Becoming an adult isn’t always fun—but there’s a huge feeling of accomplishment that comes with mastering and understanding things that once seemed far too “adult” for you. And nowhere is that more apparent than in the confusing, jargon-filled world of finance and money. With your SEPs and your ETFs and your 401(k), it can feel like an alien language just designed to make you feel frustrated. But the truth is, the language is often a lot more confusing than the concept behind it.
When you break it down, a lot of finance is pretty straightforward—you make money, you pay taxes, you save money, sometimes you need to borrow it, and sometimes you lose it. If you can see past the jargon, things get a lot more clear—and you can start to take a real hold of your financial future. Don’t let the confusing language keep you away from making savvy financial decisions. Here’s a crash course in finance and a glossary of terms, so you can start to take a more active role in your financial future.
A 401(k) is much less complicated than the name suggests—it basically boils down to a retirement savings plan that is sponsored by your employer. Part of your pre-tax paycheck goes into the account every month and a part of what you put in is normally matched by your employer. When in doubt, talk to your HR department.
The other major retirement account you need to know about is an IRA. For some people, like the self-employed, this is their primary retirement savings opportunity—in the form of a SEP IRA. But anyone can sign up for an IRA in addition to their other retirement plans The most important distinction the traditional IRA versus a Roth IRA.
With a traditional IRA you can make contributions up to a certain limit (up to around $5,500 per year) and that amount is tax-deferred—you don’t need to pay taxes on it this year, but you will pay taxes when you cash it when you retire. A Roth IRA is the opposite, you pay taxes on the money you invest now but not when you take it out.
The Rule Of 72
The rule of 72 is actually one of the niftiest little tricks to help you understand money and saving—one that helps you estimate how long it will take your money to double. Divide 72 by your annual return rate and that gives you the number of years it will take your money to double. So if you expect to make 5 percent a year in returns, your money should double in about 14 years. (But of course, you need start saving first... and for most of us, that's the tricky part.)
Mutual Funds And ETFs
Mutual funds are the kinds of thing you probably feel like you've heard your parents or grandparents talk about, without having any idea of what they actually are. Basically, they’re both ways to invest without just focusing on one stock. If you’re looking to diversify your portfolio (another buzzword you should know, which basically means just spreading things out), then these are a great way to do it—because they’re both linked to a lot of stocks at once. But while a mutual fund (the more old-school version) is passively managed and linked to a huge index of stocks, an ETF is actively managed—people choose which stocks should be included. Those are the basic differences, but be sure to do your research if you’re looking at investing.
Capital gains and losses are important to understand, because they can be crucial to you during tax season. These are basically gains or losses that come from an investment. If you buy a house and the value goes up, the amount you made is capital gains. Similarly, if you invest in stocks and they go down, the losses that happened are capital losses. But these gains or losses aren’t “realized” until you actually sell or cash out. So if your house has been going up in value by $20,000 every year for the last five years since you bought it, it’s not until you actually sell the property that you have a $100,000 in capital gains.
Your FICO score is one of the things that lenders will consider when you try to borrow money—like you would for a mortgage. They look at your credit history to evaluate your loan worthiness and estimate your ability to repay. The standard FICO range goes from 300 to 850, so your score would normally fall within those parameters.
Does your tax come out your paycheck every month, while you see your friends paying up come tax season? That’s because of tax withholding. Tax withholding is basically when your employer withholds the money and gives it directly to the government, so you don’t have to worry about one big lump sum at the end of the year. Don't remember signing up for it? It was probably a part of your W4 form, which you would have filled out when you started your job.
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Compound interest goes in the miscellaneous pile because you probably learned about it math class in elementary school or high school—and then immediately forgot about it. But I saved the best for last, because compound interest helps you understand how your money multiplies. If you save $100 and get 8 percent returns, you’ll have $108 dollars at the end of a year. But the next year, you’ll also make money on those extra 8 dollars—and so and so forth. When you’re interest is earning interest, that’s when you’re money is really working for you.
There's so much jargon in finance, that it's easy to find it overwhelming—but if you take some time to familiarize yourself, you'll realize it's not as scary as you think. Then you can take your financial future into your own hands, because it's never too late.