Blank face + question mark + quivering mouth + Home Alone face = the feeling you get when trying to decipher confusing financial information.
We’ve all felt it. Financial lingo can often contain many acronyms and terms that are not part of your everyday vocabulary. While financial terms aren’t necessarily the most exciting, they are some of the most important.
Yet many of us are more fluent in hashtags than finance—not surprising, considering that fewer than half of young adults get any information about money management from their school or workplace.
However, you don’t have to figure it out on your own. OCCU is committed to offering financial guidance to alleviate the anxiety nearly a third of young adults feel about managing money.
APY vs. APR
When discussing interest rates, you’ll often hear the terms annual percentage rates (APRs) and annual percentage yields (APYs). They’re two different terms with one important difference.
An APR is what you’ll see on a credit card or loan offer, and it refers to the interest rate you’ll be charged over the course of the year. You can use it to compare different credit cards and loans. Lenders calculate APR by multiplying the monthly interest rate by the number of the months in a year. If your credit card has a monthly rate of 1.5 percent, for example, the APR would be 18 percent.
1.5 monthly interest rate x 12 months in a year = 18 percent APR
An APY, on the other hand, is something you’ll want to know about when investing your money or building up a savings account. APY refers to the interest rate you’ll collect, AKA paid back to you, on the money you have deposited in the financial institution through your savings, checking or similar accounts. The difference is that APY takes into account compounding interest—the interest you earn on your original balance, plus the interest you earn on the interest you’ve already accumulated. Your APY gives a much more accurate picture of how much you can gain each year by stashing some money into your savings account.
Credit vs. Debt
Another area that often confounds people is the difference between debt and credit. Many young adults grew up watching their parents struggle with debt during the recession and are wary of ending up in the same situation. One in four already carry student loan debt, and many are reluctant to take on any more.
But many Millennials confuse credit with debt, which is why more than 60 percent avoid using credit cards. While staying out of debt is a great strategy for financial healthy, avoiding credit isn’t. The difference is that while debt refers to the amount of money you have borrowed, credit refers to the amount of money you’re able to borrow. Debt is the result of using credit. The more debt you have, the less credit you have available.
Too much debt can be a burden, but having credit is essential for achieving future goals such as getting a car loan or buying a home. And the only way to build up your credit is to use it. When you do, you’ll incur some debt. The key is to pay it off faster than you accumulate it.
Great Words to Know
Ready for some more helpful finance terms? Here are a few more you should know:
FICO score: This is the number lenders use to determine your creditworthiness. It’s based on factors such as your payment history, length of credit history and how much debt you have. The higher you score between 300 and 850, the better the terms you can get on a future loan or credit card.
Net worth. This refers how much your financial assets—money, investments, home and car—are worth after subtracting all of your debts. Calculating your net worth gives you snapshot of your overall financial health.
Asset allocation. As you start preparing for your financial future, this investment term is one you’ll need to think about. Asset allocation is a strategy for diversifying your investments to minimize your risk. It involves spreading your money across several different asset classes, such as:
- Cash, which in investment terms means a savings account, money market account or other investment that can be quickly and easily converted into cash.
- Bonds are a type of loan you make to a government or organization, which pays interest for a set term of 10 to 30 years.
- Stocks are ownership shares you buy in a public or private company; if the business succeeds, your money multiplies.
Armed with knowledge of these key terms, you can begin to navigate your way to financial prosperity.