18 Common Terms to Know to Improve Your Financial Literacy

Money is a topic that tends to make most people uncomfortable. Seventy percent of Americans believe it is rude to talk about money. Even married couples don’t talk about money—43 percent say they don’t know what their partner earns, and 36 percent don’t know how much they have invested between the two of them.

Part of the reason money is a taboo topic is that many people don’t understand the basics of financial planning. If someone isn’t confident in their financial vocabulary, it’s even more difficult to talk to their spouse or even their financial planner.

Why Is Financial Literacy Important?

Financial literacy is more than just knowing how to use financial terms; it’s understanding how those terms affect you and your future.

Financial literacy helps you understand what you need for a secure financial future. It’s one thing to know that you aren’t saving enough for retirement—one in three people has less than $5,000 saved. Financial literacy will take you a step further; you’ll understand what you need to save and the best places to put your savings to allow your retirement fund to grow.

Financial literacy is important at every age. Most of today’s college graduates begin their careers carrying an average of $38,000 in college debt and don’t know how to manage it or begin paying it down. Only 60 percent of American households maintain a budget, and the average family is carrying $6,354 in credit card debt, which adds up to over $1 trillion nationwide.

By improving your financial literacy, you will be better equipped to manage any financial situation and make confident decisions regarding your personal finances. To get started, here are 18 financial terms that are helpful to understand.

18 Useful Financial Terms to Know

401(k) plan - A 401(k) is an employer-sponsored retirement plan that allows employees to set aside tax-deferred money for retirement.

529 plan - A 529 Plan is a tax-advantaged savings plan that allows you to save for college or other forms of education. In Missouri, education saving plans have additional tax advantages thanks to Missouri Most, which waives state taxes on educational savings and offers other advantages.

Annual percentage rate (APR)APR is the annual interest rate charged for borrowing money or on a credit card balance.

Annual percentage yield (APY) - APY is the annual interest rate paid on a savings account, certificate of deposit, or other account that earns compound interest.

Budget – A budget is an estimate of your income and expenses for a specific period of time, e.g., one month, and is the basic tool used for financial planning.

Capital gains Capital gains are the increase in value of an asset, such as real estate or an investment, above the original purchase price. Capital gains are not realized until the asset is sold.

Certificate of deposit (CD) – A certificate of deposit, commonly called a CD, is a form of federally insured savings account. With CDs, a specific amount of money is deposited for an established period of time—e.g., three months, a year, or five years—in exchange for a higher interest rate. Early withdrawal from a CD has stiff financial penalties.

Checking account – A checking account is a form of bank account that gives you easy access to your money. Money can be withdrawn or paid out by writing checks or using a debit card.

Credit score – A credit score is a ranking assigned to you that reflects the amount of financial risk you pose to a lender. Your credit score is determined by things such as how long you have had credit, the amount of debt you carry, whether bills are paid on time, and other factors. The higher the score, the lower the risk to lenders.

Individual retirement account (IRA) An IRA is a tax-advantaged savings account that is used for retirement funds. A SIMPLE IRA allows you to deposit retirement funds and have that amount deducted from your annual taxable income; taxes are paid upon withdrawal.

Interest rate (variable and fixed) – An interest rate is the percentage of the principal paid on an amount of money. If you deposit money into an interest-bearing checking or savings account, the interest is the percentage of the account balance paid to you as an incentive for maintaining an account. In the case of a loan, interest is charged based on the amount of money you owe. A fixed interest rate is established for the life of the loan, or for a bank account, and the rate remains unchanged. A variable interest rate adjusts up or down depending on the financial market.

Investment portfolio – An investment portfolio is a group of assets, stocks, bonds, mutual funds, and other investments that are considered together as part of retirement planning.

Money market account – A money market account is a bank account that pays interest, like a savings account, but it also has check-writing and/or credit card privileges.

Overdraft – An overdraft is an amount of credit extended to you when your bank account reaches zero, i.e., you use more funds than are available in the account and the bank loans you the difference for a fee.

Principal – The principal is the amount of money being loaned or the amount of money placed into an investment.

Roth IRA – A Roth IRA is a form of individual retirement account in which money is taxed at the time of deposit, so that same money is tax-free upon withdrawal.

Rule of 72 – The Rule of 72 is a simple means to determine how long it will take for an investment to double in value by dividing 72 by the annual rate of return of an investment.

Savings account – A savings account is a federally insured account where you can store money and have it earn interest.

These are some of the most common terms you will encounter as you work on your financial plan. An experienced financial advisor can help you improve your financial literacy so that you can make the most of your money. Don’t be afraid to talk to an advisor, ask questions, and learn all you can before making any financial decision. The more you know about money, the easier it will become to talk about your personal finances, whether it’s with your banker, your partner, or your family.

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