Financial terms everyone should know

When I was younger my parents would discuss finances and I was curious to learn the value of money early on. These are some money related words that will help in navigating the adult world.

Income

Individuals earn income from an employer in the form of wages or salary or they can earn income through investments. Businesses earn income through selling goods or services above their cost of production. Income is the money that comes into your pockets usually on a monthly or bi-weekly basis for work you have preformed.

Gross income

Gross income means everything you receive in payment through wages, as well as salaries, commissions, fees and tips. Also includes stock options. This money is the amount you earn in a paycheck before payroll taxes and other deductions are taken out. Your Gross income is used to determine how much you can borrow for a home as well as to determine your federal and state income taxes.

Net Income

Net income is the money that you have to spend after tax payments and pretax contributions have been taken out. It is important to know the difference between Gross and Net income since Net income is the amount that you actually receive to spend as you wish.

Investments

Money should not be sitting idle. You can put your money to good use by investing. An investment is the hope that an asset or item purchased will generate income or appreciate in value in the future. People invest their money in real estate property, stocks, bond or a business.

Credit/debit

What is the difference? Credit is money that you can borrow against your line of credit which means you can pay with a credit card and your account will not be charged until a later date, usually within a month. Interest is accrued when using a credit card if not paid in a timely manner. A debit card is real time money, which means once you purchase with a debit card the money is taken from your account instantly.

Budget

A budget is a spending plan and it can be for any designated amount of time. Usually people have a weekly or monthly budget which takes into account their income and expenses. Budgets can be made for a person, a business or government.

Interest rate

An interest rate is the rate a bank or lender charges for lending money to a borrower. The lender charges an interest normally as an annual percentage. Most people borrow large amounts of money to buy a home which is a big purchase and they pay interest rate on the money borrowed to be paid over years. Interest rate is also the rate a bank pays to its savers for keeping their money in an account.

Tax

A tax is a compulsory financial charge made to the taxpayer (all of us) in order to pay for government spending and other public expenses. There are a number of different taxes which are deducted from your income. There is federal tax, State Tax, Social Security tax, Medicare tax. Ever wondered who pays for things like US homeland defense and security, builds parks and playgrounds, provide unemployment insurance or local low income assistance. It all comes from our taxes.

FICO score

FICO is an acronym for Fair Isaac Corp, which is the company that came up with the methodology for calculating a credit score. FICO scores range from 300 to 850 and the higher the score the better terms you will receive when asking for a loan or a credit card. Anyone below 620 will have higher interest rate on loans.

Capital gains

Capital gains is the difference between how much you paid for a property as an example and how much it is worth now. If the amount has increased it is called Capital gains and if the amount has decreased it is called Capital loss. The gain is only on paper until the asset or investment is sold.