Ten “My Money” Terms Every SavvyChick Should Know
Alright, the time has come for you to finally get a grip on your finances. So you sit down, open your laptop, and type something like “What money topics should I be focused on?” into Google. Instantly, a million and one answers pop up. That’s the beauty and the curse of the internet; heaps of information right at your fingertips, but no idea which is best or where to start.
Don’t worry, SavvyChick, I’ve got your back. As a financial professional, here are the top 10 personal finance terms that I think you should know:
1. Credit Score
You may also see this called a “FICO” score. Either way, it’s a number between 300 and 850 that essentially tells businesses, banks, and credit card companies how trustworthy you are when it comes to borrowing money. Everyone has their own unique score and it can fluctuate over time based on five factors:
• Payment history (35%)
• Amount of debt (30%)
• Length of credit history (15%)
• New credit (10%)
• Types of credit (10%)
As you can see, how much debt you rack up and how often you pay your bills on time make up a large (65%!) portion of your credit score. So make sure you’re keeping your balances low and paying them off when or before they’re due.
To find out what your credit score is, you can request a free credit report from one of the three bureaus (Experian, Equifax, and TransUnion) once per year per company.
The word budget has a stigma attached to it, so let’s set the record straight right now: A budget is not prison for your money! It’s a plan that helps you prioritize your spending habits and accomplish your financial goals. A popular budget framework is the 50/20/30 split. This “rule” states that you should spend a maximum of 50% of your income on necessities (rent/mortgage, utilities, food, etc), 20% on savings goals like retirement and paying off debt, and 30% on flexible spending for things like clothes, entertainment, and travel. My advice? If you’re younger, swap the 20 and 30 portions. If you can get ahead in the savings game early on, time will reward you for it.
3. Emergency Fund
Also called a “rainy day” fund, this is the portion of your savings that you should have earmarked for unexpected events. For example, let’s say you suddenly lose your job, or your roof starts leaking, or your car needs some expensive repairs. Your emergency fund can cover you in these types of situations. Experts say you should have three to six months’ worth of expenses (housing, utilities, food, gas, insurance, etc) set aside for emergencies. If you’re married with dual income, three months may be enough. If you’re single with only one income, aim for six months’ worth.
4. Cash Flow
This is the amount of money that’s left from your income every month after you pay all of your bills. If this number is positive, that means you’re spending less than you earn (hooray!). If your cash flow is consistently negative, you’re spending more than you earn and likely living outside of your means. To calculate your cash flow, simply take the amount of money you bring in every month and subtract all of your expenses for that time period. Look for red flags where you may be spending too much.
An asset is something that you own that you expect to provide economic value in the future. For example, a house, property, cash, car, fine jewelry, a business if you have one, furniture, and investment accounts are all considered assets because they’re things that you own and could sell for money. Some assets like a house or business may appreciate, or increase, in value over time. Others like a rental property or investments may provide passive income, or money that you earn but aren’t actively working for.
A liability is something that you owe. More commonly called debt, things like credit card balances, an auto loan, and a mortgage are considered liabilities because they’re money that you have to pay back at some point in the future.
7. Net Worth
Your net worth is simply the sum of your assets minus the sum of your liabilities. In other words, it’s what you own minus what you owe. Here’s a simple example: Let’s say you just graduated from college and the only asset you have is $5,000 in the bank. If you owe $20,000 in student loans, your net worth is a negative $15,000.
Inflation is the increase in prices over time. On average, prices in the US increase between 2% and 3% per year, which means that every dollar you have today will be able to buy 2-3% less next year. Inflation is called cash’s worst enemy because it decreases the purchasing power of your money. For a more in-depth explanation on cash and inflation, check out this video post.
Depreciation occurs when an object loses value over time due to wear and tear. Assets that depreciate are cars and other machines like washers and dryers, televisions, and appliances, as well as furniture and other fixtures. So while these types of assets add function and value to your life, their monetary value decreases over time.
10. Compound Interest
Albert Einstein called compound interest the eighth wonder of the world because it’s so incredibly powerful. In short, compound interest is interest on top of interest. Think of it like a snowball effect. When an investment appreciates, the additional value is called interest. That interest then starts earning even more interest. Over time, the interest continues to compound, and the bigger it gets, the bigger it grows. You should think of compound interest as your best friend when it comes to building wealth. Click here to learn more about this powerful tool.
There are plenty of other financial terms that you should know, but these ten give you a great foundation!
Tara Falcone is a former Wall Street analyst and the Founder of ReisUP LLC. ReisUP is an early-stage financial services company that focuses on increasing investing education and access for everyday investors. Her mission is to educate and thereby empower people – especially her fellow millennials – to “rise up” and play a more active role in achieving their financial goals. Make sure to check out her free DIY Guide for Retirement Accounts!