Financial literacy is an important, lifelong personal finance skill that everyone should have because it fosters careful spending and informed decision making. Responsible personal finance habits will guide you toward a life of financial freedom, and increasing your vocabulary of money words can only help. Here are five money definitions you should add to your financial literacy repertoire so you know how to get the most out of your money and financial decisions.
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1. Credit Score
Your credit score impacts many facets of your life including getting a loan for a car or house and being approved for a credit card. Because a poor credit score can have such a negative impact on your life, it’s important that you frequently check your credit score. Experts recommend checking your credit report at least once a year to catch errors or identity theft.
APY—or annual percentage yield—is your yearly compounded interest generally associated with a bank account. Every year, your financial institution will pay you a certain percentage of the money you keep in an account and the APY determines how much you receive.
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APR—or annual percentage rate of interest—works the other way around. APR is the interest that you pay a financial institution or creditor on loans or credit cards. Therefore, if you know you won’t be able to pay your credit card bill in full each month, choose a card with a lower APR.
4. Mortgage rate
A mortgage rate is the interest rate charged by a mortgage lender, in this case regarding home ownership. Before getting a loan, shop around for a financial institution that has a low mortgage rate because a house is a large investment, and paying an above-market interest rate is a waste of money. Once you’ve obtained a loan, you should know your mortgage rate so you can make sure you’re getting the best deal out there. If you happen upon a lower rate, consider refinancing your home to save money. Before you make your decision, calculate the “payback period” because refinancing fees can be expensive.
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5. 401(k) Fees
Recently, NerdWallet published a study that calculated fees associated with companies’ 401k plans can actually reduce a two-income family’s return on investment by as much as $155,000 in a lifetime. Many of us are unaware of these costly fees. How it works is when you invest in a company’s 401k plan, the money is often used to purchase mutual funds, some of which charge high fees and front-end loads. These high fees are associated with active funds using managers who make the stock purchasing decisions. On the other hand, passive funds that follow a market index without an active manager generally have lower fees. Do some research to learn more about your company’s 401k plan and the funds it selects to ensure you’re getting the most out of your hard earned money.
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