As a college students, grad students, and young professionals, this time in our lives is challenging when it comes to balancing one’s financial standing. We are bombarded with thoughts such as, “Should we be paying off our credit card with the outstanding balance, or funding our retirement accounts?” or, “Does budgeting mean I can’t do anything fun?”
One reason individuals are struggling is due to their lack of familiarity with financial terms that surround us every day. It is important to take a moment at this time to define what some of these words are, and how they impact us as we try to become more financially stable. Here are the top vocabulary words necessary for you to learn to start feeling more prepared to face a world of financial questions. These introductory terms will help you feel more confident with understanding more complex concepts introduced later on!
– A checking account is defined by google, as an “account at a bank against which checks can be drawn by the account depositor.” Basically, a bank serves as a piggybank which holds your money until you need to use it. Typically, individuals will have two accounts: a regular checking account and a savings account. A debit card is provided to the checking account so that individuals can use their card to make purchases at retail stores.
As mentioned above, savings accounts are created for this purpose. Saving is defined as “the process of setting income aside for future spending.” This is important because the money saved can be used for a variety of things such as emergencies and short-term goals, and funds for investing. Putting aside even $400 can help brace even the most surprising emergency when it arrives.
Annual Fee –
It is important to mention that some banks charge what is known as an annual fee. This is a dollar amount that is charged for using a bank. Credit card companies’ can also charge annual fees for the use of their credit card. But don’t fret! There are many banks that provide student accounts, or accounts with easy to reach minimums that are easy for students to manage while their income is low. Make sure you review these requirements prior to opening a bank account! Also, there are many credit cards out there with no annual fee! Don’t get swept up in the “free” items offered. Most of the time, you are basically paying for them anyways in how much you have to spend during the year to get those plane tickets. Get the free card and put those annual fees towards that trip or special item you wanted in the first place.
Now that we have gone over some of the more basic financial terms one should be familiar with, we will move onto one of the most important components of financial awareness. A budget! This is a plan for managing money, “dividing up expected income and expenses among spending and saving options based on personal financial goals during a given time period.” Budgets will vary person to person, as well as month to month. Below are the terms needed to understand how to construct your budget.
This should be the first line on anyone’s budget. Income basically just means what is the total amount of all money an individual receives.
Let’s take a moment to share how we are supposed to know what our income is. When we get a job, we are offered a pay amount. This will be in the form of an hourly dollar number or a salary. This is pre-taxed money. Or, gross income. Net income is the amount of money received after taxes, and all other things are taken out. Think of it as what actually arrives in our paycheck every pay period. Net income can also be called “take-home pay”; it’s the “amount of income left after payroll deductions (taxes, health insurance, any other deductions).” (Tip – to figure out your hourly or salary rate, you can divide your salary number by 2080 to get your hourly rate, or times your hourly rate by 2080 to get your salary rate. 2080 is the number of hours worked in a year)
Your budget will include expenses. These are bills you will have to pay every month. Fixed expenses are bills or costs that are the same amount every time. For example, your rent and cable bill most likely will be the same amount every month.
Remember: there is a difference between a want and a need! Needs are “essentials or basics necessary for maintaining physical life, including food, clothing, water, and shelter, sometimes called material well-being.” Needs should be paid first, before your wants. When wants are purchased before needs, individuals can experience stress due to not having enough money.
The terms mentioned above have been defined using Worcester Polytechnic Institutes list of Financial Literacy Terms and Definitions (https://www.wpi.edu/student-experience/resources/financial-literacy/terms here is the link to be able to link out to there website).
The next financial literacy article will be talking about student loans, so make sure to check it out!
Written by GUADS staff member Paige