When you first start getting serious about your family’s finances (yay! congrats!) you find that there’s a wealth of information (pun definitely intended) at your fingertips.
But, just like any other industry, there are buzzwords in personal finance. They aren’t as complicated as the buzzwords belonging to some other industries, but the following definitions will come in handy as you navigate your way toward a better financial future.
Here are the 15 essential personal finance terms that your family should know.
Personal Finance Terms Every Family Should Know 1 of 16
Emergency Fund 2 of 16
You need to have an emergency fund so that when something unexpected comes, you won't go (further) into debt. But how much do you need, and what is it for?
Here's the thing: Start with $1,000. Keep $1,000 in your checking account. If you're anything like me, you'll think, "Goodness gracious, why isn't that money going toward my debt right now? I don't need to have this money around."
But the worst thing when you're getting started digging out is some unforeseen circumstance dragging you back down. It'll derail you too much. So get to $1,000. Then go back to your regularly scheduled debt payment.
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Traditional IRA 3 of 16
IRA stands for Individual Retirement Arrangement (but typically referred to as Account), and a Traditional IRA is one where your contributions are not taxed until you retire. Contributions are also tax deductible, so if you contribute the maximum ($5,500 for the 2013 tax year; $6,500 if you're older than 50) your income is reduced by $5,500/$6,500, which, along with other deductions, could reduce the amount of taxes you have to pay this year.
Important notes: You cannot withdraw from a Traditional IRA while you are working. I found this to be a plus rather than a minus during my debt repayment journey because I know I would have borrowed from my future self if there were no penalty, leaving my retirement account empty.
Income restrictions: Your income has to be under a certain level (and it varies, depending on how you file and whether you have employee-sponsoerd retirement accounts. Read this article for more information).
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Roth IRA 4 of 16
A Roth Individual Retirement Arrangement differs from a traditional in that you don't get to deduct your contributions from your taxes now, but your withdrawals aren't taxed when you retire. Basically, you're setting aside your take-home pay in the case of a Roth, which has already been taxed.
You can also take money out of a Roth (tax-free, no less) before you retire, but I don't recommend that. Both a Roth and a Traditional IRA are helping you get ahead by using the power of compound interest.
Income limits are much higher compared to a Traditional IRA, and again, depend on your filing status (read this for more information).
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401(K) 5 of 16
401(k) actually refers to the subsection in the IRS code where the rules of employee-sponsored retirement plans are defined. If your company offers any sort of retirement plan, it's likely a 401(k).
Important notes: If you are an employee of a company that has any sort of matching funds for your 401(k), earn that matching dollar amount. Some companies say they'll match up to 6% of your income, so figure out a way to contribute 6% of your income! If you walked past a $20 bill lying on the ground outside, would you pick it up?
Of course you would. This is no different. In fact, it is many more $20 bills! With a 401(k), unlike both IRAs, you can contribute up to $17,500 per year. If you can afford to do that, do it. That way, your future self will not have to eat cat food during retirement.
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Side Hustle 6 of 16
I remember when I first started reading personal finance blogs. Every time I saw the phrase "side hustle" that old disco song would run through my head. Turns out, though, a side hustle is not a new fancy disco dance.
It is, however, a fancy term for a part-time job. Side hustles are anything you do above and beyond your normal day job to help earn money to achieve a goal. These are typically done while in the midst of a debt payoff to get it paid off faster. Side hustles include pizza delivery, food service, babysitting, taking surveys, working retail over the holidays, doing mystery shops, and yes, even blogging!
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The Joneses 7 of 16
You know the phrase "keeping up with the Joneses"? That's what I'm referring to here. It's very hard to stay on a simple path of frugality when everyone around you is buying fancy cars, going on fancy trips, and furnishing their homes with designer items.
Listen up, friends. The Joneses? They don't exist. Also, conspicuous consumption only shows one side of the equation: what a person is willing to spend. It doesn't show what a person has saved. So don't try to keep up with a family you don't even know or care about.
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HELOC 8 of 16
A HELOC is a Home Equity Line of Credit and it allows you to borrow money from your house.
It's a little confusing, but it works like this: Your house is worth x dollars, and you owe something less than x on it. (Unless you're me, then you owe exactly x because you just bought the place!) Because your home is an asset, you can borrow from it at a fairly reasonable rate. People do this all the time for home renovation projects.
You can get in trouble when you take out a HELOC and can't afford the payment in addition to all your other bills.
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Credit Union 9 of 16
A credit union is a not-for-profit financial institution. Customers are members and owners, and not just in name. There used to be all kinds of restrictions on who could belong to which credit union, but many of them now have community charters, which means with a little bit of digging, you can find several credit unions that might be right for you.
I cannot understand why people bank at big banks. I read all the time about how some online bank's savings account is an amazing 0.9% interest rate. Big deal! At my credit union, I'm earning 2.25% in my checking account!
If you're not familiar with the beautiful world of credit unions, I encourage you to check it out.
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529 10 of 16
A 529 Plan is a tax-advantaged savings plan intended to help you save for college. According to SavingForCollege.com, a 529 can act like an IRA, compounding interest year after year to help families set aside funds for their children's college education. Some states offer more advantages, too, so check with Google to see if your state qualifies. And don't worry! Saving money in a 529 does NOT mean that your newborn baby will be stuck going to college in your state. There are transfers available as well.
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Bonds 11 of 16
Buying a bond is essentially when you lend money to a government or business, and they pay you back with interest. Bonds can be bought at all levels: national, state, county, municipal, and even from private businesses. It's like you are the bank!
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Stocks 12 of 16
When a company decides to go public, they sell some percentage of their company as shares of stock. The public is allowed to purchase shares of this company, and when you buy a stock, you become a partial owner of the company. In some cases, you can even vote on company rules. You can buy stock in any company that is publicly traded on exchanges like the New York Stock Exchange or the NASDAQ.
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Mutual Funds 13 of 16
Often, it's easier to buy a group of investments rather than individual stocks or bonds. That's where mutual funds come in. These are groups of stocks (or bonds) that financial management companies might choose to diversify your investments and lower your risk. Be careful with mutual funds, though, as many of of them can have high expenses associated.
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APR 14 of 16
APR is the three-letter-acronym meaning annual percentage rate. You'll hear this at the end of car commercials. It's the interest rate and expenses for the whole year, representing — in a single number — the fees associated with with paying back a loan. Pay attention to this number because regardless of how it breaks down, you can consider it as the interest you're paying. In general, the lower the number, the better.
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ARM 15 of 16
ARM stands for Adjustable Rate Mortgage, and these are the icky little monsters that helped the housing bubble pop in 2008. You'd think they would be abolished by now, but that's simply not true. When I was shopping for a condo, one place offered me a 5/1 ARM, which meant the interest rate started at 4.75%, and stayed there for five years. Then, every year after that, the lender had the option to raise my interest rate up to 1%. I saw firsthand how easy it would be to end up owing too much on a condo, simply because the lender could raise my rate! Go for the fixed rate.
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Inflation 16 of 16
Inflation measures the rate at which goods and services get more expensive. You can see a chart that shows inflation rates for the last decade here. The reason we keep hearing about inflation is that we're in a funny spot in history. Interest rates on savings accounts are lower than inflation, which means that a dollar today is worth 98 cents next year.
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