6 Money Terms You Need To Know

You learn a lot of things of varying importance at school, but usually not a lot about money. And unless you major in finance or business, college usually doesn’t help you out, either. But as an adult who pays taxes, receives a paycheck, and (hopefully) has a savings and retirement account, you can’t live in ignorance forever.

Money can be a stressful subject for those who don’t have their finances under control. Lucky for them, the first step in financial literacy is learning more about the subject. Forbes put together a list of the top 25 money terms people need to know; here are the highlights:

1. Compound Interest

Think of it as interest on interest, and it’s a good thing to see when shopping for savings and/or retirement accounts. Most accounts allow you to accrue interest based on the amount deposited in the account. Compound interest allows you accrue interest on the deposits AND the interest. This adds up to a not-inconsequential amount over time.

2. FICO Score

When people talk about their credit, they’re usually framing it with their FICO score. An acronym from the Fair Isaac Corp (they formulated the methodology that delivers your score), it takes into account any outstanding debts, if payments have been made on time, length of credit history, etc. Scores can range from 300 to 850; a technically *okay* score is over 620, and up from there.

3. Amortization

This is the process of paying off debt over time, like a conventional mortgage. You make monthly payments of a pre-calculated sum that pays down the interest, balance, possibly insurance, you know.

4. Escrow

An account held by impartial third party in a transaction - typically used in relation to home-buying. A buyer may put money into an account which the seller can’t access until certain terms have been met. Escrow accounts can also be used to pay property tax and insurance premiums for home. For many, it’s rolled right into the mortgage.

5. Defined-Benefit Plan

These are employer-sponsored retirement plans in which a benefit promised to the employee based on length of employment, earnings, etc. These are increasingly uncommon (expensive for employers), so the following is more common.

6. Defined-Contribution Plan

A retirement plan companies may offer workers. The 401(k) is the most common. The money that goes into these accounts is pre-tax (so you don’t pay taxes on amounts deposited). The money is then invested, which means you, as the investor, are the one weathering economic fluctuations.

 

 

As you go through life, chances are you’ll hear these terms and be expected to know what they are. Or at least expected to make decisions which can affect these things (like filling out paperwork for a new job, and seeing that you have to enter an amount for a defined-contribution plan). With this list, you’ll increase your financial literacy and be slightly better equipped to handle these situations!