Money talk can be confusing, but it doesn’t have to be. Whether you’re budgeting for your next coffee or thinking about the future, getting familiar with key financial terms can help you make smarter choices. Here’s your quick guide to the must-know financial lingo that every college student should have in their vocabulary! This is not financial advice, just a starter kit of terms from a girlie in business!
1. Credit Score
Your credit score is a number (typically between 300 and 850) that shows lenders how trustworthy you are when it comes to borrowing money. The higher your score, the more likely you are to be approved for loans and credit cards, and the better the interest rates you’ll receive.
2. APR (Annual Percentage Rate)
APR is the yearly interest rate charged for borrowing money, including any additional fees. It’s a way to measure how much a loan or credit card will actually cost over time. The higher the APR, the more you’ll end up paying in the long run.
3. Interest vs. Compound Interest
- Interest: The additional money you pay on top of what you borrowed, usually displayed as a percentage.
- Compound Interest: Interest that is calculated not only on the principal (the original amount borrowed) but also on the interest that’s already been added. This means compound interest can lead to quicker growth,or more debt, depending on whether you’re investing or borrowing.
4. Roth IRA (Individual Retirement Account)
A Roth IRA is a type of retirement savings account where you contribute money after paying taxes, and then your withdrawals from the account in retirement are tax-free. It’s a great way to build wealth for the future while enjoying tax benefits.
5. Budget
A budget is a plan for managing your income and expenses. It helps you track how much money you have, what you spend it on and how much you can save. A solid budget helps prevent overspending and allows you to reach financial goals.
6. Emergency Fund
An emergency fund is money set aside for unexpected expenses like medical bills or car repairs. Financial experts at Forbes recommend saving 3-6 months of living expenses to protect yourself from unforeseen circumstances.
7. Debt-to-Income Ratio (DTI)
Your DTI is the percentage of your monthly income that goes toward paying off debt. Lenders use this ratio to assess how much additional debt you can handle. A lower ratio is generally better.
- Assets are things you own that have value, such as savings, property and investments.
- Current Assets can be converted to cash within a year.
- Fixed Assets can’t immediately be turned into cash, but are tangible items that a company owns and uses to generate long-term income.
- Liabilities are what you owe, like loans or credit card debt. The goal is to have more assets than liabilities, which means you’re building wealth.
9. Investing
Investing involves putting your money into stocks, bonds or real estate with the goal of growing it over time. While investing carries risk, it has the potential to offer higher returns compared to simply saving money.
10. Stocks and Bonds
Stocks represent ownership in a company. When you purchase stock, you own a small portion of that company. The value of your stock fluctuates based on how well the company performs in the market.
Bonds are a type of loan you give to a company or government in exchange for regular interest payments. When the bond matures, you get your initial investment back. According to Forbes, by investing in bonds, you can get a predictable and reliable stream of income through interest payments. Bonds are usually seen as a safer investment than stocks but tend to offer lower returns.
12. Net Worth
Your net worth is the difference between your assets and your liabilities . A positive net worth means you’re in good financial shape, while a negative net worth means your debts outweigh your assets.
13. FICO Score
FICO stands for Fair Isaac Corporation—it’s the company that created the scoring model.
It was founded by engineers Bill Fair and Earl Isaac back in the 1950s, and the name is literally just their last names mashed together. So when someone says “FICO score,” they’re referring to the credit score developed by that company.
It’s become the industry standard, used in over 90% of lending decisions in the U.S. Even though there are other scores (like VantageScore), when people say “credit score,” they usually mean FICO.
It’s calculated using your credit history and helps lenders determine how likely you are to repay a loan. A higher FICO score means you’re more likely to be approved for loans with favorable terms.
14. 529 Plan
A 529 plan is a tax-advantaged savings account used to save for education costs. You can contribute money tax-free, and if you use it for qualifying education expenses, you won’t pay taxes on the withdrawals either.
15. Leverage
Leverage refers to using borrowed money to increase your investment potential. It allows you to make bigger investments with less of your own money. However, it can also magnify your losses if things go wrong, so it requires careful consideration.
You’re Ready to Make Money Moves!
Understanding these terms can help you feel more confident in managing your finances as a college student and beyond. Financial literacy isn’t something that happens overnight, but with small steps and learning as you go, you’ll be on your way to financial success.