8 Financial Terms You Need to Know

You may have heard several, or all, of the below terms and phrases at some point in your life but never truly understood what they meant. These 8 financial terms are the most important for you to understand as a young adult starting on your financial journey.

1. Pay yourself first

The phrase “Pay Yourself First” means to add to your savings and/or investment accounts each month before you begin paying your monthly bills or making additional purchases. It is a long-term financial strategy that is built on the prioritization and consistency of increasing your savings and investments.

2. Credit score

If you’ve ever applied for a loan, rented an apartment, applied for a mortgage, signed a lease, etc., you’ve probably had to provide your credit score. Your credit score tells potential lenders how likely you are to pay your bills on time and in full. Your credit score is calculated based on your credit history and will influence the amount of credit, value of loans, and interest rates you are eligible for.

3. Tax deductions

Tax deductions are expenses incurred throughout the fiscal year that can be subtracted from your gross income. By reducing your gross income, you also reduce your taxable income, thus reducing the amount you owe in taxes. A taxpayer may either itemize (list) their deductions or use the standard deduction (whichever is greater) to reduce their taxable income.

4. Compound interest

In its positive form, compound interest is the interest earned on a savings account that is calculated based on the both the amount of deposits and the accumulated interest from previous periods. It is the act of interest earning interest that is the “magic” here. When it comes to retirement planning, the goal is to start saving as early as possible in order to put compound interest to work for you for the maximum time period possible.

5. Fixed-rate mortgage

A fixed-rate mortgage means that the interest rate remains the same for the entire life of the loan. The monthly payment amount of principal and interest will never change, even if interest rates or your credit score changes. This stability and predictability makes fixed-rate mortgages the most popular mortgage type.

6. Refinance

To refinance means to reevaluate and either revise the terms of a credit agreement or replace it with a new one. The term is most frequently used in context of a mortgage, and normally involves replacing a current loan with an entirely new one. When you refinance, you could make favorable changes to your interest rate, payment plan, length of loan, type of loan, or any other terms outlined in your current credit agreement.

7. Spending plan

A spending plan is another name for a for budget and refers to planning out the use of your monthly or annual income in advance. A spending plan would include all your bills and payments (such as utilities, rent, internet, and groceries) and any spending or saving goals you have.  (See Pay Yourself First, above.) Having a clear spending plan helps prevent debt and random, spontaneous spending decisions. Knowing exactly how much money you have for your bills, necessary purchases, investments, donations, or any other monthly payments, allows you the freedom to make thoughtful, purposeful decisions about how to spend, or not spend, the money you work so hard to earn.

8. Time value of money

The time value of money is a concept that points out the amount of money you have in hand now is worth more than that exact same amount of money will be worth in the future. This is because the US national debt continues to grow, driving down the purchasing power of the dollar. It is also because the cost-of-living increases each year as the price of fuel, groceries, insurance, and taxes tend to increase over time.

Recommended Additional Reading

• Pay Yourself First by Lynn O High  | Jan 23, 2017
• Your Score by Anthony Davenport | Jan 1, 2019
• The Compound Effect by Darren Hardy | Sept 15, 2020
• Understanding Mortgages by David Ravinda | Jan 1, 2019
• How to Stop Living Paycheck to Paycheck by Avery Breyer  | Oct 6, 2016
• Personal Finance For Dummies by Eric Tyson | Nov 13, 2018

Schedule Your Consultation Today

For more information, questions, or to get started on your financial planning journey, schedule a consultation with Jack Brkich III, Certified Financial Planner, today!

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About the Author 

Jack Brkich III, is the president and founder of JMB Financial Managers. A Certified Financial Planner, Jack is a trusted advisor and resource for business owners, individuals, and families. His advice about wealth creation and preservation techniques have appeared in publications including The Los Angeles Times, NASDAQ, Investopedia, and The Wall Street Journal. To learn more visit https://www.jmbfinmgrs.com/.

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