We often draw a blank when we hear financial terms such as interest, 401(k) and money markets. We scramble to Google these terms but still may not be able to clarify exactly what it all means. Below are 10 common financial terms and how they may apply to your life.
- Money Market Accounts (MMA): These are accounts similar to your typical savings accounts at banks; however, there are two key differences. Money Market Accounts typically require larger daily minimum balances (usually anywhere from $1,000 to $2,500, although some online banks are removing the minimum deposit requirement) and they pay more interest (usually an average of about 1.0% APY). MMAs are a good option for those looking to minimize financial risk (as opposed to stocks and bonds).
- Interest vs. Interest Rate: Interest is the amount it is going to cost you to borrow money. Interest rate is described as the percentage paid for the use of the loan. Interest rates may be variable or fixed and are typically higher on riskier loans.
- 401(k) Plan: This is the most common retirement account, provided by an employer. Money is deducted from your paycheck pre-tax, therefore lowering your taxable income (that’s a good thing!). Another great benefit is employer matching. This is when employers match what you are contributing (usually up to a certain percentage or dollar amount); it’s basically free money!
- Stock: This represents ownership in a corporation and part of its earnings. To name a few, the benefits to owning stock are: growing your money (provided the company is doing well) and the ability to defer paying your taxes.
- Bond: Bonds are another form of a loan; it is money leant from an investor to a government or corporate entity. Yes, the government and corporations borrow money too! Bonds are a good investment opportunity because they are a bit safer than stocks. If a company were to go bankrupt, creditors (issuers of bonds) are paid before those who hold stock.
- Premium: This term may sound a lot more complicated than it really is. Simply put, premiums are the price that a bond or stock sells above its issue price.
- Equity: This is the value of ownership or the value of the shares in a company.
- Secured vs. Unsecured Loans: These two terms are commonly misunderstood, especially when it comes to student loans. Secured loans require the lender to put up something of value against the loan; if the loan is not paid, the lender has the option to use that item to satisfy your debt. A secured loan gives the lender security. An unsecured loan is just the opposite; nothing of value is needed to obtain a loan. Student loans, as well as credit cards, are unsecured loans.
- Refinancing: Sometimes a borrower may have a loan with such high fees and interest rates; A new loan is then taken out to pay the old one, essentially with lower fees and interest.
- Short-term vs. Long-term Investments: There are many types of investments. Short-term investments are great for financial goals set for two years or less, such as money market accounts. Long-term investments typically carry a longer maturity date, such as retirement accounts.
What are some difficult financial terms you’ve had to research?