By the time you’ve reached your 30s, you’ve probably heard dozens of financial acronyms and terms thrown around—from APRs to IRAs, expense ratios to exchange-traded funds. Yet while the lingo may sound familiar, you might not have a really clear understanding of what the words actually mean or how they apply to your finances. And that can be problematic when you’re trying to make the best decisions with your money.
So we’ve gathered, and answered, 35 questions on a range of financial topics that you’ll want to know by the time you’ve established your career and started building some wealth.
While we’ve started with the basics, we also include more sophisticated terms and topics. Master these, and you can not only sound smart about money, but you’ll be able to make smarter decisions with yours, too.
1. What’s your net worth?
Your true worth is unquantifiable, my friend. But financially speaking, your net worth equals your assets—cash, property (like your home, car and furniture), your checking and savings account balances and any investments—minus your liabilities, which are your debts and other financial obligations.
To calculate the net worth of your home, for example, you’d take an estimate of its current market value. (You can look at what similar homes in the neighborhood have sold for recently or have a real estate agent make an appraisal.) Next, subtract how much you still owe on your mortgage. If an agent says she could sell your home for about $215,000 and you owe about $110,000 on your mortgage, for example, that’d be about $105,000. The asset value minus your liability (or what you owe on it) equals the net worth.
Why is knowing your total net worth important? It gives you a true financial picture of how you’re doing, and highlights where you could make improvements.
2. What should you include in a budget?
First, add up your essential expenses, such as your mortgage or rent, utility bills, cell phone, food and child care. Then tally your financial obligations, like credit card, auto or student debt payments and savings goals (for emergencies, retirement and anything else you’re working toward).
Then add in “discretionary” expenses, or those that are not absolutely essential but are important to you. Don’t forget to factor in fun—entertainment, weekend trips, whatever you love—because drudging through life with a too-tight spending plan is a recipe for failure.
1. How much should you save in your emergency fund?
Most experts agree that you should have three to six months’ worth of living expenses saved to keep you afloat in the event of, say, a home or car repair or other unexpected expense—or the loss of your job.
2. Where’s the best place to hold short-term savings?
For money you need to be able to access within the next year or two, advisors usually recommend looking for a high-yield savings account. Just be aware that you can only make up to six withdrawals each month.
Unfortunately, you won’t earn much interest on a savings account, as the national average is currently .06 percent. But some banks—like Ally Bank, Synchrony and Barclays—are offering 1 percent or more as of early March, so it’s worth shopping around. “Internet banks often have the [lowest] fees, better interest rates and can be much more convenient,” says Ken Tumin, co-creator of comparison site DepositAccounts.com.
3. What’s the difference between a money market and a savings account?
Both savings and money market accounts are government-insured. But money market accounts are more likely to offer check-writing capabilities and ATM or debit cards (although they are subject to the same six-withdrawals/month limit). MMAs typically have higher interest rates, but also have higher minimum balance requirements. Details vary by account.
4. Where should you put money you’ll need in two to 10 years?
If you need the money in a year or two, “You might start thinking about CDs if you want to maximize your rates,” Tumin says. One-year CDs aren’t offering much more than high-yield savings accounts now. But some two-year CDs are offering 1.5 percent or more.
If you have a longer timeframe, consider investing in stocks and bonds. Just be aware that, while the stock market has historically gone up over time, it can go up or down in the short run. (And, as advisors will caution, past performance doesn’t guarantee future returns.) So while stocks may provide higher growth opportunities than CDs and bonds, you want to allow enough time to ride the downturns out and may consider moving money into more conservative options as your time horizon gets shorter. Investing in a mix of stocks and bonds can also lower your risk.
5. What’s a CD?
CD stands for certificate of deposit, which you can buy from a bank and is guaranteed to pay interest over a designated period of time—usually much more than a savings account would. A five-year CD from Melrose Credit Union is paying 2.4 percent, for example, while its savings accounts offer rates of just 0.5 percent. The catch is that you can’t touch the money in a CD until the designated time period ends.
“CDs can offer higher rates than savings accounts, but the price you pay is to have less liquidity,” says Tumin. “If you take the money out early, it can cost you several months of interest.”
(This page has been updated to clarify the process for calculating the net worth of an asset.)
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You may have heard of a system like this before, but follow along on this tour, because it really works.
Putting the pieces in place
1. Set up two free checking accounts:
- One to pay fixed expenses (such as the mortgage, car payments and utility bills).
- One to pay variable expenses (groceries, gas, clothing and so on).
2. Set up a high-yield online savings account.
We call this our “curveball” account. It’s an emergency fund for use when life throws us curveballs — large medical bills, a job loss or reduction in income, major home repairs, that kind of thing.
3. Make a plan for big-ticket items.
My husband and I agreed that we would use one family credit card for large purchases, such as airline tickets and hotel stays. We still have our separate credit cards — it’s wise to keep your own credit cards to maintain your credit score and credit history. Using them once or twice a year should be sufficient. And don’t close those cards because it will affect your overall credit score.
Implementing the system
1. Draw up a budget for fixed and variable expenses.
Add up how much you need in each category. This will be your guideline for how much should be in each of your checking accounts.
Fixed expenses might include:
- Rent or mortgage payment
- Property taxes
- Utilities (gas, electric, water, etc.)
- Home, auto and umbrella insurance
- Life, disability and long-term-care insurance premiums
- Health insurance premiums (if not taken out of your paycheck)
- Cable TV, Internet, phone and cellphone
- Gym or yoga memberships
- Debt payments (credit cards, student loans, car loans, personal loans, etc.)
- Savings (yes, this is an expense — pay yourself first!)
Variable expenses might include:
- Eating out
- Personal services (haircuts, doctor visit copays, etc.)
2. Distribute money to the accounts.
When your paycheck comes in, allocate the designated amounts into each checking account based on the budget you created. The sum earmarked for the curveball account can go there directly.
3. Pay fixed costs directly.
All bills are paid automatically from our fixed-expenses account. We do not have to write any checks, and no debit card is necessary. This account has a cushion of a few hundred extra dollars in case a bill shows up unexpectedly or before we have a chance to replenish the account.
4. Pay variable expenses from the second account.
This account should have a debit card, which you can use for purchases.
5. Link the curveball account to either checking account.
If an emergency arises, you can transfer funds within 24 to 48 hours. You can then access the money with a check or debit card.
Realizing the benefits
Once I implemented this system, the process of tracking expenses wasn’t so cumbersome anymore. Separating expenses into fixed and variable categories meant I didn’t have to worry constantly about checking account balances. Having fewer transactions in each account also made it easier to see the bigger picture of our spending.
The chart below depicts the flow of money.
Every family’s finances are different, of course. Feel free to customize my system as necessary. The point is to get — and keep — a grasp on the flow of your money. If you know exactly what’s coming in and going out, you can’t be surprised by debt.
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