The need for financial literacy is finally catching on at the high school level across the country, but what about for those in the “Millenial” generation who missed out on this new proliferation of required personal finance classes?
For starters, understanding basic financial terms can help this, and any generation, make the most informed choices about their fiscal path.
In a recent article, Mashable, a leading source for news, information, and resources for the “Connected Generation”, which includes Millenials, listed commonly used terms and their definitions that Millenials can use to navigate their personal finance world:
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 an 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.
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 agreeing to, 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 on 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. 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 estate 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.
Your credit score indicates to lenders how trustworthy you are, in other words, how likely you are to pay back your loans and debts (and do so on time). 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 are allowed, by law, to receive one free credit report a year. If you need to check it more than once, be wary of "free" credit score sites that might ask for a credit card and include hidden charges/fees.
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.
An Individual Retirement Account (IRA) is a retirement plan that is 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 that can be easily bought and sold, making them easy to convert. It's often smarter to invest in liquid assets, like bonds and stocks, than assets that can take longer to sell, called illiquid assets (real estate, huge blocks of stocks, collectibles).
While the concept seems a little abstract, every person is worth a monetary sum. Your net worth is actually your value if you were to sell all your assets and pay off all your debts. 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 (don’t worry if this happens; this 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.
A savings account works a little differently than a checking account. 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 you are less inclined to take money out, and more inclined to let it alone).
Common types of savings accounts include 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 a high rate of interest that will vary with the market, and your withdrawals from this account may be limited.