Note: Guys Should Know These, Too!
Lingo. Terminology. Vocab.
We all need to learn the Language of Money, if only so we know what it is that we are reading when the statement comes in the mail, or so that we understand the term sheet and the portfolio. Knowledge is power, and it starts with money smarts and financial security. You should know your financials from your fiduciaries. There’s a lot of lingo, but here are five things to get you started.
Get this one straight from the start, or Uncle Sam will straighten it out for you. This is how much money you set aside each paycheck to cover your State and Federal taxes each year. You should base this amount on how many dependents you have. There used to be a number of allowances, but the tax line has been streamlined somewhat. It’s best to set up your monthly withholding to come out of your paycheck, so that, come April, you’re not surprised with a giant amount owed.
FICO is an acronym for the Fair Isaac Corporation. They’re the ones who came up with the notion of rating people based on their ability to pay bills on time. Okay, no, it’s more than that. Your FICO score is your credit rating, though, and it takes into consideration things like your income-to-debt ratio, your payment history, the length of time that you’ve had credit, and the total amount owed. In general terms, it measures your creditworthiness, and it’s a score to take seriously. The closer to 850, the more likely you are to achieve low interest rates on future credit, and the happier you’ll be when it’s time to make a big purchase.
In short, take the amount of your total assets, subtract your total liabilities, and this is the number you get. You can toss in the value of your car, your home, any of the things you could sell off, and subtract all of the loans you’ve got. For many young people, there is a time (a very scary time) when their net worth is in the negative. We all work hard to get this number squarely positive, and large, over time. Millenials sometimes worry that it will never happen. But become financially savvy, and your net worth should rise. Invest wisely, folks. A strong net worth is a good thing to have.
Where you have your money. As in, don’t put all of your eggs in one basket. All too often we put our money in a single place and let it rest there, hoping all will be well. Think of the folks who trustingly put their money under the mattress and everything is okay — until there’s a house fire. Women tend to have this greater sense of trust and put all of their funds in one instrument, like a 401k, not realizing that to do so binds them to the regulations of that singular instrument. Their assets are all allocated in one place. They could instead allocate some in a 401k, some in bonds, some in savings — you get the gist.
Diversification is spreading assets across risk groups. Having money in investments that are not correlated spreads the risk across sectors. This doesn’t necessarily mean that you can’t put all of an asset in stocks, exactly, but it does mean that if you have $10k to invest, don’t invest it all in tech stocks. Instead, spread it across tech, agriculture, and industry stocks so that if one market sector takes a dip, it is highly unlikely that they all will dip, all at the same time. Smart asset allocation (see above) is the process by which you choose what proportion of your portfolio you want to dedicate to various asset classes, based on your goals, personal risk tolerance and timeline. Eggs in different baskets, my friends.
With just these five terms, you have enough to get you started a few steps down the financial path. There are many others that will get you deeper into the knowledge bank, but starting to learn the language is starting to build confidence. I just spoke with my daughter the other day, and when she (at 24) said, “what’s FICO?” I knew we had a lot to do.
Get started here, then dig in more day by day and before long, you’ll have an entirely new vocabulary, and a head start on wealth management as well.