When you’re new to this whole “adulting,” thing, life can seem a bit confusing. All of the sudden interest rates, hard inquiries, and utilities are something you need to worry about … but do you know what they are?
LoanMart has your back, that’s why we’ve brought you this awesome list of essential financial terms that all young adults should know. The more you know, the better prepared you’ll be to master your finances!
Budgeting – You’ve probably heard this term before, but do you really understand it? Budgeting does not simply mean spending as little money as possible. Budgeting your money means wisely spending your money.
Many people think that budgeting money is practiced only by those who have financial shortages or issues, but this definitely is not the case. Some of the wealthiest people in the world attribute their wealth to their budgeting habits.
Stay organized with your finances so you don’t end up wasting your cash. Set some money aside for living expenses, food, and other necessities so you don’t accidentally overspend your money.
Federal Tax – Each year, every American citizen of the appropriate age must pay two kinds of taxes: federal tax and state tax. Knowing the difference between these two taxations is important, especially for young adults.
Federal tax is a tax on your income levied by the United States government. Every American citizen must pay federal taxes. Since federal taxes are based on each individual’s personal income, the more money one makes each year, the more they have to pay annually in federal taxes.
There are online resources that can tell you an estimate of how much money you will probably be paying in federal taxes, based on your annual income.
Hard Inquiry – A hard inquiry is very much connected to your credit score. In order to keep your credit score as high as it can be, you want to make the least amount of hard inquiries into your special number as possible.
A hard inquiry, also referred to as a “hard pull,” typically occurs when a financial lender or credit card issuer looks into your credit score. Hard inquiries happen usually when you are applying for a new credit card, a loan, or any other type of funding.
Every time a hard inquiry is made into your credit score, your overall score may be affected—usually in a negative way. This means that the more loans and credit cards you apply for (regardless if you receive approval or not) the worse off your credit score may be.
Sometimes, department stores will offer customers discounts if they apply for a credit card with their store. While this may seem like a great idea, you might want to reconsider the cashier on these offers. Your credit score may be impacted negatively—it may not be worth the minimal store discount, ever.
Interest—Interest is essentially a reoccurring fee for borrowing money, based upon the principle amount of money the lender distributes to you. When you borrow money, the lender will most likely charge you an interest fee every month for the duration of your loan period.
You want to chip away at your principle balance as much as you possibly can when you have a loan, so your interest charges become less and less.
It is important to note that interest rates differ depending on the type of loan you are taking out. Typically, short term loans have higher interest rates than long term loans, but it really depends on what kind of lender you are working with. Some lenders might charge you an interest rate that is 12% of your principle balance and other lenders could charge you as much as 300% of your principle balance. This is why you always want to know what your interest rate is going to be before you agree to any kind of loan.
Personal Income/ Personal Revenue – Your personal income is the money you make from working for your employer, running your own business, or any other kinds of jobs you might have. This is also what your state and federal taxes are based upon.
Sometimes, in order to receive lines of credit, like a car title loan, you might be required to show a proof of income.
You definitely want to always keep track of your personal income, so you can budget your money, and not have to deal with a ton of financial stress.
Soft Inquiry – Soft inquiries, or “soft pulls,” are when an individual person or company looks into your credit score as part of a background check. For example, your employer might run a soft inquiry before they hire you.
It is important to note that soft inquiries do not usually affect your overall credit score. Many people think that any kind of inquiry into one’s credit score will impact it in a negative way, but this is not true. In fact, the people who check on their own credit scores often usually have the highest numbers.
State Tax – State taxes are similar to federal taxes, in that the amount you must pay is based on your personal income. But state taxes differ from federal taxes because state taxes are levied by each state’s individual state government, not the federal government. That means different states can have different rules when it comes to state taxes.
Some states don’t even have a state tax at all—these states are: Wyoming, Washington, Texas, South Dakota, Nevada, Florida, and Alaska.
Just like with your federal taxes, many American citizens receive a tax refund from their state taxes as well. So, if you have your state taxes taken out of your personal income automatically, you will most likely receive a return when you file!
Subsidized Loan—These next two terms are particularly important if you are taking out a student loan. Sometimes, when you take out a loan the lender will offer you a subsidized, or unsubsidized plan.
Under the conditions of a subsidized plan, you won’t have to make any interest payments as long as you have demonstrated the appropriate financial need. Many college and university students qualify for subsidized student loans.
If you are a student with a subsidized plan, you must be enrolled in school for at least half-time, and you do not have to start making payments on your loan until 6 months after you have graduated.
Unsubsidized Loan—An unsubsidized loan plan requires the borrower to make reoccurring interest payments right away on their loan. Unlike a subsidized loan, you do not need to demonstrate any kind of specific financial need in order to qualify for an unsubsidized loan.
Sometimes, lenders might offer lower interest rates on unsubsidized loans than they do on subsidized loans. This is to encourage the borrower to pick the plan that will have them giving money to the lender right away. However, if you can afford to make the interest payments, an unsubsidized loan might be the right way to go for you.
Utilities—Utilities are public services like the electricity, natural gas, water, and sewage maintenance that come with your housing.
Living on your own is a huge financial endeavor. If you are looking for a place to live, the cost of rent is obviously going to be very important to you—you need to always be able to afford your rent payments if you want stability in your living situation.
However, don’t get too caught up in how much your rent is and forget to consider your utility payments. Housing advertisements usually display the cost of rent most prominently, trying to get people to look at their property. But it is important to always remember to leave room for both rent and utilities when coming up with your living expenses budget.
Does this information appeal to you? Find some other great resources about how to save money and rock your finances at our awesome LoanMart blog!