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game of life stock market crash
Photo by Wayne Silver

Price earnings ratio.  Common market.  NASDAQ.  Do you know what these mean?

They’re not important in everyday life with little ones.  When you’re up to your elbows in diapers, you rarely need to know the difference between a liquid and a zero-coupon CD.  Let’s be honest, you mostly deal with the ingredients in homemade play-doh, or keeping track of your grocery coupons due to expire this week.

But even though knowing all these financial acronyms and gobbledy-gook jargon doesn’t affect your everyday life as a mama or home manager, they’re still good to know. The world moves pretty fast, and financial decisions are made at large that can eventually trickle down to the cost of whole-wheat flour.  I’m not saying you need to be on par with a professional stock analyst, but it’s important to keep your brain in the know with what’s going on in the world.

The world at large, and your world, too

But let’s say the most you get out of understanding the day’s NYSE market data is not spacing out during that section of the nightly news with Brian Williams.  It’s still important to know those basic financial terms that you do see on a regular basis.  You might know most of them – bbut you might not, and you think you do.  It’s always wise to double-check those words on your regular bank statement.

The most basic financial terms, defined

There are no stupid questions here at Simple Mom, and I don’t want to assume the most everyday money words are easily understood.  So here are a few that I think each of us should know.

1.  Interest: Money paid regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt.  ex:  “The monthly rate of interest is five percent” (noun); “I’m making interest payments on my car loan” (adjective).

2.  Savings account: A simple bank account that earns interest from a FDIC-insured financial institution.  ex:  “I keep my emergency fund in my savings account” (noun).

3.  Money market account (or fund): An interest-earning savings account offered by a FDIC-insured financial institution with limited transaction privileges.  They often have a minimum balance requirement, and only allow for a certain number of transactions in a given time period – but the interest rate is usually higher than a simple savings account.  ex:  “I receive a competitive return from my money market account with minimal risk” (noun).

4.  APR: Annual or annualized percentage rate, typically of interest on loans or credit.  It is the amount you will pay in interest charges per year.  A fixed-rate APR doesn’t change often (it still can change, though the creditor is legally required to tell you before increasing the APR).  A variable-rate APR changes from time to time, and oftentimes it’s tied to another interest rate, such as the prime rate or treasury bill rate.  ex:  “My credit card’s APR jumped from 7 to 15 percent” (noun).

row of monopoly houses
Photo by Woodley Wonderworks

5. Mortgage: The charging of real property by a debtor to a creditor as a security for a debt, on the condition that it shall be returned on payment of the debt within a certain period. A fixed-rate mortgage is one where the interest rate on the note remains the same through the term of the loan. An adjustable-rate mortgage (ARM, for short) is a mortgage loan where the interest rate on the note is periodically adjusted based on a variety of indices. ex: “We just refinanced our ARM to a fixed-rate mortgage with a five percent interest” (noun).

6.  401(k) and 403(b): A plan that allows an employee to save for retirement and have the savings invested, while deferring income taxes on the saved money and earnings until withdrawal. The employee elects to have a portion of the wages paid directly into his or her 401(k) account, which are invested in mutual funds, annuities, or any other investment vehicle offered by the broker.  A 403(b) plan is similar, except that they can only be offered by non-profit institutions.  Because these types of employers don’t generate a profit, 403(b) accounts are unable to accept profit sharing or dividends from the company.  ex: “When I left my job, I rolled over my 401(k) to a Roth IRA” (noun).

7.  IRA: Short for an Individual Retirement Account, an IRA is a savings or investment plan in which a person can set aside a certain amount of earned income every year; contributions and earnings on contributions are tax-free until retirement.  In a Traditional IRA, your contributions are tax-deductible, yet when you retire, you then pay taxes on your withdrawls.  In a Roth IRA, you are taxed on your contributions, but when you’re of retirement age, your withdraw tax-free.  ex:  “I converted my Traditional IRA into a Roth IRA because it offers tax-exempt, rather than tax-deffered, savings” (nouns).

8.  Mutual fund: An investment program funded by shareholders that trades in diversified holdings and is professionally managed.  It’s a basket for a lot of investments—mainly stocks and bonds—that would be complicated for the typical investor to manage otherwise.  ex:  “Mutual funds offer lower fees and a less risky portfolio than single stocks” (noun).

9.  CD: Short of Certificate of Deposit, a CD is a certificate issued by a bank to a person depositing money for a specified length of time.  It also tells you how much interest you will earn. CDs are generally a very low-risk, steady investment because the extra money you get back, or the interest the bank will pay you for using your money, is set ahead of time and guaranteed by the bank.  ex:  “If I cash out my CD early, I’m hit with a 10 percent penalty fee” (noun).

10.  Credit: Borrowed money used to purchase things, with the agreement to repay the funds at a set time.  ex:  “I bought my new furniture on credit” (noun).

Tools to strengthen your financial vocabulary

These are some great sites that will help you teach yourself money lingo (and they also have some pretty sweet calculators):

I also recently got my hands on David Bach’s new book, “The Finish Rich Dictionary: 1001 Financial Words You Need To Know.”  It’s written like a dictionary, and it plainly spells out the meaning behind 1,001 financial terms.  It is a gem of a book! I’ve already used it quite a bit, and yes, I even pulled it out during the stock market update on the nightly news.

There are a few chapters sprinkled here and there on other topics, such as how to learn how compound interest can work for you, how to plan for retirement, and  the top ten money mistakes people make.  I don’t agree with everything he says (like that sometimes it’s okay to purchase a home with no money down), but the definitions alone are worth the book – I’m glad it’s now in my library.

david bach's finish rich dictionaryI have the opportunity to give five Simple Mom readers a new copy of this book! It will further your financial vocabulary, and will be a great resource in making wise financial decisions.  I think it’s a welcome addition to the discussion of basic financial skills in this Money Management 101 series.

In order to win, leave a comment on this post, admitting to one financial term you’ve heard of in your life to which you don’t know the meaning.  C’mon, we all have them – show me that you need this book!  The giveaway will be open until Monday, February 23 at midnight CST.  I’ll randomly draw five names from the comments.  And yes, no secret codes, no extra entries via Twitter right now (they’re just a little bit exhausting, and we’re really busy packing).

I look forward to reading the comments!

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