Money Basics: Defining Dollar$ and Cents
by Lindsey Turnbull
This month, we’re focusing on financial literacy. Being financially literate means that you understand how to manage your finances, money, and investments efficiently. It also means that you can make the appropriate decisions about investing, taxes, college, budgeting, etc. Financial literacy gives someone a chance to control their money, avoiding predatory loans, fraud, high interest rates, debt, etc.
Because we don’t talk about finances nearly enough, it can be intimidating to try to learn, only to be greeted by a ton of jargon. We wanted to introduce some finance basics in a way that’s simple and easy to understand.
At the Bank:
Bank: A bank is a for-profit financial institution
Credit Union: A not-for-profit financial institution
There are pros and cons to banks and credit unions. You can compare and contrast the decisions based on your wants and needs.
APR: Annual Percentage Rate, or how much interest you pay on the money you borrow. The higher the APR, the more money you will ultimately owe if you don’t pay off your balance in full every month.
Checking Account: A checking account is an account you can easily withdraw (take out money) from or deposit (put money in) into. Money is your checking account is money you already have. Money in a checking account can be accessed by a check, debit card, ATM, etc., and there is no limit to how many times you can withdraw money. Banks and credit unions may offer free checking accounts to students and minors. You do not earn interest from a checking account, and funds are insured by the FDIC (Federal Deposit Insurance Corporation) up to a certain amount. Usually, a parent or guardian will need to go with you to open a checking account.
Credit: The ability to borrow money. It is a loan you are promising to pay back with interest. Credit is tracked by something called a credit score.
Credit Score: A credit score is something lenders (like banks) use to determine how likely you are to repay your credit. A good credit score can help you rent an apartment, get a loan or buy a house or car.
Credit Card: A credit card accesses money you are borrowing. If you do not pay off the balance of a credit card every month, you will be charged interest. Sometimes interest is very high, over 25% for people without credit. That means for every $100 you borrow, you will have to pay $125 back. Some credit cards charge yearly fees, others offer benefits or points. You must be 18 or older to get your own credit card, and sometimes you may need someone over 21 to co-sign, or vouch to pay the bill if you cannot/do not.
ALWAYS aim to pay off your entire balance when the payment is due. Pay your bills on time, every time.
Debit Card: A debit card is connected to your checking account. Charges you make with a debit card access money you already have.
Direct Deposit: Allows your paycheck to be deposited directly into your checking and/or savings account. You can specify if you want some of your paycheck to go into both accounts. This makes it easy to ensure that you are saving money!
Interest rate: Money paid regularly at a particular rate for borrowing money
Overdraft Fee: A fee charged by banks for not having enough money to cover a purchase. For example, if you’re trying to by a $15 movie ticket, but only have $13 in your checking account, you could be hit with a fee ranging from $25-50 dollars, depending on your bank, in addition to the $15 for the movie ticket.
ATM Fee: An ATM fee is charged by some banks and credit unions for using an ATM that does not belong to your bank, usually $2.50-$5.00. Some banks or credit unions will refund a certain amount of ATM fees per year, so read the fine print on your bank agreement! An ATM will alert you when it is about to charge you an ATM fee.
(Yes, you can get hit with an ATM fee AND overdraft fee in one shot!)
Savings Account: A bank account that earns interest. This is money you already have. If the rate is 5% and you deposit $100, you will have $105 in a year. A bank or credit union may limit how many times you can put money in (deposit) or take money out (withdraw) of a savings account and it is not as easy to retrieve money from a savings account as it is from a checking account. These accounts are generally for money you are not using every day- like college, a car, an apartment deposit, etc.
Financial advisors recommend that adults have AT LEAST three to six months worth of bills in their savings account in case of the loss of a job, medical emergency, or other emergency. Some people have multiple savings accounts- one for emergencies, one for retirement, one for a vacation/car/other large purchase.
Working and Money:
Earned Income: Money you make from a job. If you make over $6,300 in one year from a job, you have to file an income tax return, regardless of your age.
Unearned Income: Money you make from interest, such as from a savings account. You may have to file an income tax return for unearned income if you make over $1,050 in one year.
Gross Pay: The total amount of money earned from a job.
Net Pay: Net pay is your paycheck after all taxes have been taken out.
Income Tax Return: If you make over $6,300 per year from a job, you will have to file a federal income tax return. Sometimes, you might get money back from the government, because you paid too much in taxes. Sometimes you will owe money if you don’t pay enough taxes. (For teens, owing money is uncommon.)
Taxes: When you get a paycheck from your job, you will see deductions to things like ‘FICA,’ which stands for the Federal Insurance Contributions Act. Your FICA money goes to programs like Social Security, that helps retired people, people with disabilities, and their families. You will also pay taxes to your state that fund roads, schools, hospitals, libraries, etc. You already know about taxes, because many of the items you buy every day include sales tax. Sales tax is a local tax that may fund local government.
Money and College:
Financial Aid: Federal student aid is given to students to attend college. These programs include Pell grants, workstudy, and some student loans. Applying early for the FAFSA gives a student a greater chance of getting aid.
Student Loan: A student loan is an unsecured loan. It is not backed by anything you own (unlike say, a car loan), therefore lenders can charge a higher interest rate, meaning you will pay more over time.
Federal Loan Programs: Federal loans are loans funded by the federal government. They usually have fixed interest rates, and payment plans based on your income, meaning you do not have to pay more than a certain percentage of your income. You do not have to start repaying these loans until you graduate, leave school, or are enrolled less than half-time. In many cases, a student doesn’t need a credit check or a co-signer for a federal loan. In some cases, the government will subsidize the interest, meaning the government pays the interest while you are in school, and the interest may be tax deductible when you graduate. If you work for the government, they may even forgive your loans meaning you don’t have to pay them back!
Private Student Loans: These student loans are funded by a bank or other lender. They can have very high interest rates, sometimes over 18%. (That means that if you were to borrow $100 dollars, you would have to pay back $118 or more!) Because these loans are not subsidized by the government, you are responsible for all of the interest and payments- even while you are still in school. These loans are likely to need a co-signer and require a credit check, and are unlikely to ever be forgiven.