible, there are often fees and time delays associated with savings withdrawals. The advantage of having a savings account, however, is that you compound interest and, like your checking account, it is insured by the FDIC.
There are multiple types of savings accounts, including basic, certificate of deposit (CD) and money market. The basic savings account allows your money to grow at a set interest rate, though often a relatively low one. The CD account has a high, usually fixed rate of interest, but it also has to grow for a set amount of time. If you take money out of the account before the appointed time, you will have to pay a penalty. It's best used for saving money for a big expense down the road, like buying a car or returning to school. A money market savings account will have high rate of interest that will vary with the market, and your withdrawals from this account may be limited by the bank.
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