Finance generally isn’t a fun topic for most of us. It can be boring, scary, and frustrating. In Fidelity’s recent study, 39% of millennials worry about finances and 25% don’t know who to trust.
How do you know if you can afford to go to that music festival with your friends? Or how do you know where to best allocate your money? These are all common questions that millennials have. We look up to our parents for guidance and advice and fail to really learn the ropes on our own.
Here are 7 finance terms that every millennial should know and why:
1. FICO- Your FICO score is a 3 digit number that gauges your likelihood of paying back a loan on time. It’s determined by 5 different factors: timely payments, credit utilization, length of credit history, credit mix, and number of hard inquiries. Every millennial should pay close attention to their FICO score. It’s going to play a pivotal role when you’re trying to purchase your first home, and the slightest difference in your score can cost you thousands of dollars in interest.
2. HUD-1 Statement– We all know the basics of mortgages. You have your fixed rate and ARM mortgages, along with your typical interest rate. But what most of us don’t know is how to read the HUD-1 statement. This statement gives a detailed explanation of every fee associated with your loan. It will compare your “quoted” fees with your “actual” fees, this way you can compare to see if the quote you received is line with what you’re getting.
3. Stock Options– The tech boom in recent years allowed many of us to receive stock options from the company. It’s an employee benefit the option to purchase stock at a pre-determined price (strike price). These are generally given as an incentive to new employees. If you’re exercising your stock options, it’s also important to know that there may be tax ramifications associated with this.
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4. PMI (Private Mortgage Insurance)- Another real estate related term, but another important one to learn. PMI is a policy that all mortgage lenders require if you’re putting less than 20% down payment of a home. It protects the lenders against a loss in case you default on the mortgage. Your PMI will be paid monthly along side with your mortgage payment, but once your balance reaches under 80% of the property value, you can have your lender remove the PMI.
5. 401k– We hear this everywhere we go. On the radio, TV, and from friends. You’ll hear from every single personal finance expert to take advantage of this plan if you’re able to. Basically, your 401k is a hodgepodge of stocks, bonds, and other holdings. A percentage of your paycheck (typically 3-5%) will go towards a fund that you choose, and your employer will typically match your allocation. The amount that goes towards the fund is tax-free money, but once you take it out, it will be taxed as personal income.
6. Income-Based Repayment (IBR) Plan- If you happen to be in a situation where you might be at risk of defaulting on your student loans, it’s important to understand the different repayment plans. The IBR plan will have monthly payments that are limited to 15% of your disposable income. Your disposable income is calculated by the difference between your gross income and 150% of the poverty guideline amount for your state and family size. Student loans can not be discharged in bankruptcy and will stay with you for life.
7. 529 Plan- This might be a bit down the road for many of us, but the 529 plan is a college savings plan for your future/current children. It’s never too early to start saving towards the future.The 529 plan is operated on a state level and is designed to set aside money for college costs. One of the biggest benefits of the 529 plan is that the money grows tax free and will not be taxed when the money is taken out to pay for college. In addition, 34 states offer residents a full or partial tax deduction for any contributions into this plan.
How many of these do you already know? Understanding the intricacies of personal finance can give you a huge edge moving forward. It will protect you from unethical practices and help secure your future.