By the time you’ve reached your 30s, you’ve probably heard dozens of financial acronyms and terms thrown around—from APRs to IRAs, expense ratios to exchange-traded funds. Yet while the lingo may sound familiar, you might not have a really clear understanding of what the words actually mean or how they apply to your finances. And that can be problematic when you’re trying to make the best decisions with your money.
So we’ve gathered, and answered, 35 questions on a range of financial topics that you’ll want to know by the time you’ve established your career and started building some wealth.
While we’ve started with the basics, we also include more sophisticated terms and topics. Master these, and you can not only sound smart about money, but you’ll be able to make smarter decisions with yours, too.
1. What’s your net worth?
Your true worth is unquantifiable, my friend. But financially speaking, your net worth equals your assets—cash, property (like your home, car and furniture), your checking and savings account balances and any investments—minus your liabilities, which are your debts and other financial obligations.
To calculate the net worth of your home, for example, you’d take an estimate of its current market value. (You can look at what similar homes in the neighborhood have sold for recently or have a real estate agent make an appraisal.) Next, subtract how much you still owe on your mortgage. If an agent says she could sell your home for about $215,000 and you owe about $110,000 on your mortgage, for example, that’d be about $105,000. The asset value minus your liability (or what you owe on it) equals the net worth.
Why is knowing your total net worth important? It gives you a true financial picture of how you’re doing, and highlights where you could make improvements.
2. What should you include in a budget?
First, add up your essential expenses, such as your mortgage or rent, utility bills, cell phone, food and child care. Then tally your financial obligations, like credit card, auto or student debt payments and savings goals (for emergencies, retirement and anything else you’re working toward).
Then add in “discretionary” expenses, or those that are not absolutely essential but are important to you. Don’t forget to factor in fun—entertainment, weekend trips, whatever you love—because drudging through life with a too-tight spending plan is a recipe for failure.
1. How much should you save in your emergency fund?
Most experts agree that you should have three to six months’ worth of living expenses saved to keep you afloat in the event of, say, a home or car repair or other unexpected expense—or the loss of your job.
Related: Getting Your Emergency Fund Started
2. Where’s the best place to hold short-term savings?
For money you need to be able to access within the next year or two, advisors usually recommend looking for a high-yield savings account. Just be aware that you can only make up to six withdrawals each month.
Unfortunately, you won’t earn much interest on a savings account, as the national average is currently .06 percent. But some banks—like Ally Bank, Synchrony and Barclays—are offering 1 percent or more as of early March, so it’s worth shopping around. “Internet banks often have the [lowest] fees, better interest rates and can be much more convenient,” says Ken Tumin, co-creator of comparison site DepositAccounts.com.
3. What’s the difference between a money market and a savings account?
Both savings and money market accounts are government-insured. But money market accounts are more likely to offer check-writing capabilities and ATM or debit cards (although they are subject to the same six-withdrawals/month limit). MMAs typically have higher interest rates, but also have higher minimum balance requirements. Details vary by account.
4. Where should you put money you’ll need in two to 10 years?
If you need the money in a year or two, “You might start thinking about CDs if you want to maximize your rates,” Tumin says. One-year CDs aren’t offering much more than high-yield savings accounts now. But some two-year CDs are offering 1.5 percent or more.
If you have a longer timeframe, consider investing in stocks and bonds. Just be aware that, while the stock market has historically gone up over time, it can go up or down in the short run. (And, as advisors will caution, past performance doesn’t guarantee future returns.) So while stocks may provide higher growth opportunities than CDs and bonds, you want to allow enough time to ride the downturns out and may consider moving money into more conservative options as your time horizon gets shorter. Investing in a mix of stocks and bonds can also lower your risk.
5. What’s a CD?
CD stands for certificate of deposit, which you can buy from a bank and is guaranteed to pay interest over a designated period of time—usually much more than a savings account would. A five-year CD from Melrose Credit Union is paying 2.4 percent, for example, while its savings accounts offer rates of just 0.5 percent. The catch is that you can’t touch the money in a CD until the designated time period ends.
“CDs can offer higher rates than savings accounts, but the price you pay is to have less liquidity,” says Tumin. “If you take the money out early, it can cost you several months of interest.”
(This page has been updated to clarify the process for calculating the net worth of an asset.)
1. What’s a credit score?
A credit score is a three-digit indication to potential lenders of your ability to repay money you borrow. The FICO score is the most widely used, ranges from 300 (womp) to 850 (rock star) and is calculated based on five factors: payment history, credit-utilization ratio, length of credit history, the mix of credit types in use and number of credit inquiries.
2. What’s a good credit score, and why is it important?
An excellent FICO score includes anything from 750 up, and the next rung down—700 to 749—is considered good. However, credit pro John Ulzheimer, formerly of FICO and Equifax, points out, the best score is the one that “gets you approved for the best deal the lender is offering.”
You may qualify for a loan with a good score, but you may need an excellent score to qualify for the lowest interest rates on that loan. Credit card companies and mortgage lenders typically reserve their lowest rates and largest loans for people who have exhibited a quality track record when handling credit.
3. How can I improve my score?
Payment history accounts for the biggest portion of your FICO score—35 percent—so submitting on-time payments is the best way to boost your score. Clearing credit card debt, thereby decreasing your utilization ratio (the amount of debt you owe compared to your total credit limit), is another way to raise your score.
“If you’re able to pay off or pay down your credit card debt, you could see a significant improvement in less than one month,” Ulzheimer says.
4. How can I see what’s on my credit report?
Keeping tabs on your credit report helps to prevent errors and fraudulent activity from going unnoticed and sinking your score. “The only way you’ll find errors on your credit reports is to actually review them,” Ulzheimer says. “The credit reporting agencies don’t have any obligation to correct errors unless you ask them to do so.”
Visit AnnualCreditReport.com to order a free report once every 12 months from each of the major credit bureaus: Equifax, Experian and Transunion. Be sure to review each one, as they may include different information.
1. What’s an APR?
This acronym stands for annual percentage rate—as in the interest rate credit cards charge on unpaid balances.
Your APR can vary, as it’s based on the U.S. prime rate (set by the Federal Reserve) and whatever additional margin your lender tacks on. APR may also differ depending on transaction: For example, most cards charge different APRs for purchases, cash advances and balance transfers. Your lender may also offer low intro APRs that expire after a specified time period and higher penalty APRs for missed payments.
2. What do you owe, and how much interest are you paying?
To be in control of your money, you need to know exactly how much you owe, including outstanding credit card balances, as well as other debt like student loans, car loans and mortgages.
Not only that, but keep in mind what rate each debt charges, so you can calculate how much you’re paying in interest. (Note: If you pay off your credit card bill each month, you’re not paying interest at all—score!—but you are building credit.)
3. When will you be debt-free?
Knowing your numbers is only half the battle. You also need a solid repayment plan with an end date.
Schedules for repaying mortgages, student loans and auto loans are usually well laid out. If you have low rates, you may not need to bother paying them faster.
Credit cards are another matter. If you only pay the minimums, you’re wasting a lot of money on interest and likely not making a big dent in your principal. Check out a calculator from Bankrate, Credit Karma or MagnifyMoney to see how the timeline changes when you commit to paying more.
4. What’s the difference between debit, prepaid, credit and charge cards?
Drawing funds directly from your checking account with each swipe, “a debit card is essentially a plastic check,” Ulzheimer explains. “A prepaid debit card is cash in plastic form.” Load up the latter with funds and use it until you draw it down to zero.
On the other hand, money tied to credit and charge cards belongs to the bank, and you’re just borrowing it. With the former, the lender allows you to carry a balance—and profits from that graciousness. Charge cards must be paid in full by the due date or you risk incurring serious penalties.
This page has been updated to clarify the formula for calculating an asset’s net worth.
1. What’s the difference between stocks and bonds?
Stocks give you a share of a public company’s assets and earnings. The value of your shares goes up and down with the company’s financial well-being—and with shareholders’ perception of that company’s well-being. Read: They’re risky, but potentially rewarding.
Bonds are like loans given to an institution. When you buy bonds from a corporation, government or other entity, you’re lending money to be paid back with interest at a specified time. Read: They’re relatively safe as long as the entity stays in business. You can look at how a bond is rated before you buy one to see how risky it is. (“AAA” and “AA” indicate a high credit-quality investment grade.)
2. What are dividends?
Dividends are periodic payouts of earnings that companies may give to certain shareholders. Typically, they’re paid in cash or additional stock. For investors, they’re a good way to collect some income while still investing for higher returns. Note that dividends may be subject to taxes.
3. What’s the difference between passive and active funds?
Calling an investment fund “passive” or “active” refers to how it’s managed. Passive funds are run with a hands-off approach, and therefore generally come with low fees.
Index funds, for example, are set up to move in tandem with associated indices (like the S&P 500, which tracks 500 of the most widely held stocks on the Nasdaq and New York Stock Exchange) and mirror their returns. Actively-managed funds attempt to beat that benchmark by making a wider variety of investments.
4. What’s the difference between mutual funds and exchange-traded funds?
Because most ETFs track indices, and are therefore more passively run, they tend to charge lower fees. They’re also traded like common stocks at varying prices throughout the day. Conversely, shares of mutual funds are priced based on their net asset value (NAV) once at the end of the trading day.
5. What’s an expense ratio, and what’s a good one?
An expense ratio is how much it costs to run a fund, including fees paid for management, recordkeeping, custodial services and taxes. It’s calculated annually by dividing operating expenses by the average dollar value of the fund’s assets—lowering returns for investors, which is why it’s important to know.
“High fees will erode your profits and significantly impact your portfolio,” says Oklahoma-based Certified Financial Planner Shanda Sullivan. “Especially when you’re saving for retirement, you’re talking about 30 years to 50 years—that’s going to add up. And remember it’s not only the money you’re losing, but it’s also the potential earnings that money could be producing.”
She suggests sticking with funds that have expense ratios below 1 percent, and preferably below 0.5 percent, as well as steering clear of so-called “load” funds, which charge extra at the point of sale.
6. What’s diversification?
Diversification means spreading your investments across a variety of assets, including stocks and bonds, CDs, and cash. For example, for your stock allocation, you want to invest in the U.S. and abroad; in large, medium and small companies; and in fast-growing businesses and more-established firms. Ideally, a well-diversified portfolio includes assets that will go up if others are down.
7. How does compounding work?
Put simply: Compound interest is when your interest earns interest—which helps your money grow at a faster rate than when “simple interest” (interest added only to the principal) is applied. Money invested in the stock market benefits from compounding, which is why it pays to start investing as early as possible.
1. What’s a 401(k)?
A 401(k) is an employer-sponsored account where you can contribute a maximum of $18,000 pre-tax dollars in 2017 ($24,000 if you’re 50 and up). There’s a 10 percent penalty for withdrawing money before age 59½.
As an extra incentive to save, some employers match a portion of your contributions, which is essentially free money—so take advantage.
2. What’s an IRA?
IRA stands for individual retirement account. As the name implies, it’s a tax-advantaged option for saving without an employer sponsor. For 2017, you can contribute a maximum of $5,500 of earned income ($6,500 if you’re 50 or older).
There’s also a 10 percent penalty for withdrawing money prior to age 59½—except to use in specific circumstances, including qualified higher education expenses and first-time home purchases.
3. What’s the difference between a Roth and a traditional IRA?
Pre-tax contributions to a traditional IRA may be tax-deductible, depending on your income, filing status and whether you are covered by a retirement plan at work. Roth IRA savings are never tax-deductible, but the money grows tax-free. And you won’t pay Uncle Sam on your withdrawals because the initial contributions are made post-tax.
Sullivan recommends ROTHs over traditional accounts for income-qualifying Millennials. When you’re young, you may fall into a lower tax bracket than you will later in life, so pay the taxman now.
4. How should you save if you’re self-employed?
You can still use IRAs, but considering the contribution limit is $5,500, you should save elsewhere, too. To nab tax advantages, look into a solo 401(k), simplified employee pension (SEP IRA) or savings incentive match plan (SIMPLE IRA).
Sullivan likes the solo 401(k): “The great thing about it is you can contribute the annual amount [up to $18,000 in 2017], and your business can contribute as well. So you can double on contributing.”
5. Should you rollover your 401(k) if you change jobs?
You typically don’t have to rollover your 401(k), but it might be better if you do. Sullivan often recommends moving it to a Rollover IRA because it typically charges lower fees and offers a wider variety of investments than a 401(k). You might also consider rolling the funds into a new employer’s 401(k) to make keeping track easier.
Whatever you decide, “you need to take control of your 401(k) when you leave,” says Sullivan. Especially if it’s less than $5,000, your former employer may try to automatically distribute the funds to you, which will trigger taxes—and penalties—if you don’t roll it over within 60 days.
6. How much should you save for retirement?
You may have heard that you should aim to save 10 to 20 percent of your annual income, but everyone’s goal is different. The important thing is that you know your own answer, and have a plan to reach that magic number. (You can use online calculators, like those on Bankrate, Vanguard and AARP, to calculate how much you need to save.)
If those big numbers are too intimidating, take a deep breath. “I always tell people to just save something—whatever is doable for you—and increase it over time,” Sullivan says.
1. What’s the difference between a premium and a deductible?
Your insurance premium is what you pay each month for coverage. If you get health benefits through your employer, they may pay a portion and the rest is deducted from your paycheck.
A deductible is what you shell out for covered services before your insurer starts paying, and it typically does not include copayments—fees you pay for certain services, such as $15 for a doctor’s visit. Both deductibles and copays are considered out-of-pocket expenses, which you should include in your budget.
2. What’s the difference between an FSA and HSA account?
Both flexible spending accounts and health savings accounts are smart ways to save pre-tax dollars for qualified healthcare costs, including copays, prescriptions and other out-of-pocket expenses.
You’re only eligible for an HSA if you have a high-deductible health plan. In 2017, the minimum annual deductible for an HDHP is $1,300 for individual coverage and $2,600 for family coverage. (FSAs are not tied to a specific health plan.) In 2017, you can contribute up to $3,400 to an HSA if you have individual coverage, and up to $6,750 for a family plan. For an FSA, you can contribute up to $2,600.
Another major difference: While you can carry a balance in an HSA from year to year, letting it accumulate wealth, funds in an FSA have historically been “use-it-or-lose-it.” However, your plan provider may give you a couple months’ grace period to burn through your leftover funds, or the ability to carry over up to $500.
3. What other types of insurance do you really need?
The big ones to consider are homeowners or renters insurance, auto insurance and life insurance, says Michael Barry, spokesperson for the Insurance Information Institute.
If you own your home or car, you’re required to have insurance—for which the minimum mandatory requirements vary depending on your location and specific situation. Renters insurance may seem optional, but “people are increasingly realizing that [it] is essential to protect your personal belongings,” says Barry. (Plus, some apartment buildings do require it.)
Even if you have some life insurance coverage, Barry says a good rule of thumb is to beef up your policy when someone, like a spouse or kids, is financially dependent on you.
1. How much can you comfortably spend on housing?
A general guideline is that housing expenses shouldn’t exceed 30 percent of gross income. But some lenders set that figure in stone, and don’t even consider approving mortgages unless someone’s proposed home-expense-to-income ratio is 28 percent or less. (Others are more generous, but that doesn’t mean you should apply for as much as you’re pre-approved to borrow.)
2. What’s included in PITI?
Your monthly payments go toward the mortgage principal (the actual balance you owe), as well as interest, taxes and insurance. So make sure to budget accordingly.
Taxes and Wills
1. What credits and deductions can you take?
The simplest way to go is to claim the standard deduction, which is $6,300 for a single filer and $12,600 for a married couple filing jointly. But you may be able to deduct more if you “itemize,” which you can do for job-search expenses, medical expenses and charitable contributions—just to name a few.
You may also score savings by claiming a variety of tax credits, like the American Opportunity Tax Credit for up to $2,500 and the Child and Dependent Care Credit for up to $6,000 if you have two or more dependents.
2. When is the right time to create a will?
Create a will as soon as you have stuff worth bequeathing. It’s especially important if you have kids or other dependents to outline your wishes in the event something happens to you.
Also include in your estate planning a financial power of attorney, health power of attorney and advance medical directive, so you know that someone you’ve designated will have a say in what happens (or you’ll have left directions) in case a debilitating issue prevents you from making decisions for yourself.
Sullivan recommends being even more proactive and drafting these documents early on and then updating them whenever life changes—or at least every five years. “Life gets hectic and laying out your end-of-life wishes always gets put on the back burner,” she says. “Don’t leave that burden on your family members.”
This post originally appeared on Grow
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